Plants Becoming Export Base For U.S. Auto Makers
On the early-October morning after Ford Motor Co. and the United Auto Workers agreed on a new four-year labor contract, union vice president Jimmy Settles was asked at a press conference how many jobs the company had promised to bring back to Ford's plants in the United States. He answered the question matter-of-factly: About 5,750 that now are guaranteed to return — and as many as 7,000 additional, previously-announced jobs depending on the sales volumes of the next-generation Ford Fusion and other vehicle models that were involved. What went unobserved was that the promise constituted a remarkable turning point in the UAW-Ford relationship and, indeed, in the history of the Big Three in general: No industry expert could recall when any of the auto makers had agreed to repatriate a significant number of jobs that had previously been outsourced outside of America.
Maybe the historic moment was obscured by the all-nighter mental fog that always envelopes participants in final UAW negotiations. Or maybe the outcome was so unlikely that it hadn't sunken in yet. Prohibitive U.S.-manufacturing costs have been bleeding domestic manufacture of small cars by the Big Three for nearly a half-century, culminating in the demise of General Motors' Saturn experiment two years ago. Yet at the same time, U.S. auto makers were setting the stage for a turnaround, improving manufacturing efficiency and quality. And after the global economic crisis in 2008 and 2009 blew up old paradigms, the major pieces for a new approach fell into place: vastly reduced unionized labor costs and a bludgeoned dollar that reflected America's economic decline. That has all cleared the way for perhaps the most amazing reversal of all: While the U.S. auto industry lost 331,000 jobs from 2006 through 2009, according to the Center for Automotive Research, since then, nearly 25,000 of those jobs have been restored.
Now the possibilities go beyond just adding to the new-job totals by reversing the flow of U.S. auto-manufacturing jobs overseas: Could the American Big Three actually make significant volumes of automobiles in the United States for export around the world? Fiat S.p.A. and Chrysler Group LLC CEO Sergio Marchionne seemed to think so earlier this week when he announced a $500-million investment in Chrysler's operations in Toledo, Ohio, that among other things would yield a new Jeep Liberty SUV that the company would end up exporting to Europe and other overseas markets, presumably in much higher volumes than it exports the current Liberty. In any event, so vastly have the tables turned lately for General Motors Co., Ford and Chrysler that they have briskly moved this possibility from the realm of the laughable, to the theoretical, then to the possible — and now to an agenda item. They're joined by German, Japanese and Korean rivals manufacturing in America whose executives also would like to turn their U.S. plants into export bases.
Seeds Of Potential
"This is becoming the low-cost place to build, and this trend could go a long way," said Ron Harbour, partner in the automotive practice for Oliver Wyman, a manufacturing consulting firm. "As long as the dollar remains relatively weak, the potential for exports from this country are all the more attractive." Keith Nosbusch, head of a huge automation supplier to the auto industry, agreed. "It's all about competitiveness," said the CEO of Rockwell Automation. "If they get it right in terms of global platforms and models, the Big Three can be successful with this. They just need to make things that are exportable to other countries where there's demand for it."
Certainly a "Made in America" wave is sweeping other industries. Close to autos, Continental AG and Bridgestone recently said they'll invest a combined $1.6 billion in new tire-making plants in South Carolina, representing a huge turnaround for a domestic tire industry that for year had been contracting, closing plants and laying off workers. Also in South Carolina, Otis Elevator will build a new plant to reduce costs for production of elevators that now are being built in Nogales, Mexico. General Electric is bringing back to its Louisville plant the production of refrigerators and water heaters now being made overseas and has begun hiring about 1,300 workers to do it. National Cash Register plans to hire as many as 900 workers over the next two years at a Columbus, Ga., plant where it is repatriating output of ATM machines and self-service retail-checkout systems that have been made in China, Hungary and Brazil. And Anheuser-Busch plans to invest more than $1 billion in breweries nationwide even though the venerable brewer now is owned by InBev, a Belgian company.
Most of these kinds of shifts are aimed at changing the source of supply for the U.S. market. But just as with the Big Three, many include the seeds of export potential as well. Starved for job growth, American politicians and policymakers are trying to stoke an export boom to help inject a moribund U.S. economy with some momentum. This effort includes approval of new free-trade agreements with South Korea, Colombia and Panama. "If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers," President Obama said a few weeks ago to a joint session of Congress, where he promoted his since-stalled "jobs bill."
