12.5 Auto Industry Case Study Name____________________________ __  

Through this extensive case study, you will apply the concepts that you have learned about in chapter 12 to an authentic situation.

For each of the 12 documents document:

1. Highlight important information about industrial location in blue. Especially focus on how industrial production has changed over the past few decades with the influx of foreign automobile manufacturers.

2. Highlight chapter 12 terms in . Even if the term is not explicitly stated, greenhighlight where the term applies. This should be done for seven terms.

3. Summarize (Using a couple of sentences) your document and how it connects to industrial location.

After you are done analyzing each document:

4. Paragraph summary (8-10 sentences) o Discuss how the industrial location of the auto industry has changed in the

past 20 years (use three vocab terms). Why did these changes take place?

Restructuring of the Auto Industry: Geographic Implications of Outsourcing

James M. Rubenstein Miami University (Ohio) rubensjm@muohio.edu

Thomas Klier

Federal Reserve Bank of Chicago tklier@frbchi.org

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Restructuring of the Auto Industry: Geographic Implications of Outsourcing Thomas Klier and James M. Rubenstein

Industry Studies Association U.S. carmakers once produced most of their own parts themselves and dominated the

suppliers from whom they purchased some parts. In the twenty-first century, responsibility for making most parts has been passed to independently owned suppliers. This paper discusses key elements of changing carmaker-supplier relations and the impact of these changes on the geography of motor vehicle production.

The analysis is based primarily on plant-level data constructed by the authors. The database includes detailed information on 3,179 parts plants in the United States, 416 in Canada, and 673 in Mexico.

Key structural changes in carmaker-supplier relations include:

x Suppliers provide large modules rather than individual parts. x Carmakers sign multi-year contracts with a handful of suppliers, who in turn contract

with so-called lower-tier suppliers. x Suppliers assume many research and design responsibilities. x Suppliers deliver parts to the final assembly line just-in-time.

Geographic impacts of these structural changes include: x Coalescence of U.S. motor vehicle production along so-called “auto alley” formed by

I-65 and I-75. x Regional-scale supplier networks based on a one-day delivery radius around a final

assembly plant. x Globalization of parts production, with more than one-fourth of new vehicle parts

imported and more than one-fourth made in the United States by foreign-owned companies.

x Dispersal of final assembly plants within “auto alley” based on minimizing competition for labor.

x Division of “auto alley” between a northern node dominated by U.S.-owned firms and a southern node dominated by foreign ones.

The current geography of North American motor vehicle production The auto industry includes two types of plants. Several thousand plants make parts that go

into motor vehicles. The parts are put together into finished vehicles at several dozen final assembly plants.

The U.S. portion of the North American motor vehicle industry is highly clustered in the interior of the country between the southern Great Lakes and the Gulf of Mexico. The Canadian industry is clustered in southwestern Ontario, adjacent to the U.S. producing area.

Final assembly plants are clustered in this region because the most critical geographic factor for them is minimizing the cost of shipping finished vehicles to consumers. If the entire North American market is served from one factory, then the optimal location for that facility is in the interior of the country.

Parts makers are also clustered in the interior of the country. For some, proximity to the final assembly plants in the region is most critical. For others, the most critical factor is proximity to raw materials—especially steel, which is produced primarily in the southern Great Lakes region.

Document 1

Auto Alley The auto-producing region of the United States has been called Auto Alley. It is focused on

two north-south interstates: I-65, which runs between Indiana and Alabama, and the portion of I-75 between Michigan and Georgia. East-west interstate highways, notably I-20, I-40, I-64, I-70, and I-80, form “rungs” along Auto Alley.

Document 2

Assembly plants in 1980 In 1980, assembly plants were arrayed in an east-west distribution centered on southeastern

Michigan. Numerous assembly plants were located along the east coast, Atlanta, and (not shown) California.

