September 25, 2007
Transportation and GHG regulation
On October 15, the Detroit Branch of the Federal Reserve Bank of Chicago will convene a conference examining various policy approaches to reducing carbon dioxide and other greenhouse gases (GHGs). Following electric power generation, the transportation sector is the second largest source of carbon dioxide emissions in the Midwest, as well as in the overall U.S. (Carbon dioxide emissions generally arise from the burning of fossil-based transportation fuel—gasoline more so than diesel fuel.)
Following the energy price spikes of the early 1970s, federal regulations were issued to improve fuel-efficiency of cars and light trucks. Corporate Average Fuel Economy (CAFE) regulations place fleet-wide fuel-efficiency limits on manufacturers for their passenger cars and separate standards for their light trucks (including so-called minivans and sport utility vehicles, or SUVs).
The CAFE standards are sometimes credited with maintaining fuel-efficiency during the late 1980s and throughout the 1990s, when gasoline prices plummeted and one might have otherwise expected vehicle size and fuel consumption to have grown once again. Nonetheless, CAFE standards are often criticized. For one reason, the added cost of introducing new fuel-efficiency technologies into the latest models may be counterproductive. That is because, in confronting higher vehicle costs, automotive buyers may delay scrapping their old vehicles, thereby keeping an older (and less fuel-efficient) fleet of vehicles on the road.
Fuel-efficiency standards have also been criticized for imposing unnecessary and distorting restraints on consumers’ choices of vehicles. Logically speaking, penalties to modify behaviors to align with socially desirable outcomes should be fashioned to most closely target those behaviors that give rise to social costs. Accordingly, rather than forcing fuel-efficiency standards on specific types of vehicles, a preferable approach would be to penalize the actual behaviors that give rise to carbon emissions regardless of vehicle type. That is, a tax on fuel at the pump would be preferred to vehicle fuel-efficiency standards. And a tax per unit of carbon associated with a particular fuel—such as gasoline over diesel—would be preferred to a general fuel tax. Nonetheless, to date, fuel-efficiency regulations have been more palatable to the American public than alternatives such as direct gasoline taxes.
Midwest-domiciled automakers, especially the Detroit Three (Chrysler LLC, Ford Motor Co., and General Motors Corp.), have so far found it more difficult than other manufacturers to achieve CAFE fleet standards on cars and light trucks. Going back to the 1970s and earlier, Detroit Three automakers have tended to offer larger vehicle models for sale, and this specialization has continued into recent years.
The figure below displays the reported average fuel economy in 2006 for major companies selling vehicles in the U.S. market. For both passenger cars and light trucks, the measures of fleet average fuel-efficiency for both Toyota and Honda easily exceed those of the Detroit Three. Indeed, for passenger cars, the fleet fuel economies of Honda and Toyota already approach the hypothetical standard that is being considered for the year 2020.
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CAFE standards may soon become even more onerous for automakers. In June 2007, the U.S. Senate passed legislation mandating stricter standards on both passenger cars and light trucks. By the year 2020, fuel-efficiency standards would rise for such vehicles so that they must achieve 35 miles per gallon. (Such revised CAFE standards will likely be considered by the U.S. House of Representatives during the fall of 2007).
The vehicle fuel-efficiency of major automakers has been changing in recent years. Per the figure displaying the fuel economies of passenger cars below, Toyota’s and Honda’s have gained markedly over those of the Detroit Three during the decade. In contrast, these Japanese automakers have not widened their fuel-efficiency advantages in the light truck category. Within the category, Honda and Toyota have been selling more models that are heavier and less fuel-efficient than they had before; these models would include the Honda Pilot and Toyota Land Cruiser SUV.
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From a Midwest perspective, the region’s light vehicle production facilities tend to be those of companies that will likely find it most difficult to meet more stringent standards. The map below displays the assembly plant locations of the Detroit Three automotive companies, as well as those of the foreign-domiciled automakers. A large majority of the Detroit Three’s light vehicle production facilities are located in Midwest states. In the northern part of the U.S. automotive corridor, which includes the states of Ohio, Michigan, Indiana, Illinois, Wisconsin and Missouri, 24 of its 31 light vehicle plants are owned by the former Big 3 domestics. Accordingly, the region’s residents will be interested to see that any prospective carbon reduction policies are as cost-effective as possible.
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Not everyone believes that GHGs from human activity are significantly contributing to global climate change or, if so, that mitigation policies are advised. Still, it would appear that mitigation policies, including more stringent CAFE standards, will be forthcoming. An informed and judicious choice of alternative policies can contribute to achieving cost-effectiveness while reducing GHG emissions.
Posted by Testa at 12:10 PM | Comments (1)
July 18, 2007
Automotive wages in flux
As the “Detroit 3” automotive companies have experienced shrinking profits and market share, many midwestern communities have experienced falling jobs, income, tax revenues and public services—to say nothing of the households and families working in the industry. This summer, automotive workers and communities are watching closely as the terms of automotive employment—especially wages—are being renegotiated. On July 20, for example, the UAW labor union opens contract negotiations with Ford and Chrysler (July 23 for General Motors) for contracts that will run for 4 years. And earlier this month, auto parts maker Delphi announced settlement terms with its workers as it undergoes operational restructuring. Only four Delphi production plants will remain in operation in the U.S. as its customers will source parts from its overseas operations or from alternative suppliers. Remaining Delphi production workers will be on the receiving end of cuts to health care benefits, employment security, retirement and wages. Wages for production workers will be reduced from $27 per hour to a maximum of $18, $14 for new hires.
How should we view the wage settlements as they are announced in coming months? One perspective is to compare them to average wages for production workers in U.S. manufacturing. Production workers are typically those who have few or no supervisory roles in manufacturing plants; in other words, most assembly line workers would fall into this category. The chart below displays average wages for production workers back to 1967. These wages represent the average in compensation for overtime and regular time. The wages are expressed in current dollars, adjusted over time for changing prices by the Consumer Price Index.
The bottom line shows that, across all manufacturing industries, average wages have remained largely flat since 1967, ranging between $17 and $20 per hour. Wages were rising until 1980. With several deviations, the average wage settled at $ 18.59 in 2005, which is the latest available data from this particular source.
In the same graph, we can see that that production workers in motor vehicle parts industries (blue line) have fared somewhat better over time, but that their wages have been converging with the remainder of manufacturing workers since the 1980s.
Workers in the automotive assembly industry (green line) are smaller in number than those in parts production. In the U.S., there are approximately three workers in parts production for every worker in an assembly plant. Unlike their brethren in parts production, assembly workers’ wages have been generally rising since 1967. By 2005, the U.S. Census Bureau reported an average production wage of $35.84.
The second graph below plots the premiums in wages for automotive workers. This premium is expressed as the percent by which wages exceed the average of all U.S. production workers across all industries. As of year 2005, the average wages of automotive assembly workers topped their counterparts by 50 percent. For motor vehicle parts workers, the wage premium has fallen below 20 percent from a peak of 31 percent in 1980. Approximately one-third of workers in the parts industry are represented by labor unions versus three-fourths of domestic assembly workers.
