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Don't Blame the South for Domestic Automaker's Woes

"The Southern states have given subsidies to the Asian manufacturers to locate their plants down there at wages that are more or less half of what are being paid in the Midwest. So what's really killing the Big 3 car manufacturers is not foreign competition abroad, it's foreign competition in the U.S., subsidized by American states (in the South)."

-- Wilbur Ross, the American billionaire, investor, takeover specialist and Chairman and CEO of WL Ross & Co. Ross made his comments on a news program titled "Auto Industry Civil War" aired by CNBC on Friday, November 7, 2008. Managing editor's note: Southern Business & Development's editor and publisher Mike Randle was also on the program with Ross.

By Michael C. Randle

The above statement by Wilbur Ross has to be one of the most absurd we have ever heard regarding the struggles the Big 3 are having. Is it the South's fault that GM, Ford and Chrysler are struggling again, as Wilbur Ross suggests?

Well, let's begin by focusing on Ross' statement. Ross blamed the South for "subsidies" to "Asian automakers." Apparently he forgot the Germans, which soon will have three large assembly plants operating in the South.

Not only did Ross omit an entire continent when it comes to which countries are represented in the Southern Automotive Corridor, it is clear to us he does not know the difference between a subsidy and an incentive to a corporation that plans to create new jobs and investment. I realized then that Wilbur Ross may be a billionaire businessman, but he possesses little knowledge about economic development history or even how economic development works, particularly here in the South. Here are the facts:

* There is a big difference between subsidies, as Ross calls them, and incentives. Subsidies are gifts or loans -- sometimes both -- and they are almost always given out to save jobs, as is the case with GM, Ford and Chrysler right now. In other words, subsidies help keep jobs; therefore it is appropriate to call a subsidy a bailout. So, what GM, Ford and Chrysler are receiving as of this writing is a subsidy, not an incentive. The difference is this: There are no new jobs being created by the Big 3 even with the federal financial aid, only the retaining of existing jobs. In fact, watch GM, Ford and Chrysler take the financial aid and then cut even more jobs. 

On the other hand, incentives are performance based and are given out in exchange for new investment that many times results in thousands of new jobs. Therefore, an incentive is granted when a company is creating jobs, not when jobs are being retained. Furthermore, incentives are performance based. Unlike subsidies, incentives have claw back provisions. A claw back provision is put in place so that the company must return any incentives accepted if a set number of new job and investment levels are not met.

Ross was half-right about one thing. Over the years Southern states have collectively paid billions in incentives to automakers, both foreign and domestic, to create new jobs and investment. For example, Alabama has paid about $1.2 billion in incentives to just four OEMs. Those are Mercedes-Benz, Honda, Hyundai and Toyota. In return, those four automakers have paid approximately $20 billion in wages to Alabamians over the last 10 years or so. So, it can be assumed then that both subsidies and incentives are indeed investments. It's just that incentives have better returns because new jobs and investments are being created, not the retention of jobs that already exist.

* Ross mentioned "subsidies" to Asian automakers given out by Southern states. Honda, Toyota, Suzuki and other Asian automakers have large plants in states like Michigan, Indiana and Ohio, not to mention Ontario and elsewhere outside the South. In each case, those states and provinces gave out tens of millions in incentives to land those plants. In other words, the Midwest and Canada also hand out "subsidies," as Ross calls them, to foreign-owned, specifically “Asian” automakers.

* On the other hand, the amount of incentives given out by Midwestern states to the domestic automotive industry over the years is staggering. In 2000, Michigan gave an incentive package worth $256 million to spur a $1 billion investment by GM in that state. In 2006 Michigan lawmakers also approved $151 million in tax credits and other incentives to Ford to upgrade six Detroit-area plants. And just this year Michigan officials approved more than $130 million in tax incentives to encourage GM to build a new plant in Flint, Mich. and upgrade four other facilities in the state. Those represent a very small sample of incentive packages given out to domestic automakers by Midwestern states over the years.

* Incentive packages given to domestic automakers by Southern states are a common practice as well. The state of Tennessee in 2006 and 2007 gave out tens of millions to GM so that it could retool its former Saturn plant in Spring Hill, Tenn. That is in addition to several other packages Tennessee has presented to GM since it began operating in Tennessee in 1990. Of course, those amounts don't even include the huge incentive package Tennessee originally granted to GM just to land the plant. 

Two years after giving out an incentive package to GM to help it retool its Spring Hill plant, the state of Tennessee put together an incentive package that will eventually top $500 million to land a foreign-owned plant. That, of course, is the new Volkswagen plant currently being built in Chattanooga.

Tennessee isn't the only Southern state to dole out incentive packages to GM, Ford or Chrysler over the years. Missouri, Georgia, Louisiana, Texas, Oklahoma, Kansas, Virginia, Maryland and Kentucky have bestowed billions on the Big 3 over the years. In fact, Kentucky at this very minute has $180 million on the table if Ford will simply keep its two Louisville plants open and consider expanding one or both.

So, Ross' argument that incentives (what he called subsidies) handed out by Southern states to Asian automakers for new plants in the South has no merit at all. In fact, it borders on ignorance. Every state in the U.S. that has landed an automotive assembly plant -- both foreign-owned and U.S.-owned -- have given out incentives to land those plants. 

