Manufacturing Monday: Guess whose making the Prius now? Oh and VWs too!

Call it a positive effect on the falling US Dollar. Along with an increase activity by domestic manufacturers, foreign companies are now expanding their operations here in the US. Now, yes I understand that ultimately the money goes back overseas, but they are hiring folks who needed jobs. To me, that last part is what counts.

It's official, Toyota will make the Prius in the US!

In a big shuffling of operations, Toyota is establishing a manufacturing base in the United States to build their famous Prius. The famed hybrid will be built in Blue Springs, Mississippi. Various business news sources have long hinted that Japanese car makers have been hurting with the appreciation of the Yen versus the Dollar, including the rising cost of shipping only extends their financial pain. Indeed, there was an interesting piece back in 2007, that stated that for 1 JPY move downward would hits Toyota for about $318 million. Now I don't know if this is completely true or not, but I do remember my father's late best friend, an importer of Japanese electronics claiming that many companies were hedged around the 115 JPY level.

DETROIT (AP) — Toyota Motor Corp. will start producing the hybrid Prius in the U.S. for the first time as the Japanese automaker adjusts its U.S. manufacturing operations to meet customer demands for smaller, more fuel-efficient vehicles.

The company said Thursday it will start producing the Prius in late 2010 at a plant it is building in Blue Springs, Miss. Toyota already builds a hybrid version of the Camry sedan in Kentucky, but this will be the first time the Prius, which has been on sale for more than a decade, will be built outside of Japan and China.

- excerpt from "Toyota making US manufacturing changes", Associated Press


Toyota also will be temporarily suspending operations in it's Tundra models in Texas and Indiana due to declining demand. This is obvious, given the rising price of gas. One need only look at the current misfortune of the other car makers who essentially bet the farm on Sport Utility Vehicles, namely American auto makers! During the shutdown, Toyota said, workers will be improvement projects.

"In our view, we don't just want to send everyone home because it makes for a bad startup condition when we start back in November," he said. "Beyond the investments we've made in buildings and equipment, we've invested a lot in our team members. It doesn't make sense for us to dismiss them."

Princeton plant spokeswoman Kelly Dillon said employees will be working on special safety and quality improvement projects during the shutdown.

- excerpt from "Toyota making US manufacturing changes", Associated Press

Now you may be wondering, why include the story of a shutdown with the introduction of new work? Doesn't one cancel the other out? Perhaps, but I doubt that Toyota is going to cut operations long term. Indeed, if one looks at Japanese companies in general, they play chess while we've been playing checkers. Something tells me, that these plants in question will be used to produce future hybrid vehicles. Though oil is "down" right now, fuel prices in general have a longer bullish trend. Toyota knows this, and that is why I think they are expanding hybrid car manufacturing here.

Volkswagen Choo-choo's Chattanooga

After months of wheeling and dealing, the Tennessee city of Chattanooga will be home to a brand new assembly plant by Volkswagen. In a bit of historical irony, the location will be on the grounds of a former munitions plant that was built specifically for bombing Germany during WW2. Today though, instead officials from both parties, from the governor on down were looking to drop incentives instead of bombs on the laps of the Germans.

Tennessee’s top politicians usually wield their power in Washington, D.C., and Nashville and aren’t above throwing a sharp elbow at the opposition.

But while courting Volkswagen to build an auto assembly plant in Chattanooga, Republican Sens. Bob Corker and Lamar Alexander and Democratic Gov. Phil Bredesen worked together in bipartisan fashion to help win over VW executives during cocktails and dinner at Mr. Corker’s Riverview home.

After a venison dinner during one of three gatherings at Mr. Corker’s Annehaven home last month, Sen. Alexander closed the evening at the piano, banging out the world-famous 1940s Glenn Miller tune, “Chattanooga Choo Choo.”

- excerpt from "Chattanooga: 'Choo Choo' hit right note with Volkswagen", Times Free Press

Failing to attract others like Toyota and KIA, the area went out of its way in an almost fanatical fashion. When Volkswagen reps said the area looked good but had a problem with the growth of trees and such, the local government hired almost every construction crew in the area who then worked on 18 hour a day basis to clear the area. Of course there was the package of other incentives to help woo the Germans as well.