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Declining employment has accompanied softening wages in many instances. From a geographic perspective, declining automotive jobs is nothing new for many midwestern states and communities. The industry was highly concentrated in the Midwest throughout the first half of the twentieth century but afterward began to disperse—first to other U.S. states and later around the globe. Considering domestic employment in automotive parts and assembly combined, the next graph shows that the states of Ohio, Michigan and Indiana accounted for over three-fourths of automotive employment through World War II. By 2005, their employment share had fallen under one-half.
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During the current decade, the automotive job decline has been precipitous. The final graphic (below) indicates that the three-state decline in automotive jobs has fallen by almost one-third since year 2000, from 576,000 to 383,000 over the first half of 2007.
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The reasons for these employment declines are several.
As always, productivity gains are reducing the labor content in automotive production. Labor hours per vehicle assembled by the “Detroit 3” car makers, for example, declined from 24–28 hours in 2002 to 22–23 hours in 2006. Beyond assembly, estimates by Martin Baily of the McKinsey Institute and the Institute for International Economics report that labor hours to produce an auto in North America, including parts, are decreasing at an annual average of 1.7 percent annually since 1987, and are now approaching 100 hours total.
Globalization of production has resulted in both off-shore operations and competitive pressures on domestic producers. Since 1996, the import share of light vehicle sales has increased from 12 percent of sales to 20 percent, year to date. Approximately one-quarter of domestically used automotive parts are now sourced abroad.
Despite some periods of re-concentration over the past 2 decades and the siting of many new plants in various Midwest communities in recent decades, the overall industry continues to disperse to other states, especially in the South.
Note: Thomas Klier contributed to this entry.
Posted by Testa at 9:16 AM | Comments (0)
June 6, 2007
The mouse that roared: Putting the sale of Chrysler in context
By Guest Blogger Thomas Klier
On Monday, May 14, 2007, DaimlerChrysler Corporation announced it would spin off its Chrysler division by selling it to Cerberus LLC, a private equity company. The news ended speculation regarding a possible sale of Chrysler as well as the identity of its ultimate acquirer. The pending sale of Chrysler has since been widely covered in the media. Some have referred to the sale as a watershed event for the U.S. auto industry, which has been undergoing structural change for a number of years. In recent years such changes resulted in new ways to approach the industry’s underlying problems, such as rising health care costs. Witness, for example, the unprecedented mid-contract negotiations between the Detroit Three, comprising Ford, General Motors (GM), and Chrysler, and the United Auto Workers (UAW), which resulted in increased cost-sharing for health care by employees and retirees of Ford and GM toward the end of 2005.
What follows is a brief analysis that places the sale of Chrysler into context from a Midwest perspective.
Who and what
Chrysler represents one of the most venerable names in the U.S. auto industry. For many years, it was one of the companies simply referred to as the Big Three. In 1998, Chrysler merged with Daimler AG of Stuttgart, Germany, in what was then widely hailed as a merger with great chances of success. By way of a $36 billion transaction, the DaimlerChrysler Corporation (DCX) was born.
However, the bond that was then forged by the merger was not to last for even a decade. On May 14, 2007, DCX ended several months of speculation by announcing its intention to sell Chrysler to Cerberus. This transaction is expected to close during the third quarter of this year. According to the terms of the agreement, Chrysler will subsequently be incorporated as Chrysler LLC. Cerberus will own 80.1% of this entity. DCX, soon to be renamed Daimler, will retain a 19.9% stake.
Cerberus is a private equity company based in New York City. It has controlling interests in a number of companies, representing various industries. Among them are a number of auto supplier companies. In 2006, Cerberus made news by acquiring 51% of General Motors Acceptance Corporation (GMAC), GM’s financing arm.
Chrysler’s footprint
The newly incorporated Chrysler LLC will no longer be a Big Three company. It is now common to refer to the Big Six auto companies in the North American market; they are, ranked in order by U.S. market share: GM, Ford, Toyota, Chrysler, Honda, and Nissan. Chrysler will, however, rejoin GM and Ford as one of the Detroit Three.
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Chrysler is currently in the midst of a downsizing program that was announced on February 14, 2007. That restructuring will reduce its total number of employees in North America by about 13,000. The company is also cutting back its production capacity by closing one assembly plant and shutting down lines at two other plants. The new Chrysler LLC will be more concentrated in the Midwest in its production operations than the other domestic automakers (see map). It will also produce a higher share of its output as light trucks than any other Big Six automaker. Finally, of the Big Six, Chrysler will be the automaker most dependent on the North American market.
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Why does this matter?
These are challenging times for the domestic auto sector. The Detroit Three continue to lose market share, a number of auto parts makers are in Chapter 11 bankruptcy, and the domestic automakers have been in strained negotiations with their unionized employees for the past two years. Delphi—GM’s former parts subsidiary, spun off in 1999 and instantly becoming one of the largest auto parts supplier companies—filed for Chapter 11 in 2005. Negotiations between GM, the UAW, and Delphi about finding a way for Delphi to emerge from Chapter 11 have been going on for over a year.
At the same time, private equity and venture capital firms have been quite active in restructuring the U.S. auto industry for a number of years. Against this background Cerberus’s purchase of Chrysler is noteworthy in that it represents the first time a private venture capital firm has acquired an automaker. As a consequence, by way of becoming a private company, Chrysler LLC will likely have the ability to take a longer-term, strategic approach toward regaining profitability. Yet its owners will want to see a return on their investment along the way.
On the product side, these demands on the company may require refocusing Chrysler products so that they line up with consumer demand. On the cost side, this primarily means addressing the growing health care liabilities that Chrysler, along with the other Detroit automakers, is facing. The next opportunity to do this will arrive soon. This summer the Detroit Three and the UAW are scheduled to negotiate a new labor contract, because the current four-year contract will expire in September. The presence of Cerberus at the bargaining table is likely to change the dynamic of these negotiations.
As the Detroit-based carmakers are struggling to stem their market share losses, Chrysler, the smallest of the Detroit Three, has just been moved into the spotlight by way of its sale to Cerberus. In the process of addressing a number of difficult competitive challenges, Chrysler—the car company that invented the minivan and, in 1980 as it was teetering on the edge of bankruptcy, was bailed out by the federal government—could well set the course for the Detroit Three for years to come.
Posted by Testa at 5:12 AM | Comments (1)
February 14, 2007
The auto region continues to reshape
By Guest Blogger Thomas Klier
On Wednesday, February 14, DaimlerChrysler AG announced a restructuring of its North American Chrysler Group. Adjusting its vehicle production capacity to continued market share losses, the company will eliminate shifts at three different assembly plants (Newark, DE, and Warren, MI, in 2007, St. Louis, MO, in 2008) and idle the Newark plant in 2009 (that plant is identified in figure 1 by a blue star).
