June 28, 2006
Score one (Honda auto plant) for the Midwest
Honda has announced its intention to build another U.S. auto assembly plant, this one in Greensburg, Indiana, 50 miles southeast of Indianapolis (see map below). Unlike many recent assembly plant openings by foreign-domiciled automotive companies, Honda sited its plant in the Midwest rather than in a southern state. Does this announcement denote the end of the southward movement of auto sector plants in the U.S.?
As documented and analyzed by Thomas Klier and Dan McMillen in a recent issue of Economic Perspectives, as well as by Jim Rubenstein at the recent automotive conference, the motor vehicle industry continues to be concentrated in the Midwest, with 47 percent of motor vehicle employment to be found in the states of Michigan, Indiana, and Ohio. However, a look backwards reveals that the industry’s footprint has taken a decidedly north–south tilt in recent decades. According to Klier and McMillen, “Since 1979, Michigan alone has shed almost one-third of its auto industry employment. During the same period, southern states such as Kentucky, Tennessee, Alabama, and the Carolinas, more than tripled their employment in the auto industry.” Further, the push southward is hypothesized to have now expanded past the middle south states of Kentucky and Tennessee to a second vanguard in the Deep South in recent years. Since 2001 alone, Honda and Hyundai have launched or announced assembly operations in Alabama, Nissan in Mississippi, Toyota in Texas, and Kia in Georgia.
Honda’s Greensburg assembly plant will pull the nexus of North American automotive production somewhat north. To date, speculation about the location of the new plant had centered on Illinois, Indiana, and, especially, Ohio, where Honda currently maintains the larger part of its North American operations. Media discussion about the Midwest siting decision derived from reported inquiries from Honda about available sites in these states. Moreover, the company currently operates the most geographically proximate supply chain in the industry, with over 75 percent of its supplier base located within a day’s drive of its central Ohio assembly plants (see map below). For example, its Lincoln, Alabama, assembly plant receives transmissions from a Honda transmission plant in Tallapoosa, Georgia, 60 miles to the east, and its Ohio assembly plants receive transmissions from a Honda, Ohio, transmissions plant 25 miles west.
Adding to the logic of the new assembly plant location close to Ohio, Honda has also shown a strong preference for keeping engine production close to its assembly plants. For example, Honda builds engines inside its Alabama assembly complex. In Ohio, home to its largest assembly operations, it also operates its largest engine plant worldwide, producing over 1 million engines a year. Recently, Honda announced a decision to build an engine plant near its Alliston, Ontario, assembly facility. That plant has been receiving engines made in Ohio. Once that new engine plant is built, it will free up capacity at the Anna, Ohio, engine facility.
The choice of the Midwest rather than the south is a company-specific story rather than a reversal of the industry’s southward movement. Honda’s decision to site its next assembly plant in the Midwest is very consistent with the crucial role that supply chains and logistics play in today’s manufacturing environment. In this regard, the Midwest’s continued high concentration in automotive parts and related industries keeps it a contender for future siting of North American automotive production facilities.
June 26, 2006
Chicago companies.....a changing town?
Lately, the Chicago business press has lamented the region’s loss of large company headquarters—for example, those of Amoco, Arthur Andersen, Borg-Warner, Quaker, Searle, and Zenith. The chart below numerically depicts the source of this local concern: The Chicago area is down 19 headquarters over the period from 1975 to 2005 as measured by Fortune magazine’s list of the largest nonfinancial companies. Has Chicago lost its vitality for building large companies and hosting their headquarters?
Taking a broader perspective, it appears that Chicago has held its own as a domicile for corporate headquarters. It consistently ranks second place among large metropolitan areas that host headquarters; only New York exceeds it. Looking farther afield, one can see that headquarters offices of the largest companies have spread out to other metropolises that have come into their own as business centers. A recent conference examined shifts in headquarters site decisions and motivation. Cities such as Houston, Atlanta, and San Francisco have developed a large scope of business support services, such as legal, accounting, and management consulting, that attract headquarters. All have large hub airports which are desirable in sending out and bringing in headquarters execs and their business associates.
In some ways, then, Chicago’s relative loss of headquarters reflects the filling in and development of the remainder of the U.S. rather than Chicago’s decline. To put it another way, why would we expect Chicago and New York to maintain the lion’s share of headquarters while the remainder of the U.S. economy grew more rapidly?
A different look reveals that Chicago’s headquarters companies have grown at a healthy rate—one that reflects a mature but healthy business service center. The following tables list the Chicago region’s top 50 companies from 1979 to 2005, again measured by Fortune magazine’s accounting of total company revenues. The companies’ revenues are quoted in comparable dollars, equivalent to spending power for gross domestic product (GDP) in 2005.
