What’s up with
the U.S. auto industry? The two leading
domestic producers, General Motors and Ford,
generate a seemingly endless litany of bad
news. GM, which lost some $10 billion last
year, was forced to sell a big stake in its
profitable GMAC financing arm to raise cash.
Ford is still in the black overall, but its
net income in 2005 was down 47 percent from
the year before. A few months ago, both GM
and Ford announced the elimination of tens
of thousands of jobs and the closing of
nearly two dozen domestic manufacturing
facilities. There has been speculation that
one or both companies may be headed for
Chapter 11 bankruptcy or may seek a federal
bailout.
By contrast,
Kia Motors recently announced plans for a
$1.2 billion assembly plant in Georgia that
will employ some 2,500 workers and be
capable of producing 300,000 vehicles a year
when it opens in 2009. At the same time,
Toyota said it would invest $230 million to
expand an existing Subaru plant in Indiana
in order to boost output of Camry sedans for
the American market. These are just the
latest in a long series of investments by
carmakers from Japan, Germany and Korea in
U.S. auto operations known as transplants.
In other
words, the American auto industry is heading
in two different directions. The big
U.S.-based producers are reducing their
domestic manufacturing presence, while
foreign carmakers appear to see the United
States as a land of endless opportunity. The
latter now employ more than 50,000 U.S.
workers (most of them non-union) at several
dozen plants that account for about
one-quarter of the country’s output of cars
and trucks. “The domestic auto industry is
as healthy as it has ever been,” a
consultant recently told Business Week.
“The names on the plants are just changing.”
“NO MONEY. NO BUNNY.”
The first
foreign foray into the U.S. auto industry
was not very auspicious from management’s
point of view. After Germany’s Volkswagen
opened an assembly plant in Pennsylvania in
1978, it was confronted by workers angry
over the fact that they were being paid less
than their counterparts in plants owned by
the Big Three U.S. producers. Within six
months there was a wildcat strike at the
plant that also surprised the United Auto
Workers union, which had negotiated the
lower pay levels. Stopping production of
VW’s Rabbit, the workers chanted: “No Money.
No Bunny.”
The workers
eventually returned to the job, but labor
relations at the plant remained tense as the
UAW pressured the company to narrow the wage
gap. Adding to the disharmony was a lawsuit
charging that VW was discriminating against
African-American employees. VW abandoned the
plant in 1988.
Whereas
Volkswagen tried to reach an accommodation
with the UAW, the Japanese companies that
followed adopted a different posture.
Although the UAW, concerned about the rising
share of the market being taken over by
imports, played an important role in
encouraging Japanese producers to open U.S.
facilities, those companies strongly
rebuffed organizing efforts by the union. By
1980, the UAW had filed unfair labor
practice charges in response to
union-avoidance tactics employed at the
first wave of Japanese-owned plants. These
included motorcycle plants opened by
Kawasaki in Nebraska and Honda in Ohio as
well as a California dock operation of Mazda
Motors. “I thought there was supposed to be
some unwritten agreement” that when foreign
auto makers opened U.S. operations they
wouldn’t fight the domestic union, a UAW
organizer said plaintively to the Wall
Street Journal at the time.
As more
Japanese companies developed a U.S. presence
in auto assembly, they took somewhat
different positions toward the UAW. Honda,
which added a car operation in Ohio in 1982,
abandoned a hard anti-union position and
focused on building worker loyalty to the
company in the hope it would weaken
organizing efforts. Nissan, which opened an
auto assembly plant in Tennessee in 1983,
remained more openly anti-union. Toyota
entered into a joint venture with General
Motors in Fremont, California that
recognized the UAW. Mazda (partially owned
by Ford Motor) opened a plant in Michigan
that also cooperated with the union.
In the years
that followed, the Honda and Nissan
approaches prevailed, while the
labor-management cooperation experiments of
Toyota and Mazda were replicated only
once—at the Mitsubishi-Chrysler Diamond-Star
joint venture that opened in Illinois in
1988. This was so despite the fact that the
joint-venture plants all adopted Japanese
methods of work organization.
Honda was so
successful in gaining worker support that
the UAW suspended its organizing drive in
Ohio in 1986. The union then launched an
effort at Nissan in Tennessee, but the
workers there voted overwhelmingly against
the UAW in 1989. Even critics of Nissan
acknowledged that the company had done an
effective job in winning over the workforce
by raising wages and avoiding layoffs during
market downturns. As the rank-and-file
newsletter Labor Notes put it: “An
organizing committee led by Big Bill
Haywood, Eugene Debs and Mother Jones would
probably have lost this election.”
ROLLING OUT THE RED CARPET
The location
of the Japanese transplants of the 1980s was
based in part on political calculations.
Creating jobs mostly in Midwestern states
helped to blunt the calls—coming most loudly
from that part of the country—for
legislation setting a minimum amount of
domestic content for any car sold in the
United States. By the 1990s that threat had
subsided, so foreign producers—including
some from Germany as well as Japan—turned
more of their attention to rural areas of
the South, where wages were lower and
workers were even less likely to be
sympathetic to unions. That region is also
reasonably close to the network of parts
suppliers and has reasonably good access to
transportation routes.
