by Susan J. Aluise | June 3, 2011 12:54 pm
For the past few months, the auto industry has been seen as a key driver of job growth and economic recovery. After all, Ford (NYSE:F[1]), General Motors (NYSE:GM[2]) and Chrysler have added thousands of jobs and are investing billions of dollars in their facilities.
But in the wake of a nearly 4% decline in U.S. auto sales last month and an unexpected slump in the manufacturing sector, investors this week have been running for cover in advance of Friday’s jobs report. That news injects a note of caution into bullish predictions of U.S. automakers’ rebounding fortunes.
As even the Obama administration admitted this week, only 115,000 of the 400,000 U.S. auto industry jobs lost in the 2007-08 recession have been restored. That raises questions about whether the “Detroit Three” need to further streamline their operations to grow jobs and increase earnings.
Those numbers also raise questions about whether the U.S. operations of foreign manufacturers might be better positioned than those legacy automakers to drive U.S. job growth in the sector. One key reason: the distinction between an “American” car and a “foreign” car has blurred as companies like Toyota (NYSE:TM[3]), Honda (NYSE:HMC[4]), Nissan, Hyundai, Volkswagen and BMW have expanded their U.S. manufacturing plants and added jobs.
Foreign-owned auto companies have invested $44 billion into their U.S. operations, accounting for 80,000 direct vehicle-manufacturing jobs and an additional 500,000 dealer and supplier jobs, according to the trade group Global Automakers. Their 300 U.S. facilities also account for nearly half of all vehicles built in the U.S.
“There has been an international move to produce cars in the U.S. for U.S. consumption,” Julie Maydew, vice president of industry research firm ResourceMFG said. “Foreign direct Investment is increasingly regarded as a source of new jobs, production and exports and foreign manufacturing jobs within the U.S. are growing five times faster than outsourced jobs.”
Here are three reasons why foreign automakers may be well positioned to give the “Detroit Three” a run for their money:
1. Cheaper Infrastructure: Unlike the Detroit Three, which focus manufacturing capacity in traditional Midwestern industrial states like Michigan, Ohio and Indiana, foreign manufacturers have concentrated their U.S. plants in the South. Toyota, Honda, Nissan, Hyundai, Kia, BMW and Mercedes have benefited from the business-friendly climate in southern states. Consider Volkswagen’s $1 billion Passat plant, which opened in Tennessee on Tuesday – a development company officials say will create 11,000 jobs. By building in a lower-cost area and buying 85% of its parts for the mid-sized sedan locally, VW can dramatically reduce its costs.
2. Non-Union Workforce: The United Auto Workers union is having a devil of a time trying to unionize the U.S. operations of foreign manufacturers. That’s because many of those southern plants are in so-called “Right to Work” states, where employers have an upper hand and labor costs are far lower. The entry-level wage of $14.50 an hour at the Tennessee VW plant is only about half the average wage earned by UAW members in the Midwest. While the union permits wages of $14/hour, the Detroit Three are hiring only half as many employees as their rival manufacturers in the South.
3. Hefty State Subsidies: Southern states are willing to spend big to lure manufacturing jobs. The state of Tennessee ponied up $500 million in incentives for VW to build in Tennessee; the city of Chattanooga added another $77 million. Incentives that big make it an easy decision for foreign automakers to head south. The Detroit Three are investing in southern plants, too. But the National Labor Relations Board’s demand that Boeing (NYSE:BA[5]) shutter a non-union aircraft manufacturing plant in South Carolina and give those jobs to union employees in Washington state, could make further expansion in the south a dicey proposition for Ford, GM and Chrysler in the near term.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
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