Foreign Auto Plants

Case Study of Foreign Auto Assembly Plants

As the U.S. automakers downsized their domestic manufacturing operations over the past two decades, foreign car makers opened one U.S. assembly plant after another. And in nearly every case, the Asian and European companies received financial assistance from state and local governments eager for industrial jobs.

The first foreign automaker to set up shop in the United States was Volkswagen, which opened a plant in Pennsylvania in 1978. That venture, which fell victim to labor unrest, ended in 1988. The real invasion began in the early 1980s, at a time when Japanese producers were winning a steadily increasing share of the U.S. car market. To allay concern about the rising tide of auto imports, the Japanese decided to open production facilities in the U.S. This move was made all the more urgent for them by efforts in Congress to pass legislation mandating domestic content for cars sold in the U.S. market.

Honda began assembling Accords in Ohio in 1982. Nissan, which started producing trucks at its Smyrna, Tennessee plant in 1983, expanded to automobiles two years later. Toyota got involved in both a joint venture with General Motors in California and an operation of its own in Kentucky. Mazda announced plans in 1984 to build an assembly plant in Michigan, and Mitsubishi said it would produce cars in Illinois in a joint venture with Chrysler called Diamond-Star.

By the time of the Mitsubishi project, governments were lavishing large sums on the facilities, known as transplants. Illinois, hoping that the Diamond-Star plant would create a slew of additional jobs as nearby supplier companies sprang up, provided a package worth $249 million, the biggest in Illinois history and then the biggest package ever given an auto assembly plant in the U.S.

Such assistance was offered, even though many observers pointed out that the Japanese firms, concerned more about import controls than state and local taxes, would certainly proceed with their plans even in the absence of subsidies. Authors Martin and Susan Tolchin noted in their book Buying Into America: “There was nothing secret about these strategies: The Japanese encouraged their companies to invest abroad as enlightened policy, designed to stave off protectionism and save jobs.”

By the 1990s the threat of protectionism had passed, yet foreign automakers continued to expand operations in the United States. The reason now was to bolster their ever-rising U.S. market share and to take advantage of what had become relatively inexpensive U.S. labor. The latter motivation prompted companies to shift their focus from the Midwest to “right to work” states in the South. Nonetheless, state and local governments continued to offer up lucrative subsidy packages, including the following:

  • In 1992 South Carolina ushered in the new wave of investment by foreign carmakers in the South by offering BMW a package that was ultimately worth an estimated $150 million. A decade later, the state put up an additional $80 million in infrastructure aid when BMW decided to expand its operations in the state.
  • In 1993 officials in Alabama lured a Mercedes-Benz facility, the first foreign auto plant in the state, with a package worth more than $250 million.
  • In 1999 Alabama put together a $158 million subsidy deal to land a $400 million, 1.7 million-square-foot Honda plant. In 2002 state and local officials provided an additional package worth $90 million, including $33 million in tax breaks over 20 years, when Honda decided to expand the facility.
  • In 2000 officials in Mississippi lured a $950 million Nissan plant with a $295 million subsidy deal. While the plant was still under construction, the company announced an expansion of the project that also involved an increase in the subsidy package to $363 million.
  • When South Korean carmakers Hyundai staged a competition for a $1 billion plant, various states put together bids, but it was Alabama that won the contest in 2002 with a package worth $252 million.
  • Commentators much made of the fact that when Toyota chose San Antonio, Texas in 2003 as the location for an $800 million assembly plant, the company had not selected the site with the most generous subsidy package. In another example of the fact that subsidies are not the most important factor in investment decisions, Toyota highlighted criteria such as access to the large Texas market for the pickup trucks that would be built at the plant. This is not to say that Toyota passed up all government assistance. The company received a package valued at $133 million, including $47 million in tax phase-ins and waived fees.
  • In 2006, Georgia Gov. Sonny Perdue flew to Seoul to sign an agreement with Kia Motors that included a subsidy package worth $410 million, the largest such deal with a foreign automaker in the United States at the time. The package, which amounted to about $160,000 for each of the projected 2,500 direct jobs at the $1.2 billion plant, included more than $200 million in state and local tax breaks as well as cheap land, equipment grants, construction of a training facility and infrastructure improvements.
  • Mississippi legislators approved Gov. Haley Barbour’s 2007 $294 million subsidy package as soon as Toyota moved to Blue Springs to produce the Highlander. Local governments were expected to kick in another $60 million.
  • In 2008, Volkswagen – which had abandoned U.S. manufacturing in 1988 – announced plans to spend up to $1 billion on an assembly operation in Chattanooga, Tennessee. The Chattanooga Times Free Press revealed that the state and local subsidy package was worth in excess of $400 million. The total was later put at about $577 million, making it the richest subsidy deal ever offered in the United States to a foreign automaker.

By the late 1990s there were signs that the big giveaway to BMW by South Carolina was exacerbating a fiscal crisis in the state. While the carmaker and other companies were enjoying minimal levels of corporate taxation, the state’s schools were falling into greater disrepair and educational achievement was worsening. Funds for other government services such as highway maintenance and public safety were also in short supply, leading to tax increases for families. “The foreign companies that come in here don’t care that the schools are terrible,” one philanthropist told a reporter. “They just want the cheap labor. And the incentives are so extraordinary.”

It is only a matter of time before the other states that have given nine-figure subsidy packages to foreign carmakers also begin to wonder if they made the right decision for the long-term prosperity of their citizens. They may also realize that giveaways ultimately work against future corporate investments. A sign of this came in 2005 when Toyota rejected several subsidy-laden deals from U.S. communities and instead decided to build its next assembly plant in Ontario. The decision was said to be made because of the higher quality of the workforce in Canada.

The pace of investment by foreign automobile manufacturers in the U.S. has slowed in recent years amid the economic downturn.


Sources

Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. San Francisco: Berrett-Koehler Publishers, 2005.

Jeff McCourt and Greg LeRoy, A Better Deal for Illinois: Improving Economic Development Policy, Good Jobs First, January 2003, pp. 28-35.

Kim Hill and Emilio Brahmst, The Auto Industry Moving South: An Examination of Trends. Ann Arbor: Center for Automotive Research, December 15, 2003; available online at http://www.cargroup.org/pdfs/North-SouthPaper.PDF

Ron Starner, “Global Automakers Lead the Pack,” Site Selection, May 2003 and other articles from Site Selection.

Jay Hancock, “S.C. Pays Dearly for Added Jobs: South Carolina’s Economy was Supposed to Improve, but Taxes Exploded while Services Crumbled,” Baltimore Sun, October 12, 1999.

Martin and Susan Tolchin. Buying into America: How Foreign Money Is Changing the Face of our Nation, New York: Times Books, 1988.

Walter Woods, “Georgia Wins Kia Plant,” Atlanta Journal-Constitution, March 13, 2006.

Walter Woods, “$160,000 Per Job to Land Kia,” Atlanta Journal-Constitution, March 14, 2006.

Micheline Maynard, “Toyota to Build $1.3 Billion Plant in the Land of Elvis and Honey,” New York Times, February 28, 2007.

Laura Hipp, “Toyota Mississippi: Was It A Good Deal?” Jackson Clarion-Ledger, March 1, 2007.

Dan Strump and Tom Krisher, “Toyota to Restart US Auto Plant, Draws UAW Ire,” Associated Press, June 18, 2010.

Andy Sher & Dave Flessner, “VW Incentives Could Top $400 million Over 20 Years,” Chattanooga Times Free Press, July 16, 2008.