In 1992 BMW
announced plans for an assembly plant in
South Carolina that would employ up to 4,000
workers. The following year Mercedes-Benz
selected a site in Alabama for an SUV
facility expected to employ about 1,500
workers. The red carpet that these states
rolled out for the foreign automakers helped
draw attention to one of the secrets of
success for the transplants: substantial tax
breaks and other subsidies from state and
local governments.
At first, the
amounts were relatively modest. Honda
received a grant of about $16 million for
its first plant in Ohio. Nissan got about
$26 million for worker training and
infrastructure improvements at its operation
in Tennessee. The joint-venture transplants
in the Midwest were showered with much
larger sums. The Mazda plant in Michigan got
more than $100 million in tax breaks,
low-interest loans, training funds and
infrastructure assistance. The Diamond-Star
operation in Illinois was placed in a newly
created enterprise zone that helped bring
the value of its subsidy package to around
$250 million.
The Southern
states continued the giant giveaways. The
deal that BMW got from South Carolina was
estimated to be worth up to $300 million,
and Mercedes got about $250 million from
Alabama, which also offered to rename a
section of Interstate 20/59 the
“Mercedes-Benz Autobahn.” The practice
continued when Japanese producers later
announced plans for U.S. expansion. In 1999
Honda followed Mercedes into Alabama with
the announcement of an assembly plant that
drew a package of tax abatements,
infrastructure assistance and other benefits
worth about $248 million. In 2000 Nissan
announced an investment of around $1 billion
in a plant in Mississippi that would employ
some 4,000 workers. The state showed its
appreciation with a subsidy package worth
more than $295 million. The following year,
a car producer from another foreign country
said it would join the migration to the
American South. Hyundai Motor of South Korea
announced plans for an assembly and engine
production plant in Alabama, picking up a
subsidy package of about $230 million.
In 2003 Toyota
said it would build an $800 million assembly
plant in San Antonio, Texas. Much was made
of the fact that the company had not chosen
the site with the most generous subsidy
package. Instead, the company highlighted
criteria such as access to the large Texas
market for the pickup trucks that would be
built at the plant and proximity to auto
parts plants set up in Mexico by suppliers
such as Delphi. This is not to say that
Toyota was completely shunning subsidies;
the package offered by the Lone Star State
was worth some $133 million. Yet Toyota’s
decision should have raised questions as to
whether the Southern states needed to give
away so much to companies that clearly had
decided to focus their investments in the
region.
Toyota set off
another scramble among state officials in
late 2004 when it announced plans for a
seventh North American plant, followed
shortly thereafter by No. 8. Adding to the
allure was the fact that Toyota, which is
poised to overtake General Motors as the
world’s largest carmaker, said it wanted to
begin producing its popular Prius hybrid in
the United States.
The phenomenon
shows no signs of ending. Foreign automakers
continue to announce new U.S. expansion
plans, and state and local governments
continue to lay out huge sums of public
money for the transplants. In the recently
announced Kia Motors deal, officials in
Georgia ponied up more than $400 million in
tax credits and other assistance for the
South Korean company. There were reports at
one point that a competing state,
Mississippi, had offered a package worth $1
billion. That amount turned out to be
exaggerated, but it is telling that the
prospect of a ten-figure subsidy deal did
not generate much controversy.
FOOTLOOSE CORPORATIONS
What we have,
then, is a development strategy based on a
non-union workforce, the willingness of
state and local governments to provide
lavish subsidies, and the siting of plants
mainly in rural areas hungry for
manufacturing jobs. The foreign carmakers
also have an advantage over the likes of GM
and Ford in that they are operating in
brand-new, state-of-the-art facilities.
It is worth
noting that this is not a low-wage model.
The hourly pay of many transplant workers is
not far below that of unionized workers at
the Big Three and is usually well above the
average for their local labor market. This
should not, however, be seen as a sign of
generosity on the part of the foreign firms.
It is clear that they pay relatively well to
make unionization less appealing. The UAW,
in other words, deserves credit for
indirectly raising living standards among
transplant workers.
A bigger
discrepancy between transplant workers and
UAW members is seen with regard to benefits,
especially for retirement. Employees at
foreign-owned plants invariably have
defined-contribution plans such as 401(k)s
rather than traditional pensions. This gives
the transplants a huge competitive advantage
over the Big Three, which have high “legacy
costs.”
And, of
course, without union work rules and
grievance procedures, the transplants can
extract more output per worker than the Big
Three. Consequently, the employment growth
at the foreign-owned plants doesn’t begin to
make up for attrition among UAW members.
For now, it
appears that transplant workers are
satisfied with their working conditions as
an improvement over what their rural areas
otherwise have to offer. Similarly, state
and local governments are willing to forgo
substantial tax revenues to attract
investment that they assume would otherwise
go elsewhere. But it is not certain that
these arrangements will pay off over the
longer term. Once the threat of unionization
seems more distant, will the foreign
carmakers continue to keep wages relatively
high? Will those companies grow dissatisfied
with inadequate public services provided by
local governments that gave up too much of
their tax base as business incentives?
Today, the
new auto sector of the South is being
presented as kind of industrial utopia. Yet
the story of global business is one of
footloose corporations always seeking
greener pastures. At some point, the South
will probably be in the position the Midwest
is in today—watching its prosperity
transplanted somewhere else.
