Governments are falling over themselves to attract automakers to their countries and regions. Courtney Fingar explains.

When luxury carmaker Mercedes-Benz decided in the early 1990s that it would produce its first passenger vehicle in the US, investment promotion agencies (IPAs) around the country were extremely eager. They knew it was the kind of project that could almost single handedly transform a state or region’s economy. In the end, there was an unexpected result. Mercedes announced plans in 1993 to set up its international headquarters in – of all places – Vance, Alabama.

While Alabama claiming the top prize came as a bit of a shock to some in inward investment circles, it was less of a surprise that Mercedes selected a south eastern state. Forget Detroit, the hot spots for automotive investment in the northern US are, literally, hot spots where the sun shines all year round. Beginning in the late 1980s, Japanese and German automakers began a migration to the Sun Belt, far from their US rivals’ stronghold in the Great Lakes region. They did not get there by accident.

“The southern states have been very aggressive in investment promotion activities, and they’ve come up with the goods,” says Michel Lemagnen, research director of Oxford Intelligence, a UK-based group that tracks the expansion plans of international companies*.

With European and Asian automakers gobbling up market share in the northern US, they are continually increasing production and spreading joy around to southern investment promotion agencies. The clustering effect – more pronounced in automotives than in other sectors – always means additional investment from component manufacturers and suppliers.

For the better part of a decade, Alabama had watched with envy as its neighbours landed big automotive production plants. Nissan arrived in Tennessee in 1983, Toyota in Kentucky in 1988, and then BMW in South Carolina in 1992. After making the shortlist for a new Saturn plant which went to Tennessee, Alabama saw Mercedes as its big chance to prove itself.

“The state made a conscious and strategic decision to target the automotive industry,” says Steve Sewell, marketing director of the Alabama Economic Development Partnership in Birmingham. “There was a new automotive corridor developing in the south east, and Alabama very much wanted to participate.”

Another driver was an urgent need to compensate for declining traditional industries, such as textiles and paper. Automotive manufacturing represented the best opportunity to replace those lost jobs with high-paying ones and Alabama believed the skill set of its workers was a good fit for the car industry.

Mercedes agreed: it invested $300m in a 1.2m square feet facility. And it seems to have few regrets about the decision, springing from a $600m expansion two years ago.

Hyundai took a cue from Mercedes and recently chose Alabama for its first US manufacturing plant, an investment that is expected to bring $1bn and 2000 jobs to the state. That follows a $440m Honda vehicle assembly plant, a $220m Toyota engine plant and a $250m International Diesel plant.

In July, Honda announced it would double production capacity in Alabama, bringing its total investment in the state to $1bn. The automotive industry now employs 27,000 people in the state, and expansions and new investments are expected to add at least 7000 more jobs.

Further afield from the US, investment promotion agencies in many emerging markets are hoping that, like Alabama, they will go from a no name to a big name in auto investment in a matter of a few years. They have good reason to hope for a positive outcome. Facing the considerable challenge of maintaining growth in a maturing industry, the major automakers are trying to wean themselves from dependence on the developed markets and move into developing countries such as China, Brazil, India, Thailand, Mexico, Poland, Russia and South Korea.

These markets combined are expected to provide 60% of the industry’s growth in the next decade. This is causing some amount of angst for countries, such as the UK, which are worried about volume car manufacturing migrating to more cost-effective locations.

Eastern promise

In Europe, many automakers have headed east in search of greener pastures, and lower costs. Poland and the Czech Republic have captured the bulk of investment but Slovakia, Slovenia and Hungary have also bagged a few projects, and the Russians and Romanians are getting in on the action as well. The Czech Republic and Poland are becoming “the new Spain” in attracting auto investment, according to Garel Rhys, a motor industry economics professor and director of the Centre for Automotive Industry Research at Cardiff Business School in Wales. “They are very, very strong competitors because they can offer attractive packages on the back of real economic advantages,” he says. Apart from being able to provide incentives above and beyond what most western European countries will, central and eastern European countries are cheaper places to make cars and they offer largely untapped domestic markets.

Poland holds perhaps even greater potential than its neighbours because of its 40-million population and strong domestic market, the largest in central Europe. As in much of the region, car sales can only increase. The market is nowhere near saturated, unlike western Europe, and demand exceeds the production capacity of domestic manufacturers.

Fiat, Daewoo, General Motors and Volkswagen set up production in Poland after the fall of communism in the early 1990s. The automotive industry was one of the first to be privatised and the process is nearly complete; of 102 enterprises, all but six are now privately owned. Fiat and Daewoo entered the country by taking over formerly state-owned plants, a move that Roman Kornacki, vice-president of the Polish Agency for Foreign Investment (PAIZ), says essentially allowed them to buy a production base, distribution networks and instant access to the market. “Starting immediate production at existing factories and upgrading them with their standards was cheaper [for foreign companies] than going through direct investment,” he says.

“Poland has always had car production so they bought skills very cheap, and they bought a future market.” The strategy has worked: those companies are now leading players in the Polish market.

Pole position

It has worked for Poland as well. The country currently produces about a million cars a year, and automotive manufacturing is the second-largest sector for foreign manufacturers in Poland. Most investment has been in special economic zones set up by the government. According to the PAIZ, Poland has attracted $5.5bn in automotive investment in total. The PAIZ has used costs, market size and location as Poland’s key selling points.

“Locating in Poland is to be in the very centre of the big markets of eastern and western Europe,” Mr Kornacki says.