In examining individual companies among these rankings, we can see that, on average, the annual revenues of the top 50 companies in 2005 exceed those of the equivalently ranked companies in1979. In fact, the sum of the top 25 companies’ revenues in 2005 exceeded that of their counterparts’ in 1979 by 89 percent. For the top 50 companies, the revenue total of 2005 companies exceeded that of 1979 companies by 78 percent. Over this time period, the overall U.S. economy grew by 115 percent. Accordingly, in the context of the faster regional growth taking place in the Sun Belt and the West since 1979, Chicago has enjoyed healthy, though modestly lagging, success as the domicile of many of America’s largest and fast-growing companies.
In explaining Chicago’s continued role as a headquarters city, we can see that many large companies have survived and prospered from the 1979 list. These companies include Brunswick, Caterpillar, Deere, Kraft, Sears, United Airlines (UAL), and USG (United States Gypsum). Still others—such as Walgreen’s, Abbott, McDonalds, Archer Daniels Midland, and Illinois Tool Works—have survived and even experienced outsized growth. Walgreen’s revenues are up over 13 times since 1979. Illinois Tool Works Inc. ranked 17th in 2005, with $11.7 billion in revenue, although the company had not made the top 50 list of 1979.
Other companies have chosen Chicago as their headquarters’ domicile from outright relocations, during mergers, or through spinoffs. Boeing is the most notable relocation, choosing Chicago in 2000 over competitors Dallas and Denver. OfficeMax Inc. is another relocation to Chicago (from Boise, Idaho). Smurfit-Stone chose Chicago during its merger, and medical equipment maker Hospira Inc. was a recent spinoff of Abbott.
Other promising companies with headquarters in the Chicago region, such as Hewitt Inc., a human resource management company, have grown up here and have since emerged as public companies. Equity Office Properties Trust is another home-grown company with headquarters in the area, as is CDW, a computing equipment leasing company.
A comparison of the top 50 lists also reflects the shifting industry orientation of the Midwest away from manufacturing to services. In 1979, 33 of the top 50 companies could be classified as manufacturing versus 26 in 2005.
The Chicago region correctly stands up and takes notice at the loss of a large company headquarters. Hosting companies’ headquarters is an important specialization of Chicago’s economy. Over the long term, Chicago’s headquarters’ performance is a cause for interested concern though perhaps not for alarm.
June 19, 2006
Logistics and the Midwest
Transportation of goods and materials seems to be as important as ever in the U.S. economy. Rising personal income in the U.S. begets greater demand for goods, and these goods must be transported from their place of production to the places where households consume them. In addition, as global trade has expanded, goods are purchased and transported from afar to an ever greater extent. Meanwhile, the physical production processes in manufacturing now have longer supply chains of parts and inputted materials around the world, which help take advantage of the differences in labor costs and skills in different countries, further magnifying transportation demands.
Such transportation activities have long been more important to the Midwest economy. The movement of materials, parts, products, and finished goods is as much a part of its commerce as farming and manufacturing. But the nominal values of farming and manufacturing are diminishing in the region as a share of the Midwest economy. Can the same be said of goods transportation and logistics?
Upon initial consideration, we might think so. However, the aforementioned trends in global trade and transportation may also tend to heighten transportation demands in (and across) the Midwest region. So, too, many Midwest manufacturers have adopted so-called just-in-time (JIT) production technologies in manufacturing. JIT production methods put a premium on low inventories everywhere along the supply chain. And to accomplish these low inventories, JIT production methods make heightened use of the transportation of parts and materials.
The figure below displays transportation and warehousing output as a share of Midwest total output and as a share of U.S. total output (figures quoted are in nominal dollars and exclude personal air transportation). True to form, the Midwest has been an intensive user of transportation and warehousing services. A closer look at the transportation subsectors reveals that rail, air freight, trucking, and warehousing are more concentrated here than in the overall U.S. Pipelines and seaports are less represented.
It is somewhat surprising that the nominal share of output devoted to goods transportation has declined over time in both the region and the nation since 1947. This means that either fewer transportation services are being demanded or that productivity gains are delivering greater actual or “real” transportation services, but doing so at a lower price.
The latter wins hands down. An examination by the U.S. Bureau of Economic Analysis shows that real output growth in warehousing and transportation lagged badly from 1947 to 1987, averaging a growth rate 2.3 percent per year over this forty-year span. This is well below the growth of overall output, which was 3.6 percent per year.
However, in the more recent period from 1987 to 2000, real output in the sector did outpace overall economic growth, 4.6 percent versus 3.3 percent.
Two general phenomena explain the more recent resurgence in real output growth in transportation and warehousing. The more recent period has experienced rapid growth in global trade. Since 1987, for example, the sum of goods exports and imports in the U.S. economy has grown from 14 percent to 21 percent, as measured against total gross domestic product (GDP).