Skeptics are far from scarce. "I don't see that we're on the precipice of a giant transformation that materially alters whether we're exporting from this country," said Craig Giffi, leader of the consumer and industrial-products practice for Deloitte. And Detroit's Big Three have to be careful about taking this idea too far, he said. "They can't be materially off on too many capital bets and stay at the top of the market. A mistake here or there could be catastrophic for any company."
A few crucial factors will determine whether the Big Three mount any kind of export drive. One is the mix of vehicles they choose. Some uniquely American models are exported in relatively small numbers now, such as Jeep Wranglers made in Ohio and big GMC Yukon SUVs made in Texas. As the Big Three entertain the idea of higher-volume exports, Harbour believes that larger and unusual vehicles still must predominate because the small-car market in Europe and other likely export targets already are flooded. "You'd probably want to go to a more up-level segment because you'd have a vehicle that would be unique if you brought it into the European market and you have the added advantage of it coming from a relatively low-cost manufacturing environment," he said. "Germany and other parts of Europe, along with the North American market, are the only ones where you have a significant volume of larger vehicles, and making them here you'd have the most to offer other markets, because you don't find a lot of them built in markets other than Germany."
With export potential as a growing consideration, each of the Big Three is plunging with some fervor into revitalizing its North American manufacturing infrastructure. Prodded by the Obama administration in the wake of the federal bailout, GM invested $545 million to convert its Orion Township, Mich., plant from production of midsize sedans to output of the new Chevrolet Sonic subcompact. Expecting to export these cars is nothing short of revolutionary. Long ago, GM had given up on U.S. production of its least-expensive cars and filled out that position in its product line with vehicles made in Korea. It was looking to China or Mexico as possible sites for later small models.
Really Imported From Detroit
But on October 14, there was South Korean President Lee Myung-bak standing in that Orion, Mich. plant with Obama, wearing a Detroit Tigers baseball cap and touting a new U.S.-South Korean trade pact that will help make Sonics saleable in Korea by cutting tariffs in half. "Given the right mix of content in those vehicles, GM could actually make a few dollars on them," Harbour reckoned. And overall, GM is in the process of pouring $2 billion into 17 of its U.S. plants in eight states, promising to retain or create 4,200 jobs in the process.
Ford's contract with the UAW spells out much of the company's increasing investments in its U.S. plants — up to $16 billion in new products and additional plant capacity — in part to stage jobs now being imported from Europe, China, Japan and Mexico. "We're getting Fusion production back at [Ford's Flat Rock, Mich.] plant" from Mexico, said UAW President Bob King, as well as some production of "Transit in Kansas City and a medium-duty truck in Ohio and an expanding number of vehicles in the [Wayne] Michigan Assembly Plant. We're doing an amazing job of creating jobs and product investment in North America. And we're very proud and patriotic about that."
Chrysler struck a chord with its "Imported from Detroit" marketing positioning this year, but the company also is backing up that slogan in some very real ways. Most notably, Fiat CEO Sergio Marchionne committed to building and exporting a new Maserati SUV at Chrysler's Jefferson North Assembly Plant in the heart of Motown, where the Jeep Grand Cherokee already is built. Beyond that is Chrysler's thoroughgoing refurbishment of all of its other North American facilities. The company has announced a total of more than $3 billion in domestic manufacturing investments, although no new plants. "In the United States, we've focused on getting every ounce of capacity that we can out of our existing footprint," said Chrysler spokeswoman Shawn Morgan.
For example, Chrysler has begun assembling a new, Fiat-designed Dodge compact car in Belvedere, Ill., an old plant that also produced the last Chrysler-made compact, Dodge Neon, which was phased out in 2005. Chrysler is sinking $600 million into a new body shop as well at the plant, which also currently builds Chrysler's car-based Jeep Patriot and Compass, as well as the Dodge Caliber. The company has committed to spending $365 million and plans to add 1,100 jobs at its Toledo Assembly complex, mostly building Jeeps. And soon, Chrysler will re-open about 25 percent of the northern part of its Trenton, Mich., engine plant to make components that support production of its new Pentastar V6 engines in plants at Trenton South and Saltillo, Mexico.