"I think the Big 3 can be competitive. But the federal government has to put together another rescue package. I think it is in our long-term interest to have a thriving domestic automotive industry. But instead of Indiana competing with China, they are competing with Alabama. Another important point about the Big 3 is that per car they spend $7,000 more in the United States than any of these transplants do. The Big 3 would be much better off if they operated on a level playing field with the South when it comes to manufacturing vehicles."

-- Scott Paul, the Executive Director of the Alliance for American Manufacturing, on the same CNBC report and discussion that Wilbur Ross and Mike Randle were a part of in November.

We agree with Paul's comment that it is in this country's long-term interest to have a thriving domestic automotive industry. But the key word used by Scott Paul is "thriving." The U.S. automotive industry has been contracting for almost three decades now, shedding more than 600,000 jobs since 1980. So this latest crisis is nothing new. To thrive, GM, Ford and Chrysler must make huge changes, particularly their overall business models, something they haven't done since foreign automakers began making cars and trucks in the U.S. in the early 1980s.

It should be noted that there is one major difference between U.S. carmakers and foreign-owned carmakers in this country. That difference is every domestic assembly plant in this country is union organized. Contrastingly, not a single foreign auto plant in the U.S. is organized.

As for Scott Paul's comments, we have our own in response.

* There are 11 major automotive assembly plants in the South that are operated by the domestic auto industry. Just five years ago there were 17 assembly plants operated by Ford, GM and Chrysler in the Southern Automotive Corridor. The Big 3 have built cars and trucks in the South for decades, almost as long as Detroit itself. But even the South's well known success in the last two decades at landing a large majority of the foreign-owned automotive assembly plants (called "transplants") that currently operate in the U.S. is not enough to keep the domestics running at full strength in what is widely believed to be the most attractive region in the country for auto making.

In comparison, there are only eight major assembly plants operated by foreign-owned automotive companies in the South. Those eight plants are run by foreign automakers from just three countries -- Japan, Germany and South Korea. Three more new plants are now under construction in the South. Those are Kia (Korean) in West Point, Ga., Toyota (Japanese) in Blue Springs, Miss. and Volkswagen (German) near Chattanooga. (Since we are counting, there is a great map of automotive assembly plants operating in the South at one of our Web sites

During these critical times for the domestic automotive manufacturing sector, much of the media has painted the picture that foreign-owned plants -- otherwise known in a somewhat negative connotation as "transplants" -- cover the South like kudzu. But as you can see, it won't be for a couple of years before foreign automakers even equal the number of plants operated by American car and truck manufacturers in the Southern Automotive Corridor. Simply put, the Big 3 have more assembly plants in the South than do foreign-owned automakers.

* Whose fault is it that domestic automakers spend $7,000 more to make a car, as Scott Paul maintains? Is it Toyota's fault? Is it the South's fault? Is it the union's fault? No, when a company struggles because it cannot keep its overall costs at a competitive level, the blame lies squarely with the company.

GM, Ford and Chrysler, even in these incredibly difficult times, continue to rank in the top five in auto sales of all automakers. Why then, if the U.S.-based companies continue to outsell other automakers such Mazda, Suzuki, Honda, Nissan, BMW, Mercedes, etc., do they need federal financial assistance? There is only one reason: Their business models cannot compete. In other words, for the Big 3 to "thrive" again, any financial assistance from the federal government must be met with wholesale changes of their overall business models. 

Furthermore, to blame the South when it is home to more domestic auto plants than foreign as not having a "level playing field" for the domestic auto industry is nonsensical. And to blame a foreign automaker for GM, Ford or Chrysler's problems is like blaming Best Buy for Circuit City's bankruptcy. It is called competition, which last I checked, is a significant aspect of the American business culture.

* We would like to further respond to Paul's plea for a "level playing field." We assume he is arguing that foreign automakers have it better in the South than do domestic automakers in the heartland of the country (the Midwest). Again, the South has provided the same incentives, business climate, work force and overall cost advantages to domestic automakers as it has to foreign automakers and that's been the case for decades.

Yes, it does cost less to manufacture a product, whatever that product may be, in the South than it does in the West, Midwest or Northeast. Foreign automakers know that as do tens of thousands of other manufacturers, including GM, Ford and Chrysler. There are no regulations that we know of that keep the Midwest or any other region of the country to become more business friendly to new and expanding industry.

The South has worked hard to maintain the best regional business climate in the world's largest economy, which remains the United States. The region is also home to 13 of the nation's 17 right-to-work states. Compared to other regions, the South has kept its tax burdens low. Its energy costs are the lowest in the nation. Labor costs are also lower in the South than the other three regions. Yet, you won't find a better work ethic, or a deeper appreciation for a paycheck for a hard day's work, than in the South.

In part because of those things, the South has become the largest regional economy -- by a large margin -- in the U.S. The results speak for themselves. The South is home to more people than the Midwest and the Northeast combined. And commerce from companies based in the South represents 40 percent of the nation's Gross Domestic Product.

The South has made great strides both economically and socially over the years. Not only has the automotive sector thrived in the region, but others have, too. Is the South supposed to apologize for that?

While others call this meltdown of the domestic automotive industry an "Auto Industry Civil War," nothing could be further from the truth. The South has a large stake in the domestic auto industry, not just the foreign-owned sector. It is not the South's fault that GM, Ford and Chrysler are struggling. To maintain otherwise is just silly. The blame of not being competitive primarily because of operating costs that are out of control lies squarely in the lap the company or companies that have created a failed business model.

 Southern Business & Development

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