A tale of two cities

Automobiles,The Big Three,Suppliers,Supply Chain,New Domestics

STAMPING JOURNAL® MAY 2007

May 8, 2007

By:

Facing deep structural problems and mounting financial stress, Big Three executives publicly sought a meeting with President Bush to discuss how the federal government could assist the automotive industry, and the hundreds of thousands of Americans it employs.

If Charles Dickens had written about modern Detroit and Washington, D.C., it might have read like this: "It was the worst of times, and it was the worst of times." It appears that as the Big Three face their greatest financial problems, their ability to capture government attention is at its weakest.

General Motors Vice Chairman of Product Development Bob Lutz famously remarked, "It is my considered opinion that Toyota has more clout in Washington than we do." Lutz's consternation is shared by his counterparts at GM and Ford. In Washington it seems Detroit is getting no respect.

Detroit's Clout Diminished

The animosity between the Big Three and the nation's leadership became dramatically obvious in 2006. Facing deep structural problems and mounting financial stress, Big Three executives publicly sought a meeting with President Bush to discuss how the federal government could assist the automotive industry, and the hundreds of thousands of Americans it employs.

The invitation was politely declined.

President Bush delayed the meeting until after the November election. He also irked Detroit when he was quoted that the Big Three need to start producing "a product that's relevant." This reaction is a telling sign. If the automotive industry were considered as critical to the health of the nation as it once was, such a brush-off would never have been possible in an election year.

When the meeting finally took place, the results were ambiguous. The Big Three's main problem, it seems, is that the phrase "Big Three" is no longer synonymous with "automotive industry."

Automakers from Japan and Korea continue to win market share while earning healthy profits. The Europeans also are doing quite well-even the European half of DaimlerChrysler is financially sound while American Chrysler struggles. The same is true for the supply chains of these automakers. The press is rife with stories of the bankruptcies and financial struggles of automotive suppliers. Most of the struggling suppliers do a majority of their business with the Big Three.

Industry Identity Changing

The term automotive industry increasingly is understood to comprise much more than the traditional Big Three automakers. As market share has shifted to Asian automakers, so has the footprint and the perceived identity of the entire industry. Not a small share of the credit for this development is owed to the distribution of Toyota, Honda, Mitsubishi, Hyundai, and, coming soon, Kia facilities throughout the U.S.

Hyundai's first U.S. assembly facility in Montgomery, Ala., began producing the Sonata® sedan in mid-2005. When Kia (owned by Hyundai) was choosing a site for its first U.S. assembly plant, it decided to build the plant near an established Hyundai facility. Experienced Hyundai staff members would be instrumental in launching the facility's first products, and the sharing of nearby suppliers promised to provide additional savings. However, there is such a thing as too nearby, at least from a strategic perspective.

Today Kia's facility is under construction at a site that was chosen with military precision. A Hyundai or Kia executive flying in from Korea to visit the automaker's site would land at Hartsfield-Jackson Atlanta International Airport. To reach the Hyundai facility in Montgomery, he would head south on I-85. Halfway there, he would pass the budding Kia facility, growing just off the highway, with a brand-new interstate exit courtesy of the state of Georgia.

The fact that Georgia and not Alabama provided the highway exit was strategic in site selection. The Kia facility lies just inside the Georgia border, and not by accident. This precise facility placement provides more than just tactical benefits such as sharing of suppliers and launch expertise with Hyundai's facility in Alabama. It also provides strategic benefits that add to Kia's political clout. Not only does one more state have a reliance on the automaker and the taxes it pays, but also one more congressional district and two more U.S. senators represent them in Washington.

By distributing their facilities around the country, international automakers have been successful in garnering considerable political influence. Their position is further strengthened by having momentum on their side. If politicians perceive the international automakers' success as evidence that it's possible to be successful in the current regulatory environment, why change everything for the Big Three, which some think are simply not trying hard enough?

Perhaps the most effective means of influencing legislation is to support or oppose it with the impact it will have on the number of jobs in the affected area. The automotive industry is the perfect arena for these battles, as automotive investment has a huge impact on local economies. Perhaps no other industry creates as many supplier and spinoff jobs when a new facility is constructed.

Unfortunately, the same also applies to automotive disinvestment. When assembly plants close, a tremendous ripple effect ensues, closing supplier facilities and many nearby businesses that rely on these workers for revenue. State and local tax revenue drops as laid-off workers seek unemployment benefits—a serious combination punch that local politicians must deal with.

All of these effects and more, such as a real estate downturn, can be observed in Michigan, the home state of the Big Three. And it also happens to be occurring when the Big Three's power to affect politicians is in decline, taking away one of the possible sources of relief from these problems.

There is no doubt that local, state, and federal government will have strong ties to the automotive industry in the future. Fuel economy and emissions standards will certainly be under tighter government scrutiny. The possibility of government assistance for the Big Three, particularly in the case of one of them declaring bankruptcy, appears shaky indeed.



Center for Automotive Research

Bernard Swiecki

Contributing Writer
Center for Automotive Research
1000 Victors Way
Suite 200
Ann Arbor, MI 48108
Phone: 734-929-0484
The Center for Automotive Research focuses on the future of the international automotive industry. Its overall objectives are to provide industry research and analysis, communication forums, and informational resources that respond to the changing needs of the international automotive and automotive-related industries.

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