The 1980 distribution was a remnant of a geographic pattern that originated in the 1910s. Most final assembly plants were located in major metropolitan areas. Parts produced in the Midwest were shipped to these plants, where vehicles were assembled for regional distribution. Thus, a Chevrolet purchased in New England had been assembled in Tarrytown, New York, a Chevrolet purchased in the southeast had been assembled in Atlanta, and a Chevrolet purchased in the southwest had been assembled in Van Nuys, California. Ford had a similar pattern of assembly plants in major metropolitan areas for regional distribution.

Document 3

Assembly plants 2009 In three decades, the geography of assembly production within the United States has

changed. All but one (the NUMMI GM Toyota joint venture in the Bay area) assembly plant have been closed on the west coast, and all but one on the east coast (the final coastal survivor in Wilmington, Delaware, is vulnerable to closure at the time of this writing).

New assembly plants have been opened in the southern portion of Auto Alley, between central Indiana and Ohio on the north and central Alabama and Mississippi on the south. Kentucky and Tennessee lie at the center of this region of assembly plant investment.

Document 4

Nationality of assembly plants, 2009

The final assembly plants owned by the Detroit 3 carmakers (Chrysler, Ford, and GM) are distributed differently than are those operated in the United States by the internationally owned carmakers like Honda and Toyota. The Detroit 3 assembly plants are clustered in southeastern Michigan and nearby communities along the southern Great Lakes between Chicago and Cleveland.

International carmakers have selected locations for assembly plants south of Michigan and the Great Lakes area. Honda has several facilities in central Ohio and eastern Indiana, Toyota in Kentucky and southwestern Indiana, and Nissan in central Tennessee. The clustering of plants in the Deep South represents investment by eight different international carmakers.

Several assembly plants shown on the Detroit 3 map will be closed as a result of restructuring ongoing at the time of this writing. The resulting distribution will be even more highly clustered around the southern Great Lakes.

Detroit 3 assembly plants International carmakers’ assembly plants

Document 5

Parts suppliers also cluster in Auto Alley These two maps compare the distribution of parts plants that opened prior to 1980 with those

that opened since 1980. The earlier map shows a higher concentration of parts plants in Michigan and other southern Great Lakes communities, especially between Milwaukee and Cleveland. The map of more recent openings shows that many parts plants have continued to locate in and near southeastern Michigan, but a larger percentage are located further south, especially in Kentucky and Tennessee.

Before 1980 Since 1980

Document 6

Foreign plants gravitate southward

Parts plants opened since 1980 by international companies are more likely to be located in the south, whereas those opened by U.S.-based companies are more likely to be in Michigan and northern Indiana and Ohio. In part, this represents a need by parts plants to locate near their customers, the final assembly plants. Internationally-owned parts plants are more likely to be shipping to internationally-owned assembly plants, which are clustered in the south. U.S.-owned parts plants are more likely be shipping to Detroit 3 assembly plants, which are clustered in the southern Great Lakes.

Document 7

Regional supply base linkages This map shows the location of suppliers to Toyota’s North American assembly plants. The

concentric circles are drawn around Toyota’s principal final assembly plant complex in Georgetown, Kentucky. One-fourth of Toyota’s suppliers are located within the inner circle, one-half within the middle circle, and three-fourths within the outer circle. The other one-quarter are located elsewhere in North America.

The map shows that three-fourths of Toyota’s suppliers are located within 483 miles of Georgetown. That distance translates into a radius of a one-day drive. This is not a coincidence: with adoption of just-in-time, most suppliers need to be within one day of their customer.

Just-in-time does not mean right next door. Only a handful of suppliers are located within an hour of a final assembly plant. The map shows that only one-fourth are located within 194 miles, which translates into a 3+ hour range.