Conversely, Toyota Motor Corporation, in response to strong growth in the North American market, is about to announce where it will build its next vehicle assembly plant in North America. The company is looking to expand its footprint of production facilities to meet its goal of achieving 60% of local production. Several weeks ago a story appeared in the Wall Street Journal identifying a handful of locations that are being considered by the company (identified in figure 1 by the red stars).
What are the main drivers underlying a decision to locate an assembly plant? This blog suggests a number of influences.
First, let’s briefly outline the current industry geography. Today there are 68 full-size assembly plants (plus two currently under construction) producing cars and light trucks, such as minivans and sport utility vehicles, in the U.S. and Canada. Figure 1 shows them all with the exception of the lone West Coast plant (the GM-Toyota joint venture called NUMMI, which is located in Fremont, California, in the San Francisco Bay area).
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The striking feature of figure 1 is the high degree of clustering exhibited by this industry. The vast majority of the plants are located in the interior of the country, extending south from Michigan and Ontario in a rather narrow band. In addition, one can see the importance of transportation infrastructure. It is a key location factor for manufacturing industries, such as the auto sector, which are operating based on lean manufacturing principles. Interstate highways and rail lines (the map only shows interstate highways) are enabling assembly facilities to connect with their supplier base on a just-in-time basis.
In a second quarter 2006 issue of Economic Perspectives, Thomas Klier and Daniel P. McMillen analyzed how the geography of assembly (as well as auto parts production) facilities has evolved in the U.S. and Canada since 1980. They identify noticeable changes in the industry’s geography. These changes, however, occurred gradually, in evolutionary fashion over the last three decades.
Two major trends have shaped the footprint of today’s assembly facilities: Foreign-owned assembly plants gravitated towards the southern end of the auto region, preferring warmer climes and a work force that had not previously been employed in auto assembly. With two exceptions, all of foreign-owned assembly plants operating today have been so-called greenfield plants, i.e., newly constructed plants on land that was previously not a manufacturing site. The domestic assembly facilities, on the other hand, re-grouped in the northern end of today’s auto region after decades of serving the major population centers directly. They began shutting down their coastal plants in the late 1970s in response to the changing economics of transportation costs associated with serving the national market.
And so today’s auto region with a clearly defined north-south extension came about. Concentration of locations remains very important for this industry: Assembly plants need to be near their supplier base. Yet there are reasons for them not to be right next to one another. Assembly plants are large manufacturing facilities drawing their work force from an area larger than the immediate vicinity. Notice in figure 1 how many of the 50-mile circles drawn around assembly plant locations do not overlap.
How do the latest developments fit the ongoing re-shaping of the auto region described above? Chrysler, in line with recent restructurings last year by GM and Ford (plant closings in Georgia, Michigan, Minnesota, and Virginia as indicated by the other blue stars on the map), is trimming a production facility at the periphery of its manufacturing footprint. As a result, the domestic vehicle production has recently become more concentrated in the Midwest than it has been for many decades. For example, the announced closing of the Delaware assembly plant leaves only one vehicle assembly facility in the Northeast (there were six as recently as 1980). Should Toyota choose one of the locations mentioned in the press, it could best be described as "in-fill" development. It would fill a gap in the auto region which was extended considerably further south by assembly plants that located in Mississippi, Alabama, Georgia, and South Carolina during the 1990s.
And so the combination of recently announced plant closures and a soon to be announced plant opening are reinforcing the shaping of an auto region that is located in the interior of the country, with a north-south orientation, extending northeast into Ontario.
What are the implications of this analysis for Michigan and the Midwest? In Michigan especially, intense discussion is under way concerning what role, if any, public policy can play in shaping the region’s future. Currently, the competitive struggles of the domestic automotive companies (formerly known as the Big Three) and their suppliers are affecting the Midwest economy. Surely, much will depend on individual companies’ abilities to restructure and find ways forward. However, as the research by Klier and McMillen suggests, at the same time as traditional automotive companies are retrenching, they are also regrouping closer to the traditional (midwestern) center of the automotive industry. Actions speak louder than words in many instances. Here, locational decisions strongly suggest that the Midwest remains a highly productive place to manufacture automotive parts and vehicles. The region’s advantages lie in the fact that: 1) it is already the center of production so that proximity to suppliers makes it cost effective in many respects, 2) its transportation infrastructure is highly developed to serve manufacturing, and 3) its existing work force is highly skilled and trained in these industries. Accordingly, in addition to moving in new economic directions, local policy actions to help restore the region’s place in manufacturing seem not misplaced.
Posted by Testa at 4:19 PM | Comments (0)
February 5, 2007
Michigan Labor Market--Still Awaiting Recovery
Following the 2001 national recession, the labor market remained somewhat slack and slow-growing until mid-2003. Subsequently, the national economy accelerated, pulling along labor demand and employment growth. The year 2006 marks the third consecutive year of strong year-over-year employment growth (and falling unemployment) nationally.
Meanwhile, the Seventh District, which includes the state of Iowa and most of Michigan, Indiana, Illinois, and Wisconsin, also experienced an employment recovery. However, the pace of job growth in the Seventh District has fallen somewhat short of the nation over most of the post-recession period. From the fourth quarter of 2001 until the fourth quarter of 2006, payroll job growth is currently reported to have risen by 3.9 percent in the nation, versus 0.7 in the Seventh District states overall.
Much of the Seventh District weakness is confined to Michigan, and recent indications show little sign that the Michigan labor market performance is turning around. As illustrated below by a 3-month moving average of monthly unemployment rates, the U.S. and the rest of the Seventh District states (excluding Michigan) have reported a falling rate of unemployment over much of the past 3 years. Currently, the region’s unemployment rate lies very close to the nation at around 4.5 percent. In contrast, Michigan’s current unemployment rate, after improving in 2005, is now back where it was in 2004.
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Unemployment rates are not fool-proof indicators of labor market performance because they are conducted by household surveys which are subject to sampling bias. However, other independent indicators tend to corroborate these survey indicators. Among the other indicators, the survey of payroll employment at business establishments is reported for states by the Bureau of Labor Statistics. It too is based on a survey, and it is revised later as more information becomes available.
Below, year-over-year growth in payroll employment is shown for Michigan versus the District and the U.S. The payroll survey suggests that Seventh District job growth, though slower than the U.S., has shown steady growth over the past three years. Michigan’s year-over-year job growth has continued to decline—at an accelerating pace.
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So too, reported information on initial claims for unemployment insurance by laid off (or otherwise severed) workers exhibits the same pattern: deterioration at an accelerated pace over the past three years in Michigan, and improvement outside the state.
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In past decades, weak automotive-related performance in Michigan has sometimes been appraised as temporary or cyclical. However, this time around, as indicated by labor market performance in surrounding states, weak economic performance in Michigan appears to reflect structural problems for auto makers and automotive supply companies. Since early 2004, Michigan has lost 17.6 thousand net jobs at auto assembly establishments (a 24 percent decline) and 27.5 thousand jobs in motor vehicle parts production (a 15.8 percent decline).
