Shoppers who want to buy American cars have a relatively easy job, provided that their definition of an American car is one that's assembled in the U.S.A., of mainly domestic parts. They can consult a new car's window sticker for a quick rundown on the percentage of domestic content and the country and state in which the car was assembled, posted to comply with the American Automobile Labeling Act (AALA). The first letter or digit of the car's vehicle identification number (VIN) confirms where the car was built. Cars assembled in the U.S. start with a 1, 4 or 5, for example.
But some car shoppers want to know more than just where a car was assembled, particularly if that "American" car comes from a foreign carmaker, such as BMW, Hyundai or Toyota. They want to know if purchasing a foreign car that's made in America will support the U.S. economy. Where does the money from that American car wind up? Does it stay in the U.S., or does it go back to the carmaker's home country?
How the Money Flows
Following the money isn't easy. All carmakers are global companies and they employ people in multiple nations. They build cars in North and South America, Europe, Asia and Australia. And they pay taxes (when they pay taxes) wherever they do business.
For example: When Toyota Motor Sales U.S.A. orders Tacoma pickups for U.S. distribution, it gets them from Toyota Motor Manufacturing de Baja California, a Mexican assembly plant southeast of San Diego.
Toyota's Mexican company keeps the money it receives from Toyota's U.S. company, and the U.S. company gets its revenue by selling the trucks to franchised Toyota dealers, who then make their money from the trucks by selling them to consumers throughout the country.
That same chain of transactions holds true for most automakers selling vehicles in the U.S. made at their plants in Mexico, Canada and other countries. The corporate financial reports, however, tend to wrap it all up in one big bundle.
The Kogod Made in America Auto Index tries to tease out more details about a car's money trail. Frank DuBois, an expert in global supply chain management and an associate professor at American University's Kogod School of Business, developed the index, which incorporates financial information into a car's "American-ness" rating. It assigns scores for such factors as where a company is headquartered (under the heading of "profit margin"), where most of the research and development are done, where assembly occurs, and where the engine and transmission are produced.
For example, the index gives an American-made car no credit in the profit margin category if the carmaker is based overseas. With Ford Motor Company and General Motors, DuBois argues, the majority of the company's shareholders are in the U.S., "and the profits go to the central coffers and are paid out" to mostly U.S. shareholders. With a foreign carmaker such as Honda, Kia or Porsche, the profits primarily go back to shareholders in their home countries, he says.
If a carmaker assembles its vehicles in the U.S., however, the index grants it full marks in the "labor" category, as well as in the category of "inventory, capital and other expenses." Those scores reflect the wages the carmaker pays to American workers, the money it reinvests in U.S. manufacturing facilities and taxes it pays here, DuBois says.
So that's DuBois' formula. If you're looking for more detail, here's a deeper dive into where the money goes when a car buyer takes home an American-made car produced by a foreign carmaker.
Where They Pay Taxes
It's possible to say unequivocally that Toyota Motor Corp., for instance, earns money and pays taxes in Japan and in multiple foreign countries. It also is clear that through its multiple U.S.-based sales, marketing, manufacturing and research and testing subsidiaries, Toyota generates lots of cash flow in this country. It also has a U.S. tax obligation.
But foreign and domestic corporations spend a lot of time and effort (not to mention money) trying to minimize their taxes. Like any corporation, a foreign company with operations in the U.S. is able to offset taxes here with investments and many of the same deductions that domestic corporations use.
Overseas-based carmakers with U.S. operations pay federal, state and local payroll taxes as well. It's a safe bet to say that even a company as large as Toyota doesn't have as hefty a U.S. tax bill as does a Ford or GM. But it's likely that the foreign carmakers' U.S. tax bills (at least before all the possible deductions) are roughly in proportion to their market share.
Both Toyota and Honda also say that much of the revenue generated by their U.S. operations stays with their U.S.-based subsidiaries and is pumped back into operations, capital improvements and employment growth. One reason is that there are tremendous tax and currency exchange savings to be had doing it that way, versus sending the money back to Japan and then having to pull funding from Japan to finance U.S. operations.
What Happens to the Profits?
Only the corporate and government accountants know for sure precisely how much of the profit a foreign carmaker realizes stays in the U.S. and how much goes back to corporate headquarters and the global investors who own company shares.
But many of the major overseas automakers (BMW, Daimler, Honda, Hyundai, Mitsubishi, Nissan, Porsche, Toyota and Volkswagen) sell a form of stock investment in the U.S. that allows investors to share in corporate profits.
American Depositary Receipts, commonly called ADRs, represent a direct investment in the automaker. Just like common stock, ADR prices rise and fall on the exchanges along with the fortunes of the companies that issue them. They pay regular dividends, so buying, holding and selling ADRs is a way to participate in an overseas automaker's profits, including those earned in the U.S. and in other markets as well.