A few substantial factors have combined to create a renaissance in U.S. automobile manufacturing. Of course, the most far-reaching was the 2009 bailouts of GM and Chrysler and Ford's own major restructuring. The transformation dramatically reduced structural costs and the companies' resultant break-even points, while labor costs for the first time swung into relative parity with Japanese transplant manufacturers in the United States. At GM, labor costs last year totaled about $58 an hour for regular workers compared with $56 an hour for Toyota production workers in the United States, according to the Center for Automotive Research. In overall manufacturing costs, experts put Detroit's new edge at anywhere from $150 to $200 per vehicle to as much as $2,000 per vehicle.
The acquiescent attitude of the UAW in the newly ratified four-year labor pacts is a huge accelerant of this goal. Essentially, with somewhat varying terms by company, the agreements will allow labor-cost increases of only about 1 percent per year through the life of the contract. Among other things, the pact reduced Detroit's future pension obligations for current and future workers and retirees and permanently eliminated the infamous "jobs banks" that provided nearly full pay and benefits for laid-off workers. "All new hires going forward won't carry the legacy cost with them no matter what the wage rate is," said Sean McAlinden, executive director of the Center for Automotive Research, in Ann Arbor, Mich. "That's a permanent change."
Second-Tier, First Priority
Another major structural change, begun in UAW contracts four years ago, basically assured the Big Three that they'd have an ever-improving labor-cost position. This was the creation of a lower-tiered wage structure that essentially cut in half the hourly compensation required for a major category of new hires, including wages of $14 to $16 an hour compared with the average of about $28 an hour made by people hired earlier. GM can designate up to 40 percent of the Orion Township workforce, for instance, to receive this lesser compensation package.
"Over time, we have to feather [second-tier compensation] in and have a comparable cost of labor with transplants in the U.S., or else we're not going to be competitive," GM CEO Dan Akerson told the Detroit Free Press. And Ford's new contract allows as many as 20 percent of its workers to be compensated under this structure. As the Big Three gradually employ a higher percentage of lower-tier workers, Harbour said, "I don't see a situation now where U.S. automakers would have a disadvantage from a labor-cost standpoint."
Of course, while continuing to extend the mechanism to the Big Three to help keep them competitive, the UAW will strive to keep the second-tier workforce at a minimum. Only about 4,000 of the UAW's 112,000 hires in the auto industry, at this point, are second-tier workers. And King has emphasized that the huge allowable percentage of second-tier workers at the Orion Township plant is a decided exception to what will constitute the union's usual approach. But GM said this week that because it has run through its pool of eligible laid-off workers, a substantial portion of new hires at its refurbished Spring Hill, Tenn., plant — once the site of production for the defunct Saturn division and now earmarked as a second assembly plant for GM's strong-selling Chevrolet Equinox compact crossover — will earn the lower tier-two wage.
Currencies In Command
With such dramatic cost reductions on the labor side, it's easy to overlook the growing wonder of how Detroit has overhauled the technology and schematics of its manufacturing operations. "The fact that they can seriously consider exporting small cars from this country is a direct result also of the productivity and flexibility in their manufacturing," said David Cole, chairman emeritus of the Center for Automotive Research. "Certainly this is an under-appreciated aspect of their comeback." Ford overhauled the Michigan Assembly Plant, for instance, to the tune of $550 million before launching production of its new 2012 Focus there, and the flexible-manufacturing complex now is capable of running multiple models down the same production line — the first in the world to build gasoline-powered, battery electric, hybrid electric and plug-in hybrid electric vehicles on the same lines.
Tectonic shifts in currency values also have greatly bolstered the cause of exporting cars from the United States. The dollar dropped to a post-World War II low of 75.95 yen on August 19 and also slumped to a 17-month low against the euro on May 4, when it reached $1.4940 for the first time since December 2009. Foreign cars are selling in the U.S. at the biggest price premium to domestic autos in almost 12 years, according to the U.S. Bureau of Economic Analysis. And such differentials do more than reduce Toyota's wiggle room to incentivize Corollas and cut Volkswagen's room to deal on Jettas; these rates also discourage foreign brands from importing lower-priced cars to the United States because they have slimmer profit margins. "It's very hard to import, especially from Asia, small cars right now because of where the dollar is," said Paul Ballew, chief economist for Nationwide Mutual Insurance. One reason, surely, why Toyota just initiated production of its high-volume Corolla at a new plant in Blue Springs, Miss. — a plant formerly earmarked for production of its more-expensive Prius hybrid-electric car.