Overall domestic automotive production is being eroded by imports and by enhanced production and sales of transplant automotive companies who largely produce outside the state of Michigan. Recent employee buyout programs at Ford, General Motors, and Delphi will result in a head count reduction of nearly 100,000 across the U.S. Approximately one-third of those jobs are situated in Michigan.
At least for the near future, the Michigan labor market situations does not yet look to be improving. The Michigan-domiciled auto assembly companies foresee or have announced continued employment reductions and facilities closings in both production and in administrative/R&D employees. Longer term, the Michigan economy's sharp automotive concentration means that the labor market will continued to be driven by developments in the industry.
Posted by Testa at 9:14 AM | Comments (2)
September 28, 2006
Michigan automotive and white collar jobs
Loss of market share from the traditional Big Three automakers to global competitors has impacted Michigan’s economy, leading to some deep concerns about its future. To date, most attention to this issue has focussed on job loss related to automotive production activity. Auto assembly and parts production continues at a strong (though eroding) clip in the United States, but it is rapidly shifting away from Michigan. So far, the “new domestic” carmakers have avoided siting new production plants in Michigan, preferring to site them in the South, as well as in Ohio and Indiana, such as Honda’s recent announcement to build a plant in Greensburg, Indiana. However, another important employment component for Michigan also relates to the health and sales market share of the Big Three—that is, the nonproduction activities of these auto assembly companies. These activities include research and development (R&D), sales, finance, and management operations, which form an outsized economic engine for the state. In what ways does the survival (and growth) of Big Three companies go hand in hand with the nonproduction jobs located in Michigan?
Nonproduction employment of auto assembly companies typically amounts to a surprising 35%–45% of total employment and an even larger share of payroll. While Michigan is highly concentrated in automotive production—with 15 auto assembly plants—it is also the domicile of the Big Three's headquarters along with significant company R&D and other operations. For this reason, it is not surprising in Michigan to find that nonproduction automotive employment is more concentrated than elsewhere. In counting Big Three nonproduction employment at their production plants, headquarters, R&D centers, and other auxiliary facilities in Michigan, nonproduction employment likely outnumbers production employment, making up a minimum of 55%–60% of total Big Three jobs in the state.
Moreover, additional Michigan personal income and jobs are generated from local services purchased by headquarters-type operations. As Chicago Fed economist Yukako Ono has found in recent studies, headquarters operations often purchase key services for the entire company network. These purchases may include financial services, R&D, information technology (IT) products and services, strategic management consulting, and many more. From the regional economy’s standpoint, these purchases are often sourced locally to a large extent. In fact, Ono discusses the possibility that the choice of location by headquarters may be influenced by the cost and availability of such business services.
Similar behavior of automotive headquarters makes Detroit and its surrounding environs much more than just a factory economy. Specifically, much of the value of Big Three automobiles derives from product development and design, and most of that R&D activity is conducted in Michigan. As derived demand from the domestic automotive industry, key business services are largely produced in Detroit. My blog entry from August 16 shows that the Detroit metropolitan area far and away tops other midwestern metropolitan areas in its concentration of professional and technical services employment. Among Detroit’s top sectors are engineering services (employment at 51,594 jobs in 2002) and scientific research and development (18,126 jobs in 2002).
Nationally, much R&D is funded and performed by automotive companies and their affiliates. According to the most recent survey of industry funds for research and development, which is conducted by the National Science Foundation, the automotive industry accounts for $14–$15 billion in annual R&D funding in the U.S. To be sure, in recent years, as auto assemblers have increasingly relied on their first-tier suppliers for entire components and automotive modules, some significant R&D responsibilities have been shifting away from assembly companies and toward automotive parts companies. Still, today, the lion’s share of this R&D is performed in-house, that is, largely by auto assembly companies themselves.
These practices have kept Ford, General Motors (GM), and Daimler-Chrysler among the largest R&D performers in the U.S., with Michigan at the hub of such activity. For this reason, Michigan ranks second only to California in funds for industrial R&D. And for 2003 as the figure below shows, the motor vehicle assembly and parts industries in Michigan accounted for $10.7 billion of the $15.2 billion industry-performed R&D in the state. The ties between these expenditures and local employment is apparent. According to a parallel survey by the National Science Foundation, the Detroit metropolitan area employed 102,500 research scientists and engineers in 2003—a concentration of 5.2% of the work force as compared to 3.9% nationally.
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Would Michigan retain this important function in the event that Big Three sales shares continued to decline? On the positive side, there are some indications that the Detroit area’s role in automotive research is in the process of growing beyond its historic roots. For example, the “new domestic” automakers have all sited research, development, and design facilities in the Detroit region, such as Toyota’s recently announced $150 million R&D center investment in Ann Arbor. Others, such as Hyundai and Nissan, have also recently expanded their facilities or announced plans for similar expansions.
So, too, Detroit’s attractiveness to automotive company headquarters operations displays some sparks of growth. Major automotive parts producer Borg Warner moved its headquarters from Chicago to the Detroit area last year. More generally, Chicago Fed economist Thomas Klier has documented an upswing in auto parts company headquarters moving to Michigan. The presence and growth of automotive parts headquarters in Michigan probably bodes well for company-sponsored R&D activity as well.
Still, competitive challenges are at play both here and abroad. Domestically, figures from the U.S. Bureau of Economic Analysis show that the annual R&D funding in the U.S. by Asia-domiciled automotive companies, at $125 million, makes up a very small share of automotive R&D in the U.S., amounting to less than 2 percent. And while the Detroit metropolitan area has so far attracted many of these transplant R&D activities, historically, it is not uncommon to find that attendant service activities eventually follow production in manufacturing. In this direction, the movement of U.S. automotive production from the Midwest toward the South is drawing the attention of those seeking R&D activities as well. For example, Clemson University in South Carolina has launched a research program and industrial park to foster technology development and transfer in cooperation with companies such as BMW and others.
And so, Michigan has several important economic activities at stake amidst the current upheaval among automotive companies.
Posted by Testa at 1:00 PM | Comments (0)
September 13, 2006
Where is automotive employment in the Seventh District?
Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.
But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.
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A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.
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The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.
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Posted by Testa at 10:05 AM | Comments (0)
July 25, 2006
Mid-year jobs report
Looking west from Ohio to Iowa and Minnesota, there is a distinct falloff in economic growth, at least according to recent reports on payroll employoment. With only a three-week lag, the Bureau of Labor Statistics reports their estimates of payroll employment monthly for individual states. The reported monthly figures for June 2006, now complete the second quarter of this year.
The table below displays year-over-year payroll job growth in the seven Midwest states and the U.S. Note that job growth in all states except Iowa and Minnesota fell short of the U.S. growth of 1.4 percent.
