Selected SLC Research
Article | July 1, 2008
Auto: The Resilient South
A great deal has been written about the complex and overwhelming challenges confronting the American automotive industry – mostly domiciled in the Midwest – in the last few decades.1 Researchers have demonstrated the rapidly shrinking portion of American-made new car and noncommercial light truck sales as a percentage of total U.S. sales: in 1997, the Big Three (General Motors, Ford, and Chrysler) accounted for 71 percent of new car and noncommercial light truck sales, while Asian automakers' sales totaled under 25 percent; by 2007, the Big Three's share had plunged to 51 percent while the Asian automakers' share had propelled to 42 percent. Toyota outsold GM in the first quarter of 2008 (2.41 million compared to 2.25 million) and there is speculation that 2008 will be the year when Toyota unseats GM in global sales.
Researchers have also noted the dire financial fortunes of the Big Three as they hemorrhage vast amounts of cash and battle a range of structural problems, including sizable pension and health care obligations. Concurrently, researchers have highlighted the thriving automobile sector in a number of Southern states, given the increasing number of foreign automakers establishing assembly plants in this part of the country. In stark contrast to the difficult fiscal positions of such states as Michigan and Ohio –primarily as a result of the contracting automobile sector – the industry continues to flourish in the South, generate billions of dollars in economic impact and create thousands of direct and indirect jobs.
In light of the negative effects of a slowing national economy, how is the industry currently faring in the South? Does it still continue to be a major player in the region's economic calculations? Learn how the automotive industry in the South is coping with the deteriorating national economy, one that is either already enmeshed or lurching very close to a recession.
Prior to delving into the industry's recent performance in the South, it is appropriate to quickly review why the region has attracted such an impressive roster of foreign automakers in the last 25 years or so. Researchers highlight the following factors:
- "The ability to construct new, ground-up manufacturing facilities – incorporating all the latest technologies – more efficiently and effectively at a Southern location, as opposed to reconfiguring older assembly plants in the Midwest;
- The economies of scale created by the cluster effect with the growing number of automobile assembly plants and thousands of auto parts suppliers in proximity to each other;
- The low or non-existent rates of unionization and the negligible level of interest among Southern autoworkers to unionize;
- The attractive incentive packages, including tax breaks, worker training programs, an abundant labor pool, and the ability to train a workforce that has not worked in the auto industry previously, proffered by Southern states;
- And the extremely cost-effective inter-modal transportation network in the region, spanning railways, highways, airports and, most importantly, ports.
Other attributes such as the weather, reduced cost of living, lower or no personal income taxes, free or inexpensive property costs to build assembly plants, along with other attractive quality of life attributes, make these Southern locations very enticing, too.
Finally, the cutting-edge research being conducted by two high-end research facilities – the Advanced Vehicle Research Center in Garysburg, N.C., and Clemson University's International Center for Automotive Research in Clemson, S.C. – confirms that the automotive industry in the South now extends way beyond assembly operations.
By the second half of 2007, the ominous signs of a slowdown in the national economy had become more apparent in several parts of the country. By early 2008, this national economic slowdown became clearer with the release of the gross domestic product figures for the final quarter of 2007, alongside a number of additional statistical measures such as weakening consumer spending, mounting inflation rates, tightening credit, rising unemployment levels, dropping housing values, and surging foreclosure rates. Notwithstanding the rather gloomy economic news affecting both the national and individual state economies, the automobile industry in the South has continued its upward trajectory in the last year. One of the major factors driving this trend has been the rapidly depreciating U.S. dollar.
Depreciating U.S. Dollar
In the last year or so, the U.S. economy has been engulfed in escalating levels of dismal economic news. This deteriorating economic situation was precipitated by the collapse in the housing and construction sectors in many areas of the country – propelled by the unraveling of the subprime mortgage sector – along with an unprecedented rise in energy prices and severe tightening in the credit markets.
In the midst of all this economic doom and gloom, one bright spot appeared: the nation's export sector. Not only did exports increase twice as fast as imports in 2007, narrowing the U.S. trade deficit for the first time since 1995, the increased level of trade is keeping the economy afloat. The impetus for the blossoming export sector has been the depreciating U.S. dollar. On a year-to-year basis, the U.S. dollar has depreciated steadily in the last seven years or so, thus providing a sizable boost not only to American exports but also in attracting foreign direct investment into the country. The automobile sector, in general, and the South in particular, have benefited tremendously from both these developments. Table 1 provides a statistical enumeration of the depreciating U.S. dollar vis-à-vis the Euro between 1998 and 2008.
Table 1: Record of U.S. Dollar vs. Euro, April 1998 to April 2008
|Year||Value of Euro to Dollar||Percentage Change in Dollar|
|April 8, 1998||1.0882||-|
|April 7, 1999||1.0835||0|
|April 7, 2000||0.959003||11%|
|April 9, 2001||0.901404||6%|
|April 8, 2002||0.874998||3%|
|April 8, 2003||1.0684||-22%|
|April 8, 2004||1.2088||-13%|
|April 7, 2005||1.29231||-7%|
|April 7, 2006||1.2109||6%|
|April 9, 2007||1.3367||-10%|
|April 8, 2008||1.5705||-17%|
A depreciating dollar makes U.S. exports much more competitive against exports from other countries. Similarly, purchasing or investing in America becomes relatively less expensive compared to times when the dollar's value is rising. As evident, the dollar depreciated by 79 percent between 2002 and 2008 and by 53 percent between 2002 and 2007. The following illustrates the eroding value of the dollar: in April 2001, 90 U.S. cents were sufficient to purchase a single Euro; by April 2008, 157 U.S. cents (or $1.57) were required to purchase a single Euro.
