Week of May 17, 1999
  Blockbuster Deal of the Week
   from Site Selection's exclusive New Plant database

Honda Picks Alabama: A Big Win and a Budding Controversy

Alabama has won one of the most coveted new facilities of the past few years, landing Honda's $400 million, 1,500-employee plant. American Honda (www.honda.com) will incorporate a new company in Alabama to operate the massive auto production facility, a 1.7-million-sq.-ft. behemoth that will be built on a 1,350-acre tract in Lincoln, a city some 35 miles east of Birmingham.

After hotly pursuing the deal, Alabama economic development officials (www.ado.state.al.us/) were understandably ecstatic.

"This is a great day for the people of Alabama," Alabama Gov. Don Siegelman exulted after the Japanese auto power made its announcement. "Honda brings to Alabama a prestige and worldwide reputation that honors us.

"In Alabama," Siegelman continued, "Honda will find a perfect climate, abundant natural resources and the greatest people in the world. We will produce the finest products in your company's history."

Landing Honda marked Alabama's second major win in attracting major auto industry investments.

The first big win came in 1993, when what is now DaimlerChrysler decided to site its manufacturing plant in Vance, a city some 30 miles west of Birmingham. Some 1,700 employees now work at the Vance plant, manufacturing the M-Class sport utility vehicle.


Incentives Controversy Resurfaces
"Honda is investing in Alabama and Alabama is investing our future in Honda," Siegelman said.

That, it seems, is true in several important ways. Alabama promised major incentives to land the auto facility, which, by nature, ranks very high on the capital-intensity scale. The state committed to a total of $102.7 million in incentives to buy the land and prepare the site for construction, plus training the plant's employees. In addition, Honda will receive $55.6 million in tax breaks, according to Gov. Siegelman's office.

Those incentives have resurfaced the considerable debate that boiled over in 1993, when the state provided $253 million in incentives and tax breaks to land the DaimlerChrysler investment in Vance, which became the first U.S. Mercedes-Benz plant.

The Daimler arrangement quickly landed in hot water. State school officials in 1993 refused to hand over education funds to bankroll the Mercedes incentives. As a result, Alabama was tardy with a $43 million incentive payout due Mercedes in the agreement forged by then-Gov. Jim Folsom. Ultimately, state officials had to raid Alabama's pension fund to make good on the incentives, taking out a loan on which the state paid 9 percent interest.

To make a stormy story short, a voter backlash solidified. In fact, when Folsom lost his reelection bid, most political analysts attributed the defeat to the 1993 incentives deal. Major incentive packages like those awarded Honda and DaimlerChrysler have, of course, become commonplace, as have the accompanying controversies. Undoubtedly, the Honda deal will be the subject of countless future economic analyses.

Already, critics are pointing out that the state's incentive package of roughly $158 million averages out to some $105,333 in incentives for each of Honda's 1,500 employees.

By that yardstick, though, the Honda incentives are some 30 percent lower than the package that landed DaimlerChrysler. In addition, early indications are that much of the incentives will be come from the state's share of the billion-dollar settlement with U.S. tobacco firms, a strategy that promises to be much less controversial than tapping educational funds.

Samuel Addy, interim director of the University of Alabama's Center for Business and Economic Research has calculated that Alabama may beak even in 20 years if some of Honda's large suppliers follow the company to the region (which, given the just-in-time nature of auto manufacturing, seems likely). Despite the lengthy payoff, Addy calls the state's second auto plant "a great boon" for Alabama, which may establish it as an rising center for heavy industry locations.


Facility Critical to Honda's Success
The importance Honda has placed on expanding its U.S. presence also bodes well for the Alabama deal's long-term success. The facility in Lincoln is "vital," said American Honda Executive Vice President Tom Elliott, because of the company's rapid U.S. sales of light trucks like minivans and sport utility vehicles - which is what the Alabama plant will be turning out, as well as manufacturing V-6 engines. By 2000, light truck products are expected to exceed half of all U.S. auto sales. Honda's Odyssey minivan and its SUVs have been strong sellers with high ratings from industry analysts, Elliott said. In fact, the Odysseys have been so popular that U.S. dealers have had trouble keeping them in stock, he added.

Also auguring well for the Alabama plant are Honda's escalating U.S. sales. 1998 marked American Honda's third straight year of U.S. record sales, with '98's U.S. sales of 1,009,600 new Hondas and Acuras marking the first time the company has exceeded 1 million in U.S. totals.

"Strong demand from our customers . . . has stretched our U.S. production to the limit," says Koichi Amemiya, American Honda president and CEO of Honda's Americas Region.

Sean McAlinden, a labor economist and auto researcher at the University of Michigan, echoes Honda's critical need for additional capacity in the burgeoning U.S. truck industry. "It's one of the world's best car companies, but it's weak on truck capacity," McAlinden says."

With the Alabama decision, Honda seems to clearly be signaling that it's adopting the same "build-them-where-you-sell-them" strategy that's been an integral part of Toyota's successful surge. When it goes online in 2002, Honda's Alabama plant will have an annual capacity of 120,000 vehicles and 120,000 engines.


Unions a Factor?
"Alabama has what we need to continue this success - an outstanding community of people, excellent transportation systems and the necessary infrastructure to support industry," Amemiya said. Alabama also has something else that may have played a role in its winning the Honda plant. It's traditionally a nonunion state, and Honda's decision came amid rumblings of unionization efforts in the Midwest, where the company established its first U.S. presence in the late 1970s.

On April 27, the United Auto Workers filed a complaint with the AFL-CIO asking for exclusive rights to organize Honda's plants in Ohio, where Honda employs some 13,200 workers. The issue will likely go to mediation or, if necessary, arbitration, labor spokespersons say.

The Ohio union drive is anything but a certainty, however. Large numbers of Honda's Ohio workers have come out to demonstrate against unionization. Moreover, no union has ever succeeded in representing the work force at any solely Japanese-owned auto plant in the United States. The only union representation in U.S. plants with a Japanese connection are in those facilities that are joint ventures between Japanese and U.S. companies, or are U.S.-Japanese cooperative arrangements in which plants make models for both companies.

Honda officials made no mention of unionization in announcing their decision, which came together in fast-track fashion, unfolding in only a three-month span, according to both Honda and economic development executives. Elliott said Honda "briefly" considered Midwest locations before zeroing in on the Alabama site. Honda should find a ready labor pool in Lincoln. Layoffs at a local-area Goodyear plant and a nearby U.S. Army base have been cutting 3,000 jobs each year.


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©1999 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.