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One reason that explains lagging job growth in many Midwest states is their heavy concentration in manufacturing industries. As the Chicago Fed’s Midwest Manufacturing Index suggests, real output growth in manufacturing has been growing strongly now for 3 years in both the nation and in the Midwest. In general, U.S. manufacturing growth has been buoyed by strong domestic demand for capital investment goods and by growth in U.S. exports. Some notable (and growing) Midwest capital goods sectors are mining and construction machinery, farm machinery and equipment, heavy trucks, and electrical equipment. However, strong output growth in manufacturing does not typically propel much payroll job growth because real output gains are generally being achieved through higher productivity rather than through more labor input.
With respect to total payroll employment, the three easternmost states of Ohio, Indiana, and Michigan show the weakest year-over-year growth. Further to the west, job growth in Illinois and Wisconsin have been stronger, with still stronger growth for Iowa and Minnesota.
For some states, such as Illinois, recent payroll job growth is especially encouraging since growth had been lagging since the last recession. Along with Indiana, Michigan, and Ohio, Illinois employment has not yet re-attained its previous peak which occurred in the year 2000.
Illinois' job gains are being led by growth in professional and business service industries even while manufacturing employment has been declining. The Chicago-area economy, which comprises the bulk of Illinois, has been shifting into business and financial services while moving away from manufacturing. Chicago’s business and financial services depend on customers in surrounding manufacturing-intensive states but they also serve some global and national markets.
At the other end of the spectrum, Michigan’s recent job performance remains very much in a league of its own, even when compared to other Midwest states. The chart below indexes total payroll jobs to the first quarter of 2001. While the rest of the region has almost re-attained its former employment peak, Michigan employment remains 6 percent to 7 percent below its previous peak.
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The troubles of domestic automakers Ford and GM, and their automotive parts suppliers, have been weighing down growth in Michigan. Since the year 2000, their combined share of U.S. light vehicle sales has declined from 51.1 percent to an average 41.3 percent year-to-date in 2006.
These companies are highly concentrated in Michigan. In addition to their global headquarters and many research facilities and part suppliers, for example, Ford and General Motors together maintain 12 of their 34 U.S. assembly plants (35%) in Michigan. For this reason, Michigan residents are closely following the strategic plans of these companies as they attempt to restore growth and profitability.
Posted by Testa at 7:26 AM | Comments (0)
July 19, 2006
Honda and tax incentives
Honda recently decided on a site in Indiana for its new North American auto assembly plant over sites in Ohio and Illinois. Indiana offered Honda generous incentives of EDGE tax credits, training assistance, and real and personal property tax abatements totaling up to $41.5 million. In addition, the state will provide infrastructure support for water, wastewater, and road improvements of approximately $44 million. This offer was generous relative to packages that have been offered lately by northern states to woo automotive plants. Did the incentives swing the deal for Indiana? And how can states hope to recoup these upfront costs and revenue losses? More importantly, is society well served by such raw-knuckled competition among states for production facilities? The answers are not definitive, but, though often condemned, the use of fiscal incentives may not be such a bad thing.
Large offers of this nature have become commonplace. Speaking at the Chicago Fed’s recent symposium on the automotive parts industry, Sean McAlinden of the Center for Automotive Research reported that the state of Georgia offered Korean carmaker KIA a package estimated to be worth $409 million. This was noticeably larger than the recent average offers of $57 million in tax incentives for automotive assembly plants for northern states and $44.2 million (plus free or subsidized infrastructure and job training) for southern states.
On completion of such deals, company representatives often proclaim that the incentives did not determine the choice of location, but were rather a sweetener or a comforting pledge of good faith. Professional site selection analysts tend to echo these sentiments. Taking such statements at face value, why do states offer such high stakes packages?
No doubt, there are benefits at the ballot box to those elected officials who can brag about bringing jobs and income to the state. It has been argued that these benefits, especially for investment projects that loom large in the media, result in overly generous offers and poor decision-making by state officials. This is one reason that some states enact legal requirements making the terms of such deals easily available to public scrutiny.
But how can states afford to make such offers? One reason is that the public service costs of hosting businesses are usually lower than the taxes paid by them; that is, there is typically a fiscal surplus inherent in state business tax systems that allows state officials to discount the public tax and service bills on new investment. When I examined the likely costs of public services provided to businesses in a 1996 study, I found that, across all U.S. regions, direct business taxes tended to exceed the value of direct service benefits provided to business by a ratio ranging from 1.5:1 to 2:1. This excess may allow room for governments to lower business tax bills through selective incentives.
Click to enlarge image.
Even so, opponents of the use of selective tax abatements may argue that incentives were unnecessary and that businesses have an information advantage in bargaining with states for incentives even when they will end up choosing the same location in any event. Certainly, the proclamations of businesses that afterwards contend that incentives were not a primary consideration in their location decision bear this out. If so, states are arguably better off refraining from incentives and instead spending the business tax bounty on public services or returning personal taxes to state residents.
In the case of auto plants, it is interesting to note that even if individual states “give away the store” in luring a particular auto assembly facility, the end result may ultimately benefit the state’s economy. The reason is that the assembly plants typically attract auto parts suppliers to the area. As Chicago Fed economist Thomas Klier has shown (below), a typical assembly plant can draw a significant nearby supplier base. For recently opened assembly plants in North America, an average of 19 to 20 direct suppliers have typically opened up within 60 miles of the plant. More generally, assembly plants tend to pull in many more supplier plants within several hundred miles, and supplier plant employment generally exceeds assembly plant employment by around 3.5:1.
It is true that in the case of the Honda assembly plant in Greensburg, IN, many of the supplier plants will be outside Indiana’s border and tax reach. However, if all or many adjacent states are successful in attracting assembly plants, the spillover benefits of taxation and income will accrue in roughly equal measure to the states. A so-called cluster of automotive production capability may be achieved for the multi-state region.
Source: Thomas Klier and James Rubenstein.
Click to enlarge image.
But are the incentives necessary to achieve or preserve the region’s cluster of automotive plants? At least for highly capital-intensive industrial activities such as manufacturing, the so-called business climate of the state is paramount. Placement of an expensive investment by a company in a state must be based on a strong conviction that future government leaders will not expropriate the facility’s value through regulation, over-taxation, or non-cooperation in future land use and public infrastructure needs. The situation is not unlike making investments in a foreign country. When the capital investment is fixed and not easily moved, confidence in local government is a key factor in assessing investment risk.
In this regard, Honda’s decision to locate in Indiana rather than Ohio is understandable. While proximity to its large suppliers in Ohio and vicinity was a compelling reason for considering Indiana, the desirability of diversification among government entities may have also been a factor. As for the incentive package, there is surely more to a favorable state business climate than a flashy offer of tax incentives. But at the same time, the offer of a fiscal incentive package may be a strong signal to the business that its presence will be valued. In addition, a sizable and highly visible tax incentive package may represent an implicit acknowledgment by the state that the investment is wanted, making it more difficult for future political leaders to renege on the state’s cooperative relationship with the company.
