While the Big Three auto manufacturers – Ford, GM and DaimlerChrysler – have been concentrating their expansion activity overseas, primarily in China, big news comes from Asian manufactures that continue to gain ground in the US market.
The US state of Alabama, which is already home to Mercedes-Benz and Honda Manufacturing of Alabama, will soon welcome Hyundai. With construction under way on Hyundai’s two million square-foot automotive plant, about 1000 workers will be in place when commercial production begins in March. If all goes as planned, the plant, in Montgomery, will be operating at full capacity producing 300,000 cars and trucks a year and employing about 2000 workers when it reaches full capacity in 2007.
Unlike in Europe, incentives play a big role in attracting manufacturers to various locations in the US. In Hyundai’s case, Alabama offered a $252.8m incentive package. Hyundai president Dong Jin Kim says that incentives were not as important as other factors, however. He cites the state’s excellent transportation system and a ready-to-go 1744-acre tract of land with highway and rail access to the Port of Mobile as key to Alabama becoming Hyundai’s new home.
The runner-up, Glendale in Kentucky, could not come close to offering such a fit. An economic development team put together by the Alabama governor’s office, the Alabama Development Office, Economic Development Partnership of Alabama, Alabama Industrial Development Training, CSX Railroad and multiple other sources also eased the process.
“We also saw a great local workforce that we knew would be committed to our long-term success,” Mr Kim adds. “Quite simply, we found a great work ethic.”
Likewise, Toyota decided to locate its truck plant in San Antonio, Texas, primarily due to the state’s workforce, access to market (Texans are big consumers of pick-up trucks) and proximity to the North American Free Trade Agreement (NAFTA) corridor. Besides $133m in incentives from the state, which includes funds for job training and utility infrastructure, another important Texan contribution was the creation of the Bexar County Rail District. This will connect the site to existing rail lines about seven miles away.
Although other expansions occurred in the mid-west, rumour has it that the US’s Big Three automakers may reveal decisions to close and relocate outmoded mid-western plants to the south, where wages are nearly one-third less. Large producing OEMs are attracted to the southern US for cost savings reasons, not necessarily to open R&D development operations there. Detroit will remain the ‘brains’ behind the US auto industry, with southern California being key for auto design.
The NAFTA impact
NAFTA offers Mexico advantages in the auto manufacturing business and the country is exceeding historic levels of FDI by OEMs to the tune of $16.5bn and 400,000 jobs.
Volkswagen (VW) has invested about $2bn in its Puebla plant, from which it will export its Bora model to Europe. VW is Mexico’s third largest car manufacturer after GM and DaimlerChrysler. This year, Toyota opened its pick-up truck assembly plant in Tijuana.
Canada’s influence has declined in the industry, despite Ontario’s manufacturing centre being located close to the Detroit Motor City. Consequently, Ontario has increased incentives to help attract firms.
Canada has not been the recipient of any greenfield vehicle manufacturing investment recently. The appreciation of the Canadian dollar in 2003 and growing investment by OEMs in China have not helped. The country has been especially hurt by the shift of the industry in the US away from the mid-west to the south.
Nevertheless, Canada has long benefited from bordering the US state of Michigan and plans to invest C$500m ($422m) in skills, innovation and infrastructure for the automotive industry in the next five years. Government officials also stress Canada’s low wage advantages, highly skilled workforce and R&D incentives.
The KPMG Competitive Alternatives G7 2004 Edition – a study that measures the combined impact of 27 cost components as applied to specific business operations and industries – found Ontario’s business costs to be, on average, 9% lower than the US. Ontario's combined provincial and federal corporate income tax rate for manufacturing is 4% below the US average, and tax incentive programmes mean that the real cost of Canadian R&D spending can be reduced by 58% after tax credits.
Investment in China by far exceeds that in any other country, regardless of the sector. In China, FDI has everything to do with dominating market share. But in an interesting twist of fate, Chinese sales of automobiles are slumping due in large part to government efforts to restrict credit and rein in its overheating economy. This wrinkle is causing European, Japanese and US manufacturers that have rushed to the mainland to think twice about ambitious expansion plans. But analysts insist that investors should not doubt China’s long-term potential.
Total vehicle manufacturing capacity in China is projected to exceed 14 million vehicles by 2007 as a result of the huge investment of domestic and foreign automakers. But, by then, due to saturation within the market, demand is only expected to be at seven million units, reports the National Development and Reform Commission, the main watchdog of the country's auto industry.
Nevertheless, with China’s income levels on the rise, GM chairman and CEO Rick Wagoner has announced that company’s ambitious plans to expand its presence in China by re-launching its Cadillac luxury nameplate as both an import and domestically assembled brand.
GM is a distant second to VW in China’s market. It has plans to introduce almost 20 models over three years. Its plans call for expanding its Shanghai GM and SAIC-GM-Wuling manufacturing facilities, both of which will soon need additional capacity to meet rising customer demand.
The Shanghai expansion, which will take the joint venture’s total production capacity to 300,000 vehicles a year, is expected to be ready for production by the end of 2005.
The expansion of SAIC-GM-Wuling, in the Liuzhou, Guangxi Zhuang Autonomous Region, will give GM’s mini-vehicle joint venture with SAIC and Wuling Automotive an additional 150,000 units of annual capacity, increasing total capacity to 336,000 units a year. Production is expected to begin in 2006.
“We are excited about expanding our presence in China in order to keep up with the rising demand for vehicles, especially passenger cars,” says Mr Wagoner. “GM remains focused on offering the right products in the right segments at the right time. Our latest actions will enable us to take advantage of existing opportunities and position us for long-term success in the world’s fastest-growing vehicle market.”
GM is also due to relocate its Asia-Pacific regional headquarters from Singapore to Shanghai by January 2005. “Establishing our regional headquarters in Shanghai recognises how important China has become to our plans to expand our global industry leadership,” Mr Wagoner says. “Having a strong presence in this dynamic and growing market is not an option anymore; it’s a necessity.”
Meanwhile, VW, which holds 30% of China’s market share, is investing $6.3bn to double capacity to 1.6 million Passats, Golfs, Audis and other vehicles by 2008. The firm says that its aggressive expansion in China is not under threat despite strong warnings of excessive car production capacity in the country. “We face no risks in China as our joint ventures with Chinese partners have a deep understanding of the development of the market,” says Bernd Pischetsrieder, chief executive of VW.
“China is the world’s fastest-growing car market and it will continue to grow rapidly in the years to come. However, if its production capacity expands too fast, there will probably be risks,” he says.
Mr Pischetsrieder says that VW’s goal in China is not to maintain market share but to continue to lead in the market through collaboration with joint venture partners.
GM, Ford, Toyota, Honda and PSA Peugeot Citroen, which have already set up one or more car joint ventures in China, are also aggressively speeding up investment in the market, challenging VW’s dominance. Honda intends to double its car production capacity in China to around 530,000 units by 2006 by building another factory and expanding the manufacturing capacity at one of its joint venture companies.
No doubt, as auto manufacturing develops and expands around the globe, investment is shifting to the markets where labour costs are lower and opportunities to sell more cars are accelerating. With market conditions changing fast, OEMs must dare to go where no auto manufacturer has gone before.