A Global Economy for the Auto Industry

While I don't work directly in an automotive plant, I am very much an auto worker. I've been working in the auto industry for over ten years, and I have a lot of opinions on the current situation. If you don't feel like reading this entire post (which I don't blame you), I urge you to read the figures I'll be posting later this week. (Probably tomorrow, but no promises.)

As everyone knows, the American auto industry is in big trouble. And while people are so quick to comment that Big Three are sleeping and haven't realized that this is a global economy, I beg to differ. The root of the problem is much deeper than that. The Big Three face challenges that foreign companies just plain don't have.

One of my biggest pet peeves is that people who don't understand the way things work consistently say that "foreign" cars are assembled in the US, so they are supporting American workers. Here is a quote from a Forbes article that sums up my feelings on that:

John Wolkonowicz, senior automotive analyst for Global Insight, says to simply consider one question: Where does the profit of the car purchase accrue?

“You buy a Toyota and the profit accrues in Tokyo,” he says. “You buy a GM made in Canada and the profit still accrues in Detroit. Buyers of foreign-branded cars take delight in knowing that their cars are assembled in the U.S. But the value added in the assembly process is not all that great. At the end of the day, it’s where the profits accrue that really matters.”

One of the biggest disparities in American companies versus foreign companies comes down to one word: UNION. Regardless of how you may feel about unions in general, foreign automakers producing in the U.S. primarily assemble their automobiles in low-wage states like Alabama and Kentucky, where American-owned automakers primarily produce in high-wage union states like Michigan. Add the incentives the foreign companies get for putting their plants there, and the American auto companies are at a HUGE disadvantage.

I feel badly about not having the source of this next text, as it was in an e-mail I received during some research we were doing. The author is noted as Roger Simmermaker, though I can't find where it came from.

This text discusses the issue I just mentioned above--that foreign auto receive better incentives than American companies. I've bolded some of the points that I've said MANY times, so obviously I agree 100%.

...The point I am trying to make is that this is one of many relatively unknown facts that give foreign-owned automakers huge cost advantages over American-owned automakers. Consider the following: In 1997, the state of Alabama granted huge subsidies to Mercedes in exchange for a plant that would employ 1,500 people. What were the details of this huge incentive package? $300 million in tax breaks, $253 million in direct incentives, $60 million in Alabama taxpayer money to send fellow Alabamans to Germany for training, and a promise to buy 2,500 of the new Mercedes SUV’s at $30,000 each. Based on just the initial $300 million grant alone, those 1,500 jobs will cost Alabama taxpayers $200,000 per job. Apparently Alabama, not Mercedes, will be paying those salaries for years to come. With deals like these, it’s no wonder foreign automakers have stepped up production in the U.S. We’ll even pay their workers’ salaries for them!

In 1987, Toyota constructed an auto plant on part of the 1,500 acres of free land given to them in Georgetown, Kentucky. The auto plant was built by a Japanese steel company using Japanese steel. The U.S. government granted a “special trade zone” so that Toyota could import auto parts from Japan duty-free. Financing was handled by Mitsui Bank of Japan. Total federal and state grants and incentives exceeded $100 million. These subsidies, of course, were courtesy of your tax dollars.

Tennessee gave Nissan $11,000 per job for their Smyrna plant built in 1980. South Carolina coughed up $79,000 per job to convince Germany’s BMW to build their plant in Spartanburg in 1992. Were you aware that our government was using your money to create jobs? Or are these merely job announcements where you and I foot the bill? Job announcements do make for great rhetoric for state governors’ re-election campaigns. How many years will it take a factory worker in Alabama to pay back the $200,000+ in tax money that the government gave away? A conservative answer would be “several.” This is not to say that American companies are not granted incentives to build plants here. The most recent is $100 million in incentives for Cadillac to build their next plant in Michigan.

It is my opinion that we should not be imitating the Third World by using public money to bid for jobs. But when given the choice between foreign investment (Toyota, Mercedes, Nissan) and American investment (General Motors and Ford), American investment is much better for America.

The deal Alabama gave Mercedes makes the deal Michigan gave GM seem rather frugal. The point here is that these huge incentives that are offered to foreign companies are rarely offered to our own companies here at home. Such incentives allow foreign companies to save hundreds or even thousands of dollars in costs per automobile. And American companies acquire more of their parts from domestic sources, so more jobs are created in the automotive parts industry in America. America needs more American investment, not more foreign investment.

My next post will include some figures I've come across through years of research. I hope you check that out--it should be far less dry than this post was. If you've read this far, I'm certain you will. LOL!