Toyota’s North American supplier network in relations to its Georgetown, Kentucky, assembly plants

Document 8

Supply networks are overlapping but distinctive This map depicts the supply networks of GM, Honda, and Toyota. The southern-most circle

is the median circle from the previous map of Toyota’s supplier network. Inside the circle, which is centered on Toyota’s principal assembly plant complex at Georgetown, Kentucky, is one-half of the company’s North American suppliers.

The northern-most circle is GM’s supply network. One-half of GM’s suppliers are located within this circle, which is drawn around Detroit. The middle circle encompasses one-half of Honda’s suppliers and is drawn around Honda’s principal assembly complex in central Ohio.

Placing these three circles on the same map shows that the supplier networks for the three companies overlap, primarily in Ohio. But they have distinctive regional variations, with GM’s supply base centered some 300 miles further north.

Document 9

Supply chains are global More than one-fourth of parts delivered to U.S. final assembly plants for installation in new

vehicles are made outside the United States. More than one-fourth are manufactured in the United States by foreign-owned companies (see next page). Parts made in the United States by U.S.-based companies now account for less than one-half of the market.

Historically Canada was the leading international source of new vehicle parts, accounting for one-third of all imported parts as recently as the late 1990s. A decade later, Canada’s share of imported parts has fallen to less than 20 percent.

With Canada’s decline, Mexico has become the leading international supplier of new vehicle parts, at 25-30 percent. Japan and Germany together account for around one-fourth of parts. China’s share of new vehicle parts has increased sharply in the past few years, doubling from 5 to 10 percent of all parts between 2006 and 2008.

Canada’s decline is a reflection of the fate of the Detroit 3 carmakers, which have long sourced part of their vehicle production to that country. Japan and Germany reflect imports of key parts by Japanese- and German-owned final assembly plants in the United States.

U.S. new motor vehicle parts imports by country (percent of all imports)

Document 10

North American suppliers are becoming more international Since 1994, Automotive News has identified annually the 150 largest suppliers of new vehicle

parts to North American assembly plants. U.S.-owned companies have declined from two-thirds to one-third of the largest suppliers. The increases in foreign-owned suppliers based in the United States has resulted from both acquisitions of U.S. companies and entry of new firms into the North American market.

Nationality of owner 1994 2007 United States 108 59 Europe 20 39 Asia 14 41 Other 8 11

Document 11

What is an “American” car? A decade ago, the share of North American content in Detroit 3 vehicles averaged around 85

percent. In other words, if the content of every vehicle assembled in North America by the Detroit 3 were recorded individually, the overall fleet average was 85 percent. In comparison, the overall domestic content of vehicles assembled in North America by foreign-owned companies in 1997 was only around 50 percent. Thus, Detroit 3 vehicles were significantly more “American” a decade ago.

In 2008, the domestic content of Detroit 3 vehicles had fallen to around 75 percent. Most of the 10 percent decline in domestic content has occurred since 2003. Meanwhile, the domestic content of foreign-owned assembly plants increased to around 65 percent in 2002 and again in 2006, though it fell off to 60 percent in 2008. Thus, the gap between domestic content of Detroit 3 and “foreign” vehicles assembled in the United States has narrowed considerably in a decade.

Production-weighted domestic content

Document 12

Summary x The North American auto industry has become highly clustered in Auto Alley.

x Within Auto Alley, distinct patterns have developed between the northern and southern portions.

x The northern portion of Auto Alley is dominated by the Detroit 3 carmakers and U.S.-owned parts suppliers; the southern end is dominated by foreign-owned carmakers and suppliers.

x Supply chains are both local and global x Most suppliers are located within one-day driving range of an assembly plant. x But more than one-fourth of parts are imported, and more than one-fourth are made in the

United States by foreign-owned companies.

Thomas Klier is Senior Economist at the Federal Reserve Bank of Chicago, 230 S LaSalle St., Chicago IL 60604, 312-322-5762.

James Rubenstein is Professor of Geography at Miami University (Ohio), 230 Shideler, Oxford, OH 45056, 513-523-3990.