Since 1987, however, this surge in demand for transportation services has only held the sector’s nominal share of GDP in place. That is because productivity gains, coupled with competition, have held down costs and prices for transportation services. A survey article in this week’s Economist, describes the productivity gains taking place in logistics sector, “Like information on the internet, goods are moving around the world with ever greater efficiency.” As a result, from 1987 to 2000, average prices in the sector rose at only one-third the pace of the overall average price rise of GDP.
What are the origins of the sector’s productivity gains? Technological improvements in logistics communication, as well as the intermodal shipment of goods in standardized containers, have allowed transportation services to be produced with fewer inputs of real resources. Competition among service providers, partly owing to deregulation, has also spurred technological gains while holding down prices near to the costs of production.
Is the Midwest developing a sharper specialization in transportation and warehousing? The chart below looks at the ratio of the shares of transportation and warehousing output from 1963 to 2004 for both the region and the nation. Over the past 15 years, the Midwest’s share is widening its relative concentration in the production of goods transportation and warehousing. It may be the case that the central location of the Midwest, coupled with its established transportation infrastructure and its logistics know-how, are buffering the region’s economy with growth in transportation services.
June 7, 2006
The recent influx of foreign born into the United States has drawn attention on several public policy fronts. The U.S. Congress is currently considering a tighter border policy with Mexico, in part due to concerns of national security and the rule of law. In addition, the surge in foreign born (and their offspring) figures into debates over the sources of the widening wage and income disparities in the U.S. and in the slow growth of wage rates and income at the bottom of the income distribution.
On a more positive note, the foreign-born population is accounting for approximately one-third of U.S. population growth, somewhat more if the newborn children of recent immigrants are counted. The possible benefit of a more rapid population growth stems from the fact that the U.S. labor force market is already tightening rapidly and promises to tighten further as the “baby boom” generation retires. Slow growth of the work force can ultimately slow the overall pace of economic growth, especially if accompanied by slow growth of workers with specific skills. Indeed, for many regions, one key economic challenge and opportunity is to facilitate education and skills acquisition of the foreign born. As of 2005, the U.S. Department of Labor reports that 28 percent of the foreign born aged 25 years and older had not completed high school versus 7 percent for the native-born.
Prior to the 1990s, as shown by the chart below, the Seventh District region, which includes much or all of Illinois, Indiana, Iowa, Michigan and Wisconsin, had not attracted immigrants to the same extent as many other U.S. regions. Still, as shown by the second chart below, strong growth in immigration has taken place here in recent years. So too, the Chicago metropolitan statistical area (MSA) has remained an exceptionally strong magnet among metropolitan areas. Chicago ranked 5th in foreign-born population according to the 2000 Census of Population, with 17 percent to 18 percent of its population foreign born. And since that time, the Chicago metro area has ranked among the top 10 metro area gainers in numbers of both Asian and Hispanic population.
Recent immigrants (as well as members of other ethnic and minority groups) are, to a greater extent, relocating to new areas of opportunity and high growth. According to recent report by demographer William Frey, “Hispanic and Asian populations are spreading out from their traditional metropolitan centers” and expanding their presence in new destinations, including suburbs and rural areas. In part, this dispersion may be an added impetus to current public policy attention concerning U.S. immigration and border control policies.
The chart below confirms for the Seventh District the dispersion of immigrants and foreign born. All Seventh District states experienced healthy growth of foreign-born population. However, the two states with the lowest proportions of foreign-born population—Iowa and Indiana—experienced the largest population growth rates over the decade of the 1990s at 110 and 98 percent respectively.
The Seventh District experience also confirms that immigrants are now following opportunities in employment and housing to a greater extent rather than simply following their historic well-worn path to the largest U.S. metropolitan areas and their central cities.
The final chart (below) distinguishes the growth in foreign born in each state’s largest metropolitan area from the rest of the state. In those large metropolitan areas where economic growth has been leading state economic growth and where unemployment is generally low, growth in the foreign-born population has exceeded the remainder of the state. This experience has particularly characterized the picture in Des Moines, Iowa, Indianapolis, Indiana, and Chicago, Illinois. In contrast, the Milwaukee, Wisconsin, and Detroit, Michigan metro area economies have both lagged their respective states and so have their respective growth rates of foreign born population.
In choosing their nation of destination, immigrants have in the past, “voted with their feet” in search of greater freedom and economic opportunity. Within that destination, immigrants often tended to follow well-worn paths, disembarking in cities and communities where their fellow immigrants had preceded them. In contrast, immigrants to the U.S. are today choosing to disembark directly where economic opportunities are greatest. For this reason, the growth rate of the foreign-born population has become yet another indicator in gauging the success of metropolitan areas.
How well immigrants adapt to their new communities, and how well communities adapt to them, will be part of the future equation of success or failure of many U.S. regions.