“If there were any sort of touchy steps along the way, I think it was when we got through putting together all the incentive packages,” Gov. Bredesen said. “I think it looked to them weak and difficult to understand compared to what the other states were doing. We had to do a lot of education.”

The governor said he thinks the state’s incentive package exceeded that offered in 2005 to convince Nissan to relocate its North American headquarters to Franklin, Tenn. That came to about $197 million. But the governor said costs for dealing with items such as infrastructure won’t be known fully until later because they depend on the plant’s design.

- excerpt from "Chattanooga: 'Choo Choo' hit right note with Volkswagen", Times Free Press

The company will build the facility in the Enterprise South Industrial Park, located 12 miles northeast of downtown Chattanooga. The 1,350-acre site is 100 percent owned by the city of Chattanooga and Hamilton County and is certified as an industrial megasite by the Tennessee Valley Authority. Enterprise South is adjacent to Interstate 75. Initial production capacity for the facility is anticipated to be 150,000 vehicles, including a new midsize sedan designed specifically for the North American market. Production is scheduled to begin in early 2011.

- excerpt from Volkswagen public release "Volkswagen Group of America announces it will produce cars in Chattanooga", VW.com


(Aerial photos courtesy of Chattanooga Chamber of Commerce)

So are these car companies the beginning of a new wave of foreign investment? While I love seeing stories like this, in the back of my feeble brain thoughts of union representation lurk about. We all know that in the South (and this is nothing personal against the region, mind you) that organized labor is not like that found in say Ohio or Illinois. Right now it's automobiles, but will we eventually see consumer electronics and other goods? It would be nice to know the next time I get a new television, that it was made using American labor.

But what's down the road?

All right, you know I was gonna throw a sour note into all this, so let me get this out of the way. Going through all these news stories, the term incentives keeps popping up. Today it is tax breaks and infrastructural development. But what if the global economy or more to the point job prospects become more desperate? Will local and state government offer a different set of incentives? To many politicians, getting new jobs for voters equates to them keeping their jobs. But I can't help thinking that down the road, as competition heats up, that we run the risk of turning parts of the country into machiladoras. For those who don't know, machiladoras were areas in Northern Mexico were companies went to setup factories, it was the source for Ross Perot's warnings of a "giant sucking sound" of jobs leaving America.

Like I said, I'm happy to see work come back to this country. I'm still somewhat of a capitalist, but I know how cut throat capitalism can me. We need safeguards, that sounds bad to you free traders, but we do. There are Americans who need work whose skills pertain more to factory work, which doesn't make them less, factory work can be intensive and shouldn't be put down. Saying this, look at the trends were such work goes, into mainly anti-union regions. Now I'm not saying the next President will be a Republican, but down the road we're gonna have 'em and they will do the evil that they do. Globalization, an economic depress, or just plain competition, it doesn't really matter.

In North Korea, they setup a special trade zone in which South Korean businesses can "hire and pay" northern workers. The reality is, these folks are slaves. There are similar, though not sure as bad, special zones all over Asia like in China. How soon until, say some future state governor says they will have a "special zone"? Think it's ludicrous? C'mon, the past 8 years should have shown you anything is possible now.

Ok, sour note over, had to say it, forgive me. Once gain, congrats to Blue Springs and Chattanooga on their big score. Now lets make sure we bring more work and rebuild our manufacturing base!

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Comments

Manufacturing Monday: Guess

I wouldn't be popping too many corks just yet.

These new plants are wonderful but are only a drop in the bucket in replacing the massive job losses in mfg.

VW's first foray into the US in New Stanton PA ended in failure, with closure after only a few years of making the Rabbit

Not only has Toyota cut production in Princeton, the rumors persist here in Indiana that they will ultimately close that plant, the oldest in the country. They have also quietly scaled back their aggressive one new plant per year for the next ten years in the US and have been looking elsewhere, as well as pulling some production back to Japan, like Honda has been doing.

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additional comment re incentives

I really struggle with the incentives communities give to lure big employers. On one hand many of these communities need the jobs. But on the other we create these roving bands of gypsy companies that as soon as the incentives run out they pack up and move on to the next community. This has happened several times now in my town - leaving the community and taxpayer holding the bag and stuck with a white elephant.

