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From Site Selection magazine, May 2011

Steep Hill to Climb

What are the chances a foreign carmaker will see
one of its North American plants unionized in 2011?

WINDING ROAD BEGINS IN MEXICO: In September 2010 the new Ford Fiesta hit the halfway mark of its Fiesta World Tour 2010, traveling roughly 7,000 miles from Hollywood to Dubai. The 2011 model began production in May 2010 at the company’s Cuautitlán Stamping and Assembly Plant in Mexico. The transformation of the plant from a truck plant created 2,000 direct jobs.                                                                             
Photo courtesy of Ford Motor Co.

Alexandra Segers is an international account executive for architecture, engineering and construction management firm SSOE Group.
Alexandra Segers is an international account executive for architecture, engineering and construction management firm SSOE Group.

he headlines about public-employees unions obscure another labor topic: The UAW's new push to organize at foreign-owned automotive plants. It's just the latest chapter in the long battle between right-to-work and unionized states in what remains the strongest manufacturing sector on the continent.

While the 2010 annual sales rate was a low 11.6 million vehicles, longtime Toyota executive and industry advisor Dennis Cuneo, who also focuses on labor law as a partner at Fisher & Phillips, says the normal rate is between 15 million and 16 million. "Even at the lower end of that range, you can't import all of those vehicles," he says. "That suggests that somebody is going to have to build some new assembly plants someplace in North America."

Conditions appear to be ripe. Despite recent labor cost spikes and productivity issues associated in large part with the industry's bankruptcy and restructuring issues of the past few years, U.S Bureau of Labor Statistics data show that between 1987 and 2009, output per hour has increased by 3 percent, unit labor costs have very slightly decreased by 0.2 percent, and labor compensation has decreased by 0.8 percent, despite the escalating cost of living.

The trend continues, as Automotive News reported in April that some 36,000 workers are expected to be hired by the Big Three by 2015, but nearly every one will be hired at Tier 2, entry-level wages and benefits, roughly half of what a traditional UAW worker makes. Concessions during contract talks have steadily reduced those wages over the past four years. But money isn't always the sticking point.

"The biggest complaint about the unions is not so much the wages as the lack of flexibility," says Cuneo.

That may be changing too. Typical of both labor and physical plant trends was the four-year agreement reached in fall 2010 by the UAW and Illinois-based Navistar. While increasing truck and engine model flexibility to better utilize manufacturing capacity at all facilities and supporting new facility investments in Illinois, it also featured a "significantly improved 'new hire' package featuring more competitive and predictable cost structure," said the company, as well as healthcare cost sharing by employees.

Indiana Gov. Mitch Daniels has responded to strong calls for right-to-work legislation by saying it's a legitimate issue that can be a filter for companies on a site search, but that more open debate is still needed and this year is not the time. In Missouri, right-to work legislation is a hot daily topic this spring. All of Missouri's bordering states except Illinois and Kentucky have adopted right-to-work laws. According to one sponsor of the measure, all of the neighboring right-to-work states have lower unemployment rates than Missouri. Gov. Jay Nixon opposes the measure.

The Missouri Economic Research and Information Center found that 2009 per capita disposal personal income, when adjusted for differences in cost-of-living, was $2,400 higher in right-to-work states than non-right-to-work states. Other states where right-to-work legislation is in debate include Kentucky and New Hampshire. And U.S. Sen. Jim DeMint (R-S.C.) has introduced a national right to work act.

The head of the automotive industry practice for law firm SNR Denton declined to be interviewed, citing clients on both sides of the issue. The office of the new anti-union labor commissioner in South Carolina did not respond to an inquiry. Nor did the office of the UAW director for Region 8 in the Southeast, which most would agree is the main region where the situation will play out, as it features a crop of non-union shops as well as a list of foreign automotive facilities that has continued to grow over the past two decades.

One adviser active with several of those foreign investors did respond, fresh from a visit to the still-growing Kia plant in West Point, Ga. Alexandra Segers just began working as an international account executive for Toledo-based architecture, engineering and construction management firm SSOE Group. Before that, she spent nearly 15 years as an owner's rep for Kohlbecker & Kohlbecker U.S., working with such OEMs as Kia and Mercedes Benz. She is working on two new site selections in the Southeast, with a third set to begin soon. Both current clients are European (one automotive and one aerospace) and have chosen the Southeast for their first U.S. production locations, with the aerospace client in particular telling her to evaluate only non-unionized states.