While anyone can buy ADRs, it is likely that American investors purchase many of them. One source with a major foreign-based car company, who asked not to be identified because he wasn't officially speaking for his company, says he believes American investors own a "significant portion" of the automaker's ADRs.
The Role of Payroll
Foreign-based car companies that build cars and parts in the U.S. are paying American employees to do that work, says Edmunds.com Senior Economist Lacey Plache. Those employees use their wages to buy houses and groceries and invest in their retirement. That is money that feeds the U.S. economy.
Carmakers that aren't based in the U.S. don't have as many workers here as do Chrysler, Ford and GM, the three domestic companies. But they do have quite a few, as recent statistics from the top two Japanese companies show:
- American Honda Motor Co. had a U.S. payroll in 2013 of $2.1 billion for 28,000 U.S.-based employees. Additionally, there are 152,000 people in the U.S. employed by dealerships that sell Honda cars, motorcycles, generators, lawnmowers and other equipment, Honda says. Using the average 2013 annual U.S. individual wage of $44,321, that would be an additional $6.7 billion in wages for which Honda is indirectly responsible.
- Toyota, which had 32,340 direct employees in the U.S. last year, reported a total payroll of just under $3.6 billion. The company's 1,505 Toyota, Scion and Lexus dealerships had 126,750 employees, good for a $4.4 billion annual payroll at the 2013 average wages.
- By comparison, General Motors counted 86,200 U.S. employees and about 4,300 dealerships with more than 250,000 workers at the end of 2013. Ford Motor Co. had 73,000 U.S. employees and 3,263 dealerships, while Chrysler had 50,750 U.S. workers and 2,603 dealerships (including 218 Fiat showrooms).
Foreign Carmakers Buy American
Foreign automobile makers with U.S. manufacturing operations also buy a lot of their parts and components here, to say nothing of their supplies and office and manufacturing equipment.
It makes sense to do so, they say, because shipping costs, taxes and duties often make it more expensive to ship parts and supplies from the home country than to source them here, where the plants and office facilities are located.
Take Toyota and Honda as the examples again: The two companies reported last year that they collectively spent $65 billion in the U.S. on parts, equipment and supplies. Honda had the larger share at $32.8 billion, with Toyota reporting $32.2 billion in purchases.
While some of the suppliers are U.S. arms of overseas companies and sent some of that $65 billion home as profit, most of the money remained in circulation in the form of things like wages, raw materials purchases by the suppliers, domestic transportation costs and even the U.S. taxes those suppliers paid, the companies said. Those suppliers include advertising firms and market researchers.
Making Capital Investments
The factories and other physical facilities that foreign carmakers build in the U.S. also represent money that mostly stays and is circulated domestically, covering the cost of land, infrastructure improvements and materials, as well as wages paid to construction workers and engineering and architectural firms.
Overall, Toyota says that it has directly invested more than $20.1 billion in capital projects in the U.S., including 10 factories and a number of warehouses, research, design and engineering facilities and offices. Honda says its total capital investment in the U.S. through 2013 hit $15.3 billion, with the bulk of it spent on the company's nine U.S. manufacturing plants.
Volkswagen, which completed its only U.S. manufacturing plant in Chattanooga, Tennessee, in 2011, says the $1 billion factory has 3,200 direct employees and is responsible for almost 10,000 jobs at U.S.-based suppliers. The company says it expects to issue an average of $300 million a year in car-parts supply contracts in Tennessee alone.
BMW has just one U.S. plant, in South Carolina. But it's a big one, with 8,000 employees and the capacity to build almost 350,000 vehicles a year, many of which are shipped from the U.S. to other countries. It has invested about $6 billion in that facility, and last year announced a $1 billion, two-year expansion program that will boost capacity by 50 percent and employment by 10 percent.
By contrast, Chrysler Group, the smallest of the domestic car companies, had 22 assembly, power plant and tooling factories in the U.S. at the end of 2013. Ford had 23 and, post-bankruptcy, GM counted 41.
Finding Your Bottom Line
The U.S. holdings and employment of the three domestic carmakers easily outstrip those of overseas car companies.
But for a shopper making a purchase decision, it is hard to ignore the fact that there is a positive impact on the U.S economy when purchasing from companies such as Honda and Toyota, or smaller players such as BMW, Hyundai, Mercedes-Benz, Nissan and Volkswagen.
It's up to you to decide how the financials pencil out in your "American" car purchase.
For more on this topic, read "How to Buy an American Car."
Also, consult our "Most American" Car lists for 2014: convertibles, coupes, hatchbacks, SUVs and crossovers, sedans, trucks, vans and minivans, and wagons. In each one, you'll find the cars with the highest percentage of domestic content, as defined by the AALA.
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.