Sunday, December 07, 2008

Other Side of the Bailout: VW, Nissan, Kia, Honda

1. VW Ramping Up Plant Construction in Tennessee (link): Amid a sluggish national economy and angst in the American auto industry, Volkswagen is ramping up construction of its $1 billion assembly plant in Chattanooga. Despite a slowing American auto market, Mr. Fischer said VW’s board is dedicated to the Chattanooga project, which is to start vehicle production by 2011 and employ 2,000 people.

2. Nissan's Mississippi Plant Retools For the Future (link): Nissan released its first image of a concept trade van as contractors prepared for an $118 million expansion and retooling at the company's Mississippi plant that will make way for a line of three light commercial vehicle models.

3. Kia Comes to Georgia (link): The US auto industry is throwing bolts, but here in Georgia's Chattahoochee Valley a South Korean car company is building a massive new manufacturing plant along the new Kia Parkway, replacing abandoned textile mills. The massive Kia manufacturing plant will turn out its first model in about a year, and some 43,000 people applied for 2,600 positions.

4. Honda plant brings hope to Indiana town (link): With the domestic automotive industry teetering on the edge of bankruptcy, the recent grand opening of Honda Motor Co.'s Civic assembly plant in Greensburg was a dream come true for this town of 12,000 and for a state that has been hit hard by manufacturing job losses similar to those faced by Michigan.


At 12/07/2008 11:22 AM, Blogger TheDuke said...

Having friend in Chattanooga, I can tell you that the VW was hugely subsidized by the local and state governments. The governments confiscated lands for the plant then paid VW to take it, and that was just the beginning.

At 12/07/2008 11:35 AM, Anonymous Anonymous said...

Many of the most influential critics of the Detroit Three loans provided "pre-bailouts" to lure the Japanese transplants to their states. I don’t know the aggregate figure off hand, but I’ve read enough of the individual amounts that were in the hundreds of millions of dollars for the total amount to be in the billions of dollars.

Make no mistake about this: the Japanese transplants were heavily subsidized with public money. There are no public money virgins in the U.S. auto industry.

At 12/07/2008 12:21 PM, Blogger the buggy professor said...

1) Mark --- Last Thursday, on the road, I tuned in to NPR and listened Warren Olnay's program on the wisdom or not of bailing out the Detroit.

Olney, a terrific journalist and moderator with a daily show, was doubly interesting that day because --- among a very good panel of interviewees with different views on the bailout --- you were among them.

It was an unusually informative debate. And you turned out to be a good speaker . . . no doubt to the benefit of your students. (Your comments about Flint and its flourishing local economy --- after losing 75,000 auto-jobs in the last decades --- were especially illuminating.)


2) Now to Walt's point about state-subsidies for foreign multinational implants.

Walt's right about the auto-implants being subsidized, and there's an even larger political point to be made.


3) It lies in our federal system . . . something we Americans take for granted, but that gives the multinationals from abroad a superior bargaining position.

Given different tax levels, unionization of the work force, real estate prices, and the like that differ noticeably across the 48 mainland states, multinationals are able to play one one state government after another to get the best subsidies possible.


In a unitary nation-state --- the case all over West Europe save in tiny Switzerland (not in the EU) and in Belgium and Germany (with relatively weak federal systems compared to the USW's) --- such differential bargaining tactics by foreign multinationals are impossible. And so relative bargaining power is more evenly distributed. (Take China as an example. The huge size and potential of the Chinese market --- plus the allures of disciplined, low-wage workers --- has given the Chinese state and CP enormous leverage over the concessions made by all foreign multinationals operating there --- including working with Chinese partners, transfers of technology and R&D, and links to Chinese suppliers.)


3) And so? From a free-market standpoint, the role of state governments in attracting multinationals to their territory --- which is only natural after all --- does lead to some market-distortions.


4) How big a difference the state-subsidies make was expressed --- from his viewpoint, mind you (but with accurate figures) --- by the UAW's Ron Gettelfinger in his November 20 press conference:

"Since 1992, states where we have transplants have located have put in over $3 billion dollars in incentives and I would point out that is the money that the state settled for and I want to go specifically to Alabama if I could for a minute. We have Hyundai Motor Company that got $252 million in incentives. Toyota there got $29 million in incentives. Honda, $158 million and Mercedes $253 million in incentives.

“It just seems odd to us that we can help the financial institutions in this country and that we can offer incentives to our competitors to come here and compete against us but at the same time, we are willing to walk away from an industry that is the backbone of our economy.