The other issue is while i applaud the japanese and europeans locating their auto plants here - this is great news, a downside is they typically stick with their own parts and service suppliers rather than domestic ones - so the beneficial ripple effect thru the economy is much less than a US branded plant.

However the US brands do not have as enthusiastic loyalty to US suppliers as the europeans and japanese to their own suppliers. The Japanese call this loyalty to other japanese companies Kairetsu (sp?)

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Offsets (incentives)

In the hearing on China, which I recently covered, there was testimony on how the US doesn't track offsets, incentives in each corporate global contract. You're right, the governor of New York just gave extensive incentives to IBM to make them write a pledge to not offshore outsource more jobs from the state of New York. India and China have requirements to hire their workers, be part of a state controlled enterprise, significant contract clauses to invest or purchase billions with each contract (Boeing) to make the sale, to our famous free trade zones which often mean slave labor.

No one is monitoring these it appears. I'm not sure about the United States, but he testifies Globally, no one is regulating or monitoring any of it.

What I find even more interesting is while Toyota is investing in the United States, they also opened up a $100M R&D center in Ann Arbor and here they are retooling, opening up more factories, our lovely GM is simply closing plants and doing massive layoffs..in the United States of course. I would like to see a congressional hearing on why is it GM cannot simply retool those plants and make box cars. Some of the fuel efficient technologies are now 40 years old, the Geo Metro comes to mind immediately, it gets about 50 mpg.

I find any company at this point investing in the United States, bringing manufacturing to the United States a good thing myself, even when they are foreign incorporated.

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Manufacturing Monday: Guess

From what I understand, and particularly with the US auto plants and to a lesser extent Japanese, that plants built and tooled for trucks do not easily convert to autos and vice versa. This is part of the reason that concern reamins of closure for Princeton IN Toyota - that was a truck SUV and Van plant. The Japanese have done a good job with flexible assembly lines that allow for easy switch over to other models, the US plants designed with dedicated modesl in mind have not been able to successfully do this in any meaningful way.

I agree that the Japanese are bringing good jobs here. My mind was opened on this several years ago working in TN, I asked my coworkers why everyone was driving a japanses brand - he said look around - japanese company here, japanese company over there - when was the last time Ford or GM brought any new jobs here?

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Transportation Costs

In two words, one of the major drivers behind this effort to return manufacturing capacity to the US is transportation cost.

A week back Manufacture This! had a piece
up about the effort to move manufacturing back to the US. The thing that separates the real world and Ricardo is that in the real world rapid changes in comparative advantage due to changes in terms of variable capital costs involved large transaction costs in moving manufacturing. For example:

With regard to a possible revitalization of U.S. manufacturing, Engardio notes that the cost of shipping a 40-foot container from Shanghai to San Diego has climbed 150% in the past eight years and is now $5,500. A Toronto financial-services firm, CIBC World Markets, estimates that if oil climbs to $200 a barrel, that cost could reach $10,000. Firms would simply find it more affordable to import their goods from Cleveland rather than China.

Unfortunately, it’s not that easy. American manufacturing has taken a serious beating over the past decade and the bigger struggle would be to ramp back up to full production.

As the old saying goes, the spirit may be willing, but the flesh is weak. In the case of U.S. factories, much of the baseline productive capacity and hands-on experience is now gone, a victim of China’s subsidized, artificially-low productions costs. Engardio quotes James Turk, CFO of the New Mexico-based CEMCO as saying, “American foundries now can compete head-to-head on cost, but there aren’t many foundries, welders, machinists, and quality-control engineers…What we had 10 years ago is gone.”

Freiderich List must be rolling in his grave seeing what has been done to the American system of Political Economy he revered. Productive power that took decades to call into being has been lost in but a few years. Neo-liberal economists seem unable to comprehend that skills training occurs as much on the job as in the classroom, and that in many cases it is simply impossible to locate laborers with the appropriate skills.

Take Siemens decision to move tram car production destined for North America from Germany to San Diego. Siemens found that local welders didn't have the specialized training needed to do the job, so they had to fly in welders from Germany to do the training.

This having been said consider this. The standard 40' container has around 2400 cubic feet of carrying space. Assuming 100% utilization of shipping space, we get the following.