The critical role played by a depreciating dollar in stimulating exports is apparent in Table 2, which details U.S. trade flows of road motor vehicles between 2002 and 2007.
Table 2: U.S. Road Motor Vehicles Exports to the World, 2002 to 2007
Source: U.S. Department of Commerce, Office of Aerospace and Automotive Industries
As documented in Table 2, both in terms of value and units (except in 2003), road motor vehicle exports increased by impressive levels between 2002 and 2007. In 2007, in particular, when the depreciation of the dollar was marked, road motor vehicle exports increased by more than 22 percent in terms of value and more than 18 percent in terms of units, a trend that reinforces how the depreciating dollar promoted vehicle exports.
Even in terms of the 16 Southern Legislative Conference's (SLC) states, the impressive growth in U.S. transportation equipment exports – including motor vehicles and motor vehicle bodies and parts – to the world is apparent from a review of federal export statistics: between 2002 and 2007, these exports expanded on average in these Southern states by nearly 97 percent with Mississippi (279 percent), Alabama (141 percent) and North Carolina (132 percent) leading the way. In terms of the value of transportation equipment exports in key Southern states in 2007, Texas led the way with $16.3 billion followed by Kentucky ($7.7 billion), Florida ($7.1 billion), Alabama ($5.9 billion) and South Carolina ($5.6 billion).
Prior SLC research noted how Southern ports rank at the highest level of significance from a national trade dimension. A review of recent data from the ports of Baltimore , Md. ; Jacksonville , Fla. ; Charleston , S.C. ; and Savannah , Ga. , documents the significant number of automobiles handled by these Southern ports, which is more than any other set of ports in the country. In 2007, Baltimore surpassed Jacksonville as the nation's top vehicle exporter – an 80 percent increase from the prior year, to nearly 294,000 units – with the weakening dollar propelling a surge in auto exports. Jacksonville still handled an imposing 614,647 vehicle units in fiscal year 2007 while Charleston saw a 67 percent jump in BMW vehicle exports out of its terminals in 2007. Savannah 's growth in automotive exports over the five year 2003 to 2007 period amounted to a staggering 183 percent, including a 52 percent expansion between 2006 and 2007. These Southern port trends reflect how automobile export traffic has leapt forward recently.
Along with the surge in automobile industry exports, particularly from the South, the atrophying U.S. dollar has also resulted in sizable inward foreign investment in the industry to the region. In March 2008, BMW announced that it would spend $750 million and hire 500 workers in an expansion that will transform its Greer , S.C. plant into one of its largest facilities. The 50 percent production increase at the South Carolina plant by 2012 contrasts strikingly with BMW's announcement that it will slash 7.5 percent of its German workforce in the next two years. Then, Volkswagen, which relocated its North American headquarters from Michigan to Virginia in 2007, announced that it would build "a high-volume auto factory in the USA to escape the currency exchange pinch from a weak dollar and a strong Euro." Once again, a number of Southern states ( Alabama , Kentucky , South Carolina and Tennessee ) are at the top of the list of prospective locations for the plant, which would begin producing up to 250,000 vehicles and employ about 2,000 people by 2011. Also, in April 2008, Nissan announced that it would invest an additional $118 million at its Canton , Miss. , facility to build three new models of light commercial vehicles by June 2010.
On the auto parts supplier front, several recent news items confirmed the continuing importance of the South in the industry's calculations. In Tennessee , there are 948 auto suppliers operating in 194 communities across the state; in total, the industry employs 125,000 Tennesseans, including the assembly workers at the Nissan plants in Smyrna and Decherd, the GM plant in Spring Hill, and the Peterbilt truck plant in Madison . After considering two other states, the Indiana-based automotive supplier PK chose to invest $35 million and build a facility in Senatobia , Miss. to make stamped and welded steel parts for the $1.3 billion Toyota manufacturing plant that will open in nearby Blue Springs in 2010. Also, preparing for the new Mississippi Toyota plant, auto parts supplier Vuteq plans a $31 million facility that will employ 630 people in New Albany , Miss. , to manufacture molded plastic pieces and components while another supplier, Toyoda Gosei, will establish a $19 million plant creating 120 new jobs in Batesville , Miss. , to build injection-molded plastic parts for the Toyota Highlander. In a recent count, Mississippi has more than 90 automotive manufacturing, distribution and supplier companies. Then, Kia auto parts supplier Daehan Solutions indicated that it plans to open a $35 million facility creating 300 new jobs in Harris County, Ga., near the proposed Kia manufacturing facility in West Point , Ga.
In closing, the automobile industry continues to prosper and play a dominant role in the economic calculations of the South with the advancement of numerous foreign automakers when the industry's domestic Big Three face wrenching problems. At a time when the U.S. economy is experiencing a great deal of tumult with a serious slowdown in growth, the automobile industry, in general, and the industry in the South, in particular, has received an additional boost with the depreciating U.S. dollar. Consequently, the industry's drive to move South continues, unabated and with renewed vigor.
1. The Council of State Governments' Southern office, the Southern Legislative Conference (SLC), continues to focus on the economic impact of the automobile industry in the South. In November 2003, the SLC released a report entitled "The Drive to Move South: The Growing Role of the Automobile Industry in the Southern Legislative Conference Economies." This 148-page report carried out an in-depth review of the automobile industry in the South. In the spring 2006 and summer 2007 issues of Global Corporate Xpansion, the SLC also published articles further clarifying the growing importance of the automobile industry in the South. A copy of all SLC publications on the topic may be obtained at http://www.slcatlanta.org/Publications/.