Of course, implicit tax incentive contracts of this sort work both ways. Companies that receive generous tax incentive packages, but later do not deliver on promised jobs and investments, are easy targets for retribution by state officials. In many instances today, “clawback” provisions are included upfront that eliminate favorable tax treatment if companies do not deliver.
Even so, the “gold standard” by which public policies must be judged is whether the state could possibly do better. Opponents of tax incentives for business argue that, because of such tax breaks, critical public services such as education remain underfunded. In particular, public education suffers, contributing to sub-par income growth and exacerbating social problems such as crime, poor electoral participation, and poor public health. If we accept this view, the economic returns to the practice of competitive business tax incentives are not optimal; the economic returns from any short-term job and income gains to the local economy are less than the foregone returns that greater education spending would bring locally and nationally.
In rebuttal, one might argue that business taxes are not the only possible source of revenue for highly valued public services such as education. An ideal of government is one in which citizens understand both the value of public services provided and the real costs of these benefits and, subsequently, make their choices known at the ballot box.
With the tendency among governments to over-tax business activity, the electorate may believe that they are getting a free ride for public services—that they are not in fact paying for these services. But they are usually mistaken. People and households end up (indirectly) paying for public services in any event. After all, business taxes are ultimately reflected in higher product prices paid by state residents or in lower wages and salaries paid to employees.
So why do many voters and even some policy analysts advocate the taxation of business activity to finance public services that primarily benefit households? Some argue that Americans like their taxes hidden and furthermore that this is a reasonable way for governments to finance high-payoff public services. But this approach has risks. If taxes and prices for public services are hidden, can the citizenry really make sensible decisions about what levels, types, and extent of services government should provide? What do you think?
Posted by Testa at 10:47 AM | Comments (0)
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.
Posted by Testa at 7:23 AM | Comments (0)
April 27, 2006
Midwest Auto Suppliers at a Critical Crossroads
In regard to the economy, everyone associates the Midwest, especially Michigan, with the Big Three automotive nameplates of General Motors (GM), Ford, and Daimler-Chrysler. Also, most everyone is aware that the Big Three are closing some of their assembly plants, where finished vehicles are produced, in part because they are losing domestic sales to other international assembly companies. But the more acute threat to the Midwest economy comes not from assembly plant shutdowns but from the possible retrenchment in the region’s much larger auto supplier industry—the subsector that produces automobile parts for the assemblers. Automotive suppliers are the lesser known part of the auto sector, even though they employ three to four times as many workers as assembly operations. Today, many Midwest automotive suppliers are operating in bankruptcy or are under severe stress due to their current business environment. To assess the industry’s prospects, the Chicago Fed held a conference on the changing geography and business environment for auto suppliers on April 18–19 at its Detroit branch. Presentations from the event are now being posted on the Bank’s website.
Why are so many Midwest supplier companies beleaguered? There are several factors, including the rising costs of inputs, the restructuring of the traditional assembler–supplier relationships, a shrinking customer base, high labor costs, and heightened import competition.
Most generally, the role and tasks of many supplier companies have become more complex. As Michael H. Moskow stated in his remarks opening the conference, “traditional carmaker–supplier relationships are rapidly changing. Today, assembly companies are requiring more from their primary suppliers in terms of product design, engineering, and cost. But some assemblers and suppliers are finding it difficult to achieve the cooperative relationships now required to produce popular, high-quality vehicles.”
In this regard, some suppliers reported that their relationships are better with some of the new international carmakers than with the Big Three. Representatives from Ford and GM acknowledged that supplier relations have not been as strong as desired and outlined efforts being made to improve their supplier relations.
According to Michael H. Moskow, another challenge “is that many suppliers, particularly in the Midwest, are losing business because their Big Three customers continue to lose market share to foreign nameplate manufacturers located in other regions of the United States, especially the American South. The flipside to this, of course, is the opportunity for suppliers to increase sales to the foreign manufacturers who are producing an ever higher number of vehicles in the U.S. But the transition to new customers may be a formidable challenge for many suppliers. New customer relationships take a long time to build, and the costs of relocating operations closer to new customers or servicing these customers from distant production facilities can be significant.”
In reflecting on the new geography facing Midwest suppliers, Jim Rubenstein and Thomas Klier illustrated the heightened challenge that Midwest suppliers face in transporting parts from Midwest locales to the emerging auto assembly belt. Between 60%–65% of both assembly and parts plants remain in the Midwest today. Yet, assembly plant locales are shifting to the South (from 5 plants in 1979 to 15 today), pulling parts production along. Recently, the “pull” southward on parts production by assembly plant relocation places even greater pressures on Midwest parts suppliers. In particular, there has been a further southward drift in assembly capacity in recent years, well beyond the mid-south locations in Kentucky and Tennessee that were established during the 1980s and early 1990s. As illustrated by Thomas Klier and Jim Rubenstein in the slide below, for some particular types of auto parts, the increased shipping distances from the Midwest make for difficult “one-day delivery” times that are often desirable.
Many Midwest suppliers are also being challenged by import competition. The nominal value of direct imports of motor vehicle parts to the U.S. has more than doubled over the past decade, increasing from $37 billion in 1995 to $84 billion in 2005. So, too, indirect and unobserved parts imports have also climbed in all likelihood. One-half of the loss of Big Three market share since 1995 has come from increased imports of assembled autos. Many of the parts in those same autos were produced abroad as well.
Finally, some Midwest supplier companies are at a competitive disadvantage to both overseas supplier plants and some domestic supplier plants in other regions with respect to wage and benefit compensation, working arrangements, and legacy costs. In response, management-labor relationships are being successfully restructured in this industry. JCI and Metaldyne are examples of supplier companies that have successfully introduced competitive business environments in cooperation with the United Auto Workers, the industry’s major labor union.
Based on such successes, the conference participants hope and cautiously believe that the needed transitions to create a stronger business environment for the Midwest automotive industry will come to pass. Also, they maintain, there are a number of reasons why Michigan and the surrounding areas will remain an important location for the auto industry. These include the region’s abundance of skilled workers and associated training programs; a well-developed infrastructure for logistics and transportation; and a still dominant and highly concentrated network of materials suppliers, research and development, and parts producers—all of which make up the world’s most productive automotive region.
Posted by Testa at 12:03 PM | Comments (0)
March 22, 2006
Auto Parts Issues & Conference
A conference discussion on the issues facing automotive companies, workers, and communities will be held on April 18–19, 2006, in Detroit, at the Chicago Fed’s new branch building. The conference will center on the auto supplier industry. Suppliers employ three times as many workers as assembly operations, but as an industry, it is little known to most of us. However, as assembly operations are changing owners and shifting geographically, the responsive behavior of auto suppliers will have important implications and impacts for many Midwest workers and communities.