In 2000, the container cost $2200 to ship, or about $0.92 a cubic foot. So that's the transport cost for a 17 inch computer monitor is maybe $5-6.

Now the shipping cost is $5500, or about $2.30 a cubic foot. So the same monitor now costs $12.50-15.

If oil hits $200 a barrel, and the shipping cost rises to $10000 for the container, or $4.17 a cubic foot. The monitor will cost $22.75-27.30 to ship.

That I think is the point at which companies really begin to move manufacturing back to the US. And the interesting question then is what happens to US wages as the increased cost of transportation lowers the leverage offered to employers who use threats of moving the factory overseas?

Is the US worker the main beneficiary, or does this kickstart the maquiladores in Northern Mexico?

Unions in Mexico's auto sector have been forced to accept a two tier wage system like what the UAW and CAW have.

Wages were low to begin with about $4.50 an hour, and the new contract sets a new second tier at half that. But Mexico's labor force is about 38 million to China's 798 million. So Mexico's labor force is just under 5% of China's .

Together with the coming demographic decline in Mexico, this is going to place pressure on wages there as well.

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Transportation Costs

As I have mentioned in a previous post, the mobility of labor is really a myth for the reasons you state, as well as the more mundane reasons such as family and community ties that make relocation dificult for all but maybe kids just out of school.

This also ties into the myth of the skilled labor shortage. Michigan, in one of those Jeff Daniels "pure michigan" pieces, is said to have the greatest per capita concentration of engineers and skilled laborers in the nation, yet also has the highest unemployement. You would think that employers would be falling over themselves to take advantage of those skills, as well as the firmly established manufacturing infrastructure that Michigan and the surrounding industrial states have - but such is not the case is it.

High transport costs I believe are helping in the localization of jobs and the return of some manufacturing to the US, but its still awfully hard to compete with pennies on the dollar wages, currency manipulation and lax regualtion which are the primary drivers in offshoring on skills and infrastructure alone.

On a related issue - Ford has announced a major overhaul of 3 of their 8 truck plants to producemaller cars, this is a major undertaking for Detroit. Ford is also fast tracking bringing over some successful european small car and truck platforms for production in NA (which unfortunately includes Mexico for the new Fiesta). The "smart money" is on Ford to make the quickest US turnaround of the not really so big anymore three

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Further comment

I know of many skilled workers and engineers that have gotten out of the manufacturing business. It is no longer the stable path to middle class existance as it once was - the constant threat of closure and outsourcing, the long hours for little chance of advancement or increase pay/benefits and so forth. I know talented engineers driving trucks, selling insurance and fixing copy machines, welders stocking grocery shelves, electronics technicians running a video store and installing cable and so on.

many of these guys got out for more stable employment than mfg provides. So yes we have lost much of that tribal manufacturing knowledge we once had. This goes directly to the erosion of our technological and innovative edge as a nation

And what student wants to spend five years of their lives in college and going thousands in debt studying engineering, only to have the job shipped off to india or taken by an H1B?

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Disposable workers

This is why we need labor laws, unions strengthened. Corporations see workers, including advanced researchers, as heads as something in a balance sheet, something to be traded, discarded. People are simply not commodities and wages are not just an expense to some corporation, they are vital to a strong economy. I agree with you, who is going to invest in themselves to massive debt, only to be cast aside at age 32 without even a blink of an eye?

Wall Street rewards these massive cuts, moving jobs around the globe by increasing a corporate stock price. There isn't hardly any acknowledgment on what that does to the future of that company and more importantly the nation where the jobs are.

Our government is beyond asleep at the wheel on this one.

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Disposable workers

I have always been puzzled as to why Wall Street considers job cuts to be good news?

But this really explains it - "Wall Street rewards these massive cuts, moving jobs around the globe by increasing a corporate stock price. There isn't hardly any acknowledgment on what that does to the future of that company and more importantly the nation where the jobs are"

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they report quarterly

as a result financials are focused in the moment. If they had to report 5 years out, quarterly, what the profit will be, I think that would assist in getting off of this "pop and drop" quarterly, short term business thinking. They think short term in many ways because the stock market is almost a short term monitor. That's my take on it.

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