The world's new currency regime also is stretching into a long-term problem for Japanese makers that once ravaged Detroit in the U.S.'s small-car segments. Now, Japanese automakers are searching to find other places than Japan to build their vehicles. Toyota plans to construct its second factory in Indonesia. By 2015, Nissan wants 85 percent of the vehicle it sells in the United States to be built in North America, compared with 69 percent now. And Honda recently said it will halve exports of vehicles made in Japan over the next 10 years as part of its goal of reducing Japanese production to as little as 10 percent of its global output, down from about one-third last year.
Rivals For Export
Changing conditions in several areas could thwart Detroit's export ambitions. One is that many corporate CEOs remain wary of investing too much in their American factories because they don't yet trust that the U.S. economy will build into full recovery mode; despite a long list of new manufacturing commitments, there's still a bit of a strike on capital deployment going on in their ranks. "Executives from automotive and other industries have concerns about the ability of policymakers to sustain — or even to create, and then sustain — a positive business environment that they believe are necessary to make investments in jobs and facilities in the United States," said Deloitte's Giffi. "There's enough uncertainty for them to hesitate to truly take advantage of what appears to argue for the American workforce."
There are also, as noted by Giffi, needs in other markets crying out to the Big Three. "Domestics are already well vested in this country and for them, their attention is appropriately shifted to Asia," he said. "They have to be on top of what the opportunities are there. And the Chinese government has made it pretty clear that it's not going to go along with [the Big Three] building capacity here and then exporting to China. Things like trade policy and the realities of the global automotive industry are saying that, all things being equal, they might take more advantage of [domestic production]. But new markets are forcing their hands in terms of manufacturing facilities, and that trumps the productivity and cost advantages of doing it here."
Finally, there's the formidable reality that foreign-based manufacturers also continue to augment U.S. manufacturing and have the capability — and perhaps even greater urgency — to take advantage of the same factors favoring U.S. output by the Big Three. "The low dollar screws them up," said Oliver Wyman's Harbour. "Every motivation is for them to build here."Honda, for example, as part of its outflow of capital from manufacturing in Japan, is making $355 million of upgrades at its plants in Ohio, where the company became the first major Japanese manufacturer to establish a broad U.S. production base, nearly 30 years ago. Hyundai can't make vehicles at its U.S. plants, nor expand the facilities, fast enough. Even Volvo, not long ago just a corporate orphan from Ford, now is considering building a car plant in North America under its new ownership by China's Zhejiang Geely. Some European manufacturers in the United States also have been exporting for a while and so have a huge lead in executing in this game. Germany's BMW exports cars from South Carolina to 135 countries. Daimler, the maker of Mercedes-Benz, derives nearly one fifth of its global revenue from selling the output of its plant in Alabama, which boasts 800 robots.
Meanwhile, the biggest German manufacturer, Volkswagen, could become another stiff rival to Detroit as it becomes a new factor in U.S. production. Volkswagen opened its new factory in Chattanooga, Tenn., earlier this year, and is gearing up full-volume output of a new Passat that threatens to become a real factor in the U.S. midsize-sedan segment, with starting prices around $20,000 — down as much as $8,000 from the previous model. "They want to be big in this market and they haven't been here for a long time," said Gary Silberg, national automotive-sector leader for KPMG. "This is a major global competitor with relatively deep pockets that the Detroit Three are going to have to deal with." There's no reason, of course, VW couldn't export U.S.-made Passats as well.
The Big Three have stepped successfully through a window of opportunity in 2011, picking up sales, market share, momentum, and even favorable new labor contracts. But can they take bigger advantage in a way that will reshape their fortunes, and the U.S. auto market, for the long term? Are GM, Ford and Chrysler capable of leveraging their new advantages in product balance, profitability and marketing into a reversal of decades of relative decline? "Rising" a new series by AutoObserver, looks at their chances.