Corporate Research E-Letter No. 58, March-April 2006
GONE SOUTH: DECLINE & RENEWAL IN THE U.S. AUTO INDUSTRY
by Philip Mattera
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.
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.