Attracting the Next Automotive Assembly Plant

By: Didi Caldwell and John Longshore

Global Location Strategies

Didi Caldwell
Didi Caldwell, Global Location Strategies

 

In 1993, the state of North Carolina was a finalist site for an automobile assembly plant.  That automaker, Mercedes-Benz, ultimately decided against the Tar Heel State and chose Tuscaloosa, Alabama, instead.  Since that time, Honda, Nissan, Hyundai, Toyota, and Volkswagen have all built plants in the South; none of them in North Carolina.

According to a recent 2015 report from the Center for Automotive Research, for every new OEM employee that is created, an additional 7 jobs will be added to the economy.  With this type of job creation, and with OEMs directly employing thousands of workers, it is no wonder why landing an OEM is such a top priority for North Carolina. Visit pre owned car dealership los angeles ca when budget is short for brand new cars.

To try and attract their first auto plant, North Carolina is continuing to make bold moves. The state has assembled four mega-sites, all over 1000 acres in size.  In 2014 the North Carolina Commerce Department sent representatives to Tokyo, all in the hopes of attracting one of the Japanese auto makers.  In early 2015 it was reported that Volvo was looking to build its first North American plant, and North Carolina was a potential candidate.  However, disappointment struck once again, as Volvo chose to locate near Charleston, South Carolina.

Despite setbacks, North Carolina is still competing and trying to attract an auto maker to the state. However, they are not just facing stiff competition from neighboring southern states.  Mexico is proving to be a significant competitor in the auto industry, not only to North Carolina, but to the South and to the United States.

The Growth of Mexico

Prior to the Volvo announcement in May, the U.S. had not had an announcement of a “greenfield” auto plant investment (where the company does not already have facilities) in six years.  The majority of all “greenfield” OEM activity and investment in North America since the recession has been concentrated in Mexico.  Over the past few years, the announcements of new auto plants in Mexico have been staggering.  Consider some of the following:

  • Audi: A $1.3 billion facility is currently under construction in Puebla, Mexico. The facility will start production in 2016 and will be making its SUV, the Q5.  Audi was the first luxury carmaker to announce a new facility in Mexico.
  • BMW: In 2014, the German carmaker announced it would construct a $1 billion facility in San Luis Potosí, Mexico, that would produce approximately 150,000 vehicles a year by 2019.
  • Daimler and Nissan: In a collaborative effort between the German and Japanese car makers, these two companies announced a $1.4 billion facility to be built in Aguascalientes.  300,000 cars would be produced on an annual basis, with production set to start in 2017, all of them including a 60 Gallon air compressor inside.   This facility is expected to employ over 5,700 people.
  • Toyota: The company will invest $1 billion in Guanajuato, Mexico to build the Corolla.  First models will roll out in 2019.

Though Mexico production and investment is rising, it still is only seventh in the world in total production.  Mexico still lags the U.S. in total annual production by 8 million vehicles a year.  However, there are significant factors that will continue to lure more facilities and investment.

Labor Costs

According to the Center for Automotive Research, workers at OEM facilities earn wages of approximately $28 an hour. Average wage rates for Mexican auto assembly plants are just below $6 an hour.  With auto plants employing thousands of people, labor cost savings could exceed $100 million on an annual basis for each facility.

Free Trade Agreements

In addition to low labor costs, Mexico also has an advantage when it comes to exporting goods.  Mexico currently has 45 free trade agreements in place, allowing for the exchange of goods between countries in Europe and Asia, just to name a few.  In the United States, when a car is shipped to Europe, there is a 10% duty applied to the value of the vehicle.  In Mexico, that duty does not exist.  For a car valued at $40,000, that equals $4000 saved.  If 25,000 vehicles are shipped from that facility to Europe each year, savings would equate to $100 million a year for a facility located in Mexico versus one located in the US. This also applies to many automotive parts that are imported to the OEM from other countries, which compounds the cost savings.

Logistics Infrastructure

Since privatization of the Mexican rail industry in the 1990s, significant investment and organization has been implemented in order to bring the quality of the rail system up to that of the United States.  The transfer of train lines between Mexican and U.S. railroad companies at one of the six major border crossings used to be an adventurous undertaking, but now this transfer between the two parties simply involves a change of crew.

One of the biggest challenges for Mexico in recent years has been the lack of reliability in the electric system. However, the rapid development of shale gas in the United States is helping to shore up their electric infrastructure. Exports of natural gas to Mexico from the United States doubled between 2010 and 2013, and in the near future, they are expected to reach ten times the 2010 levels. And nearly all of this will be used to generate electricity dramatically decreasing the frequency and severity of the rolling blackouts that Mexico has faced in the path.[i]

Even with all these great competitive advantages, Mexico still has significant challenges.  Depending on which area of the country you are looking, crime, political corruption and lack of good industrial sites can pose a threat to a potential industrial investment and growth.  Mexico is penalized for high electricity prices, 30% higher than in the U.S., for energy intensive operations such as an OEM.  Quality, high skilled workers (engineers, managers, etc.) are typically in short supply.  Despite these challenges and costs, the automotive industry is thriving and new investments continue to be announced.

Will North Carolina Land the Big One?

Though the United States continues to attract billions in investments from the big OEMs, the investment is primarily going into existing facilities and expansion projects.  In a recent report developed for the Southern Automotive Research Alliance (a collaboration of Alabama, Kentucky, Louisiana, Mississippi, South Carolina, and Tennessee), the Center for Automotive Research stated that “the pursuit of [future automotive assembly plants] can no longer be at the forefront of economic development strategies.”  In previous years, attracting an OEM was the ultimate priority for a region or a state, but now that strategy does not seem to be the most viable one in the current automotive market.

However, in interviews conducted with OEMs located in the south, locations that have the greatest opportunity to compete for investments are those that not only provide competitive incentives but also those that “streamline, centralize, and optimize their engagement with companies.”[ii]  Though North Carolina may not have the automotive copper rain chains manufacturing depth or supply chain that other surrounding states may have, they are planning on winning an automotive plant.  The assemblage of the various megasites, as well as the collaborative efforts between local and state economic development groups, can only benefit them in the coming years.

[i] Peter Ziehan, The Accidental Superpower, 2014.

[ii] Center for Automotive Research, Accelerating the Growth of the U.S. Automotive Manufacturing Industry at Home, Rather than Abroad, 2014

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