"They're used to unions in Europe, which are very strong," she says of foreign-based OEMs, noting that they're strong in Korea too. So when establishing a North American production beachhead, the OEMs more or less leap at the chance to avoid them, especially when they can avoid, for instance, as many as 46 paid holidays and a doubled wage due to health insurance in Germany, and take advantage of profitable currency exchange to boot.

"I have been doing this for 10 years, and I've never had a site selection in a unionized state," says Segers. "We have included Canada several times now, but never Michigan or a unionized state." As operations continue to prosper from OEMs such as Kia, Hyundai and BMW, the entire supply chain continues to look in the Southeast. Those foreign prospects include the Chinese, she says. "They're all looking to come to North America."

Welcoming Environment

A new generation of plant design standards from some OEMs is creating better working environments for all plants, says Segers, citing the design her team worked on at the Kia plant, which features pleasant interiors, numerous break areas and a recently established fitness center that's free of charge. A new child care center has been built at the Mercedes plant in Tuscaloosa, viewable from the cafeteria.

"Everybody is making efforts to have a nice working environment for their employees," she says. "That makes it hard for the union to come in, because if the workers feel good, there's no issue."

Segers stresses that new OEM design standards are not solely motivated by union issues. They're simply part of simultaneous trends toward factories that are more flexible, more environmentally aware and more worker-friendly, incorporating such features as daylighting of shop areas and wooden floors in break areas. "It doesn't matter if the plant is in Australia, Beijing or the U.S.," she says of the Daimler factory standard she has been working on. "We will follow those standards."

Dennis Cuneo says there is "a big move to flexibility, be it among the internationals or the Detroit Three," and driven in part by hedging bets with regard to propulsion systems. "One Ford plant can produce seven different models. Toyota has that global body line, and is making hybrid and regular Camrys in Georgetown. It can be done, and you'll see more of it done."

He says a visit to Ford's Rouge plant convinced him that Ford "has made tremendous strides in production quality, efficiency and flexibility. Everybody understands the need to do it. Having said that, it's not easy to be flexible in the industry, because of heavy investments in tooling, and the need to amortize the tooling. [You have to] reduce the cost of that tooling, and make it flexible enough. And a product plan today is estimating consumer tastes three to six years from now. So it's a challenge."

Searching for inherent flexibility is affecting site searches as well, contends Segers, saying it was a consideration when looking for the Kia site. "Nobody knows how the cars will sell at first," she says, but if they do (as the Kia Sorento has, for example), the site needs to be large enough to accommodate expansions. Only 600 acres (243 hectares) were leveled initially at the Kia site in West Point, but the whole site is nearly four times that size. Segers says the quality of sites on offer from states has improved.

"Now you come to sites that might have already been leveled, and have utilities in place," she says. "If you look at a site with no gas or no electricity or no water lines, the schedule normally makes it impossible to select one of those sites. A few years ago, it might have taken six months to put in the gas line from miles away, and the client had no time to wait for that. Now states know that the sites they want to market have to have that."

One automotive client's site search started in April, and must reach a decision by June 30, she says, noting that her team has received a number of highly qualified sites in the five states being evaluated. She says nearly all states in the Southeast now have a high level of qualified sites, as well as a high level of responsiveness with regard to negotiated incentives, and quality environmental, utility and geotechnical data.

The responsiveness extends to the work force. When Kia was looking for 2,000 workers last year, it got 50,000 applications in two weeks. Now it's looking for another 1,000. And some of those applications are coming from people from Michigan. Segers met a few of them recently at a new Irish pub in West Point, where six Korean restaurants and a sushi bar also have sprung up, as commercial development follows similar lines to what's unfolded over the years in Tuscaloosa and in Greenville-Spartanburg.

"They were all from Michigan, and they now work at the Kia plant," says Segers. "They moved down here. Why not? They were trained in automotive, and so they got jobs down here."

Which just may prove that union members are more flexible than widely perceived — on an individual basis. It also indicates another metric worth tracking.