However, Poland has had something of a bumpy ride on the road to a market economy, and problems with its automotive sector illustrate the special challenges facing IPAs in emerging markets. After a 1990s boom, new car sales plummeted 22% in 2000, mainly because of an increase in interest rates, excise tax and petrol prices. As a result, production of new vehicles in Poland also declined.

Despite its progress, Poland still has an ageing infrastructure and enough economic instability to make some potential investors pause for thought. Tariff rates on cars imported from the European Union (EU) were phased out last year, as part of Poland’s bid for membership, detracting from much of the incentive for manufacturing domestically.

Two years ago, Ford shut down its assembly plant in Plonsk; that same year GM’s Adam Opel subsidiary and Fiat also closed plants. On the upside, none of these companies have pulled out of Poland entirely, and Toyota reconfirmed its commitment to the country with a $71m investment earlier this year. Fiat, Volkswagen and Volvo have all announced future investment plans for Poland.

In transition

South African officials can surely sympathise with Poland’s situation, themselves familiar with bringing investment into a country in transition. For South Africa, wooing automakers is almost a life and death situation. The country desperately needs foreign investment to help tackle its urgent social problems, such as high unemployment, rampant poverty and an Aids epidemic, and the government has made the automotive sector a priority.

Moving from a protected to an open economy, the government switched from a policy of import substitution to export-led growth and launched flashy new trade and investment incentive programmes in the 1990s.

One of these programmes is the Motor Industry Development Plan (MIDP), which aimed to make the South African automotive sector more internationally competitive, through phased global integration, increased local production, expanded exports and industrial modernisation. The MIDP, along with a bilateral trade agreement between South Africa and the EU, have reduced tariffs on automotives and components.

“The key to the sector’s development has been an enlightened strategy introduced by the first democratic government, which is still evolving,” says Goodrich Kowane, automotive sector manager for Trade and Investment South Africa.

The plan must be rated a success. Vehicle exports have grown at an average rate of 37.5% a year since 1990, and most of the major original equipment manufacturers now have production facilities in South Africa – eight of them to be exact.

DaimlerChrysler produces its C-class there, BMW manufactures its 3-series for shipment around the world, and Volkswagen South Africa produces the right-hand drive Golf for the British market. Toyota has announced plans to accelerate the export programme for its plant in Durban and begin shipping Corollas made there to Australia.

More than 300 component manufacturers and another 200 non-exclusive suppliers have followed. Automotive clusters have sprung up around Port Elizabeth, Durban, East London and Pretoria. Altogether, the automotive industry employs nearly 300,000 people in South Africa. Automotives is the third largest sector in the economy, after mining and agriculture.

South Africa can boast several competitive advantages, among them good transport, telecommunications and power infrastructure; abundant raw materials; and affordable labour, land and services.

Australia rules

If South Africa’s MIDP is working, the country can thank Australia, on whose plan it was modelled. The Automotive Investment and Competitiveness Scheme (ACIS) was launched in January 2001 to boost competitiveness in Australia’s automotive sector by rewarding higher performing companies with duty credits on imports.

One of the ACIS’s sub-schemes rewards passenger vehicle manufacturers for performance in production and investment in new productive capital assets. A second sub-scheme rewards automotive component manufacturers and service providers for investment in new productive capital assets and in technology development.

“The Australians have been pretty aggressive in trying to ramp their automotive sector up, and they must have done something right based on the big investment by Mitsubishi,” Mr Lemagnen says, referring to the automaker’s two plants in Adelaide that employ 3400 people. Despite rumours last year that the facility would be shut down, Mitsubishi seems there to stay. The company announced last August that it would continue manufacturing in Australia and invest another $37m toward doing so.

To step up its game even more, Australia has recently announced a major reorganisation of its investment promotion and attraction activities, after a major review undertaken last year. A new Invest Australia agency has been created to manage all overseas operations, with a new budget and a more international staff. The change will introduce a “highly strategic approach to attracting investment”, including in the automotive sector, says Invest Australia CEO Garry Draffin.

Australia’s only obvious shortcoming is its location. “We sometimes suffer from the fact that we’re literally at the other end of world,” Mr Draffin admits. “We have to be extra competitive to overcome it.” But he shrugs distance off as an impediment to automotive exporting, saying Australia-based manufacturers easily ship to markets in the Middle East, Asia and South America.

“There are markets that are closer to us,” he says. “It’s not like we’re trying to land [contracts] in Glasgow.” Besides, he points out that the difficult bit is getting the vehicles on a ship and secured. After that, “the cost does not tend to be much different whether you are shipping the car 5000 or 10,000 miles.”

As proof, Mr Draffin offers the example of the Pontiac GTO, which is assembled in Australia and shipped for sale in the US.

It is crucial that Invest Australia proves the country’s fitness for exporting because of the small size of its domestic market. “For us, it was export or die,” Mr Draffin says. “Carmakers want to ensure that as much of their materials can be secured and delivered worldwide as possible.” The best way to provide that assurance, and to serve the needs of investors and consumers, Australian officials decided, was to build up clusters.

“We had to get behind the industry and surround it with clusters to make the industry competitive, and make sure that the industry is so locked into a community that it is difficult for an overseas investor to look at the manufacturing plant in isolation,” Mr Draffin says.

Australia has thriving auto clusters in Victoria (where GM, Toyota and Ford are located) and South Australia (with Mitsubishi and some Ford components). “It’s been quite a success story in terms of growth not only in the car manufacturing industry but in all of the supporting industries around it.”

* Oxford Intelligence will release a report in February 2003 called Advanced automotive engineering technology – global investment strategies and location benchmarking.