One of the conference organizers, Thomas Klier of the Chicago Fed, has been studying the behavior and geography of the North American automotive industry for over a decade. During that time, never have the questions and uncertainty about the industry’s future footprint in the Midwest been as portent for the region’s economy as today. The traditional assembly companies (the Big Three) and their (more-sizable) suppliers have been pulling in production from the coastal United States to the Midwest. At the same time, the Big Three and suppliers have seen their market share shifting southward from the Midwest to transplant assembly companies and their suppliers. This leaves the upper Midwest with an ever-greater concentration of the most vulnerable segment of the North American automotive industry.
Thomas offers the following analysis of the shifting geography of Big Three and transplant assembly operations to put this matter into perspective.
Click to enlarge image.
The U.S. auto industry’s footprint has been changing for a considerable time. Since the early 1980s the domestic auto producers have been losing market share to transplant producers setting up plants in the U.S. and Canada as well as a growing number of imported cars. Subsequently the Big Three closed most of their coastal and southern plants (red stars in the map) and pulled back to their traditional Midwest home.
The transplant assembly facilities opened since 1980 have been sited in the interior of the country, primarily in a north–south corridor formed by interstate highways 65 and 75, between the Great Lakes and the Gulf of Mexico. Since 1990, many of the new assembly plants have been located in the Deep South, centering on Alabama and Mississippi. That trend continued with last week’s announcement by Kia, a Korean automaker that is part of Hyundai Automotive Group, to build a new assembly plant in southwestern Georgia.
Table 1 highlights these geographic shifts with data for the last 6 years. A unit of observation is an assembly line (a measure of the output of an assembly plant, as assembly facilities can have multiple lines). Since 2000, the Big Three closed 8 assembly lines in the U.S. During the same time the so-called transplants, carmakers which are headquartered outside of North America, opened five assembly lines. None of these were sited in the three traditional auto industry states of Michigan, Indiana, and Ohio.
Click to enlarge image.
The Big Three restructuring summarized in table 1 includes two major capacity cutbacks by Ford (including the announcement from January of this year), GM’s announcement from November of last year, and Chrysler’s restructuring from several years ago.
The combined effect of these on the footprint of the Big Three assembly operations is a significant increase of their concentration in the core auto states (the share of Big Three assembly lines located in Michigan, Indiana, and Ohio will increase from 43% in 2006 to 51% by the time the recently announced restructurings will have been put into place) at a time when the domestic carmakers are substantially trimming output and capacity.
The April 18-19 conference in Detroit will discuss these trends in much more depth. More importantly, many of the nation’s experts will address questions that are key to the Midwest's economic future:
- What are the indications and plans for a turnaround of the Big Three assembly companies?
- How important are Big Three losses with respect to the region’s automotive parts industry, and in what ways?
- How are auto parts companies restructuring to put themselves on a firmer footing going forward?
- What role will changing labor-management relations and working conditions play in the re-configured auto parts industry?
Posted by Testa at 10:39 AM | Comments (1)
November 22, 2005
Driving Indiana’s and Michigan’s Economic Performance
The Midwest economy is lagging the U.S., but some states are doing better than others. These differences may help us understand the reasons for the region’s lagging economy.
Last week in Indiana, I presented some evidence that the entire region is growing more slowly than the nation. Payroll job growth in our Seventh Federal Reserve District is up only 0.6% for September from one year earlier, versus 1.6% in the nation. In some respects, this performance is not surprising since, nationally, manufacturing jobs are still declining (down 1% year over year through September), and the Midwest’s economy is steeped in manufacturing. In addition, the region’s economy is bogged down by the structural change taking place in the automotive industry. Foreign nameplates continue to gain market share from the domestic automakers (previous blog). Since the foreign nameplate companies and their parts suppliers tend to locate in the South, jobs and income are seeping away from the Midwest.
In this regard, comparing the performance between Indiana and Michigan is telling. Though both states rank among the top 3 nationally in manufacturing concentration, the unemployment rate in Michigan stands at 6.1% in Michigan (Oct.) versus 5.4% in Indiana. Year over year, manufacturing payroll job growth is virtually flat in Indiana, but down over 3% in Michigan.
Click to enlarge.
The economies of both states are automotive intensive, but Michigan to an even greater degree. Indiana’s automotive share dominates manufacturing inside the state, at 16%. But Michigan’s automotive sector accounts for 35% of its manufacturing employment. A weakening automotive sector, then, would be felt more sharply in Michigan.
On top this, the auto sector’s performance in Michigan has been worse. From 2001 to date, automotive jobs have fallen 24% in Michigan, compared to 8% in Indiana.
Indiana’s automotive performance is buffered by having a larger share of foreign auto parts and auto assembly plants than Michigan. According to senior economist Thomas Klier, 29% of automotive parts plants in Indiana are foreign owned, as are 2 of its 3 auto assembly plants.
Auto parts makers tend to locate close to their customers. In Indiana, the foreign-owned parts plants are more likely to supply parts to those automakers who are gaining market share—the foreign nameplates.
Michigan’s automakers are only 17% foreign owned; its only foreign owned assembly plant is the Mazda plant, versus its 15 domestic auto assembly plants.
If the current shifts in market share among automakers continue, it will be imperative for Michigan’s economy to attract investments from the successful auto suppliers and auto assembly companies.
Other performance differences between Indiana and Michigan are intriguing, though one cannot draw any hard conclusions. The chart below illustrates the population growth of the largest metropolitan areas in each state—Indianapolis and the Detroit MSA. Indianapolis’ population growth has exceeded the surrounding areas, and far exceeded that of the Detroit metro area.
Click to enlarge.
In searching for explanations, manufacturing concentration again comes to mind. As recently as 1969, only 26% of Indianapolis’ overall employment was manufacturing, versus Detroit’s 35%. Generally speaking, “factory towns” have had the roughest road in restructuring. As manufacturing employment shrinks, such cities must re-employ larger shares of their work force in new industries and activities. Otherwise, workers move from the area and create a different set of challenges to the town governments. That is, how to efficiently use and maintain their current roads and buildings for a less populous (and sometimes less wealthy) population.
Governance structures may also explain some of the challenges. Central city Detroit has been buffeted by job, population, and income flight, with concentrated poverty left in the wake. Detroit city leaders have been unable or unwilling to climb above the city’s fiscal problems to re-build its economy. To what extent has this failure come about because the central city was isolated from the rest of the metropolitan area (and state), and left to solve profound problems with its own (meager) resources?
Indianapolis and other cities have taken some modest steps in consolidating local governance to a closer fit with their metropolitan-wide economies. In the late 1960s, Indianapolis moved toward a “Unigov” structure. As Rick Mattoon discusses (working paper), the city’s boundary was expanded from 82 square miles to 402 square miles, with a legislative body responsible for governing the city. Though there remain many independent governments, taxing authorities, and school districts within the city, the consolidated city has six administrative departments below the mayor’s office.