"While the Southern states are working hard on it, still you often have to go recruit from the northern states for skilled tradesmen," says Cuneo.

Not Going Anywhere

Even as Detroit has lost 25 percent of its population since 2000, projects continue to arrive in the metro area, from Ford's massive investments in Sterling Heights and in a remade Michigan Assembly Plant in Wayne to the $194-million investment at the 1,900-worker plant in Redford Township operated by Daimler company Detroit Diesel, which supports some $115 million in annual payroll. Incentives include a Michigan Economic Growth Authority (MEGA) award of $56.8 million as well as other state and local tax credits and abatements. Among the crucial support components was the folding in of a major previous incentive award that went unclaimed due to the company's restructuring in 2007. The effort was led by Wayne County Economic Development Growth Engine (EDGE).

Auburn Hills has seen automotive expansions in 2010 and early 2011 from Chrysler, Magna E-car Systems, Recaro North America, Katcon USA, Montaplast of North America, Takata, Weber Automotive, US Farathane and ALTe, which up-fits vehicles to make them electric-drive. Weber's project took over two years to work through, involved moving into another German company's facility, and required a rewrite of Michigan law. But other projects in the city are known for their speed. Magna opened a new $30-million, 82,000-sq.-ft. (7,618-sq.-m.) hybrid- and electric-vehicle system development center and state-of-the-art battery/materials testing facility in the city following a quick and thorough response from the Auburn Hills economic development team that impressed them, says Laurie Johnson, economic development coordinator for the city.

Ready to Move

US Farathane, a maker of injection-molded, compression molded and extruded products, moved its world headquarters, R&D and small-parts manufacturing to a former Chrysler property in the city from Sterling Heights and one out-of-state city. Peter Auger, city manager for Auburn Hills, says getting the company through zoning and permitting processes within three months was key to the project's success, and 250,000 sq. ft. (23,225 sq. m.) of construction has ensued.

"A lot of people don't think we're building new buildings," he says. Takata is investing $20 million in an addition, which required adjoining two sites plus a new site plan approval. In that case, says Auger, it took just 27 days.

"It's about the relationship," he says, "responding to your current customers as much as your new growth. We focus a lot on retention. As you grow we work just as hard to see that you can grow in the city. We don't just wine and dine you."

Auger says the project mix includes substantial R&D and engineering jobs. The city recently helped organize Job Hub 2011, along with seven other cities and several partner organizations. More than 2,500 people registered for the event, which offered more than 1,000 positions.

Auger says it's harder to track automotive jobs now because even the Tier I and Tier II suppliers are diversifying.

"We have one company that was 90 percent automotive, and they've flopped and are now 90 percent aerospace and 10 percent automotive," he says. He also notes that automotive technologies and skill sets, including working within extremely limited tolerances, fit a variety of industries, including medical devices.

Laurie Johnson says the topic of unions comes up with site selectors, but in interviews with people who run the companies, "they always say the work force here is well educated, and technically savvy. The quality of workmanship they get with the union workers stands on its own. So that's where the give and take is. You might get a non-union worker for less wages, but are you getting the quality workmanship?"

Johnson says she's hearing a lot about people wanting to come home to Michigan after the industry bloodletting of the past few years, motivated to return by a new wave of job creation after having had to depart because there were none to be found. "I think you always want to come back to your hometown," she says.

The above map tracking 2009 direct and indirect jobs in the automotive sector is reproduced from an April 2010 report from the Center for Automotive Research. Because of the interconnected, multi-state nature of the industry, the center did not calculate an employment multiplier for any individual state. However, this observation may continue to whet every state’s appetite for the industry: “The employment multiplier for OEM activities is 10, while the employment multiplier for the entire industry is 4.”
Source: Center for Automotive Research

Story in Pictures

General Motors Spring Hill Engine Plant workers in Tennessee react as GM North America President Mark Reuss announces plans in September 2010 to spend $483 million and add 483 jobs, building Ecotec four-cylinder engines. The main assembly plant in Spring Hill remained idle as of early April, though UAW leaders are pushing to see the plant, as well as another in Janesville, Wis., reopened as the economy improves. Tennessee is a right to work state.
Photo courtesy of GM
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