"And while I read these figures to you, which are the actual figures that we have been able to dig up. I want to go to one particular story and that is the plant in Mercedes, the Mercedes plant in Alabama.

“As it turned out, as I said Alabama offered $253 million but the state offered to train the workers, clear and improve the sites, upgrade the utilities, buy 2,500 vehicles and it is estimated that that incentive package totaled somewhere around $175,000/per employee to create those jobs there. And on top of this, that state gave this automaker a large parcel of land-around $250-$300 million dollars. That was the same price or cost to them of building a facility.

“So we can support our competition but we can’t support an industry that is in need? And this need was not brought about because of what the industry has done?"


5) These subsidies --- $3 billion for foreign auto companies --- show that there isn't just a free-market operating in the auto-industry . . . whether for the Detroit-3 firms or those from Europe and Asia, don't they?


6) Observe quickly. To note all this is not to downplay, let alone excuse, the continued blatant failures in management and the UAW heads in fighting gas-mileage limits and (until recently) high-quality vehicles that can compete with those produced by their foreign competitors.

In effect, both management and the UAW leadership have been logrolling one another for decades, not just to put Detroit-made vehicles at a disadvantage cost-wise.


And not just cost-wise, but (until recently) indifference to productivity and quality gaps. With, please note, the UAW underwriting, if only indirectly, these disastrous Detroit-3 management decisons through continued wage-and-benefit concessions made by the managers.


7) May I, speaking this time as a political scientist who specialized in international relations matters --- war, peace, security policies, foreign policymaking, the concerns great powers (globally and regionally) have with their relative power-bases compared to actual or potential rivals, and global economic matters like trade, finance and development --- add just one brief comment to this discussion.

Specifically, for national security reasons, we need a vigorous industrial base in this country. Whether saving the Detroit-3 is essential to that base is, I agree, a disputable topic.

Only thorough investigation by scholars or specialists working for the Defense Department and Congress could illuminate this matter effectively.

Alas, what with the time-pressures behind the Detroit-3 plight --- at least for GM --- we might not be able to wait for such a careful study to materialize.


Michael Gordon, AKA, the buggy professor

At 12/07/2008 1:09 PM, Anonymous Anonymous said...

buggy professor,

Professor Perry is an excellent professor; I am one of his former students :) I actually agree with him more than I disagree with him, but elaborating that in the posts would not further the discussion. I think we need all the perspectives for a well-rounded debate. That’s where I come in.

Your point about the states competing against one another is a good one. I do the same thing when I shop, so why shouldn’t they? Whether it is right or wrong, companies are deciding to locate in places that are considered less union friendly. We have to change the negative perception of unions if they are to survive. I think we are on the right track with the 2007 UAW/GM agreement. Sadly, however, the twin problems of the world-wide recession and the retirees’ health-care cost are enormous and we may never see the positive results from those changes.

I would like to point out the same legacy costs that the Detroit Three are carrying are the result of how U.S. business and government operated in the 20th century. These costs are not unlike the problems Social Security and Medicare will have in the very near future. If the U.S. can’t handle a few billion $$ loan for the auto industry problems, how are we going to handle a few trillion $$ for the social-program problems for the baby-boomers?

At 12/07/2008 2:51 PM, Blogger The Daily Pander said...

Walt G:

How are we going to handle the social program problem for retiring baby boomers? Exactly the way we are now: we're not. On our current path Congress will eventually have no choice but not to pay those bills. I'm not advocating that choice, I just see it as the inevitable outcome of our current path. In the case of Social Security, absent some kind of benefit clawback (means testing, higher retirement age), or affirmative revenue increase (higher withholding, equity investments) the ultimate outcome is default.

At 12/08/2008 12:13 PM, Anonymous Anonymous said...

Professor Perry:

Your friend and supplier of post material Ben Cunningham can tell you all about Gov. Bredesen's sellout of Tennesseans for VW.

I guess you could call it a bailout in advance...

At 12/08/2008 8:36 PM, Blogger sethstorm said...

Yes, but I doubt any of the die-hard buyers of Detroit metal want any of the cars they want to buy. Neither do they want to be forced to them.

Start making the cars that those people can buy (and at the same performance per dollar that the Detroit cars have) and want to buy. So far, the transplants have failed to do this, and only want to listen to environmental activists.

Besides, when will Kia/Hyundai stop copying off of other transplants as well as domestics?

In short: Start matching the Detroit cars in performance(read: no I-4's) and cost (not in the luxury segment) and they can argue against the bailout.


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