Other Midwest cities with elements of regional governance include Minneapolis–St. Paul, which has a metropolitan sharing of property tax base. Columbus, Ohio, has not consolidated, yet its central city government has been aggressive in annexing land outward toward its interstate beltway. Both metropolitan economies have outgrown the broader Midwest.
Posted by Testa at 1:00 PM | Comments (1)
October 20, 2005
Delphi and Midwest Auto Parts
Midwestern communities that host automotive plants are especially concerned at the recent bankruptcy actions of Delphi Corporation. Such concerns are not misplaced, since the geography and problems of Delphi’s operations are similar to those of some other automotive plants.
Delphi, the nation’s largest auto parts supplier, filed for Chapter 11 bankruptcy on October 8. The bankruptcy covers only its U.S. plants; non-U.S. subsidiaries are not included. The company, which had 2004 revenues of $28.6 billion, is looking to the courts to allow it to cut costs by rewriting its contracts with its UAW-represented work force, closing plants, and restructuring its legacy-cost obligations for retirement and health care.
Delphi is a global company. It employs 185,000 people around the world. Of these, about 50,000 are employed in the U.S. Delphi makes a wide range of auto parts, including dashboards, air conditioning systems, electronics, and batteries.
Drawing from a variety of data sources, my colleague Thomas Klier and his research assistant, Cole Bolton, have put together a map of Delphi’s Midwest operations that displays current employment (figure 1). The Midwest is home to about 70% of Delphi’s U.S. employment. The two states with the highest concentration of Delphi employment are Michigan (just under 15,000) and Ohio (just over 13,000).
Figure 1 -- click to see larger image
Delphi’s Midwest footprint is very typical of the overall auto supplier industry; the Midwest is home to 61% of auto supplier plants located in the U.S. (figure 2) with other plant concentrations in the southern states, Ontario, and Mexico.
Figure 2 -- click to see larger image
This remarkable concentration in the Midwest has historically been lucrative for the region. But now, the traditional hub of the auto industry is facing some serious challenges, and Delphi is something of a bellwether.
Challenges to U.S.-produced automotive parts are either directly or indirectly linked to international trade and investment, though ongoing shifts in the domestic geography of parts production also play a role. First, the sales of the traditional “Big 3” domestic auto assembly companies have been giving way to transplant sales. Transplant vehicles are produced in the U.S. by foreign companies and, in some cases, their supply chain of parts reaches overseas to a greater extent than Big 3 auto production. The U.S. light vehicle sales share accounted for by these foreign nameplates has risen from a 15% share to a 22% share during the past decade.
In addition to having global supply chains, this sales shift threatens Midwest parts plants because the transplants and their parts suppliers tend to be located south of the traditional auto states of Michigan, Indiana, and Ohio.
At the same time, imports into the U.S. of light vehicles produced in countries other than Mexico and Canada have increased their market share by 8 percentage points (to 19%) over the past decade. Imported cars do not usually contain U.S. produced automotive parts.
And finally, parts for domestic vehicles—including those produced by the Big 3—are increasingly sourced overseas, with China’s share growing fast, albeit off a small base.
These international developments and regional shifts will be analyzed further by Thomas Klier in a Chicago Fed Letter to be released later this fall. (The CFL is now available -- link.) In addition, Klier is organizing a conference in the Detroit area to further assess the directions and challenges of domestic automotive parts producers.
To be sure, Delphi has some unique characteristics concerning its relative wage and benefit costs that are not mimicked by other domestic parts operations. But the scale and geography of struggling Delphi are enough to focus Midwest attention on both the similarities and the differences.
Posted by Testa at 5:09 PM | Comments (0)
October 4, 2005
Michigan Auto Woes
Michigan’s traditional heavy reliance on the domestic auto industry has been troubling its economy over the past five years. While GM and the other domestic auto makers have “kept America rolling” with continued auto sales and sales/finance incentives, the state of Michigan has shown the worst performance among the states. Michigan’s unemployment is the second highest at 6.7 %; and it holds the bottom spot for year-over-year payroll job performance with a 1.1 percent loss as of August. It is the only state to have lost jobs over this period. What are policy makers to do? The state’s heavy reliance on the automotive sector makes efforts to diversify a long-term and risky proposition at best. In the short term, hopes ride on a turnaround for the domestic auto makers and their upstream auto parts manufacturers, while long-term bets are being placed on new industries.
Light vehicle production in the U.S. has continued to average around 12 million vehicles since 2000. However, as discussed by Thomas Klier (Chicago Fed Letter) earlier this year, it is the geographic shift of production from Michigan and other parts of the upper Midwest southward that is adversely affecting Michigan’s economy. A shift southward has accompanied the slippage in sales share of the domestic nameplate automakers—GM, Ford and Chrysler, which has fallen from a 65% share of domestic sales in 2000 to 58% in August, 2005. Rising imports into the U.S. have contributed to this slippage, with the import share rising from 17% to 20% percent of domestic sales. And so-called “transplants,” which are foreign nameplate companies producing vehicles in the U.S., have captured the rest of the rising share from Big 3 auto makers. Transplant production largely takes place in the South. Michigan hosts only a single transplant(Mazda), which is partly owned by Ford, whereas it hosts 17 domestic assembly plants. Ohio is also laden with domestic assembly and parts makers, but it has two Honda plants as an offset. Indiana is the third state in the Midwest auto troika, and it hosts an Isuzu plant in Lafayette and a recent Toyota plant in Princeton in the southwest part of the state.
As a result, from 2000 through July, 2005 year-to-date, Michigan lost 42% of its auto assembly jobs versus a 14% loss in the U.S. located outside of the three Midwest auto-intensive states. Ohio assembly jobs are down 25% over the same period, while Indiana is actually up one-third.
Auto parts are a larger part of the story, since there are four times as many jobs in parts as assembly operations. Parts makers tend to be located near the assembly plants for historical reasons, and more recently because “just-in-time” production requires proximity for many parts such as seats and sub-assemblies. Michigan’s parts employment is down 34 percent since year 2000, versus 19 percent in the rest of the U.S.
These job losses are felt more keenly in Michigan since, even among the Midwest troika of auto states, Michigan is by far the most dependent on automotive. Michigan’s job base is 7 times more concentrated than the nation in automotive parts, versus 5 and 3 for Indiana and Ohio.
Policy makers in Michigan have long recognized the state’s heavy reliance on this cyclical and competitively-challenged industry. In response, state government is weighing large expenditures to fund life sciences research and is also promoting new company formation in advanced manufacturing and homeland security. Local communities such as Kalamazoo and Grand Rapids are also trying hard to move life sciences activities along. But such efforts to encourage diversification through public support are not without risk, and even if successful, the results often take a very long time. At times like these, many possible avenues of growth and adjustments to public policy will be considered in Michigan. Meanwhile, any signs of a Big 3 turn-around will be enthusiastically cheered.
Posted by Testa at 9:10 PM | Comments (0)