Why Non-North American OEMs are Investing in North America
Champagne corks recently popped in South Carolina and Mexico with two recent major vehicle production investments. Vehicle assembly plants are multiple-decade commitments (hopefully, longer) and are treasured by governments the world over as a proof of their competitiveness and vindication of their business environment. This multi-state/province sweepstakes is a balance of momentum, persistence, ease of engagement and, in the end, money. Before a jurisdiction pulls a winning ticket, an OEM needs to decide to add or increase their footprint in North America.
Recently, Volvo decided to join just about every other European OEM building vehicles in North America with a new $500-million plant in South Carolina. Toyota preceded Volvo’s announcement by planting its flag in mid-Mexico to the tune of $1.4-billion to build Corollas. There are more to come. Aston Martin will likely follow its technical partner Daimler to Alabama, and Jaguar is also slated to focus on a Volvo-like facility in the southern U.S. or Mexico. What is behind all this new investment? And why?
The basis of this new investment is rooted in a couple of basic tenants. North America has the sustainable supplier infrastructure at all tiers with three clear hubs of activity. The Great Lakes (centered around Detroit), the Southeast U.S. (roughly centered around Chattanooga) and Mid-Mexico (centered around Mexico City) each will reach 5-million units of capacity per annum by the turn of the decade. The latter two hubs have received the bulk of the greenfield investment, though the recent torrid pace of the industry indictates that the brownfield investment is critical. Though the development of lower-tier and tooling supply are still issues outside of the Great Lakes area, but time will slowly remedy this.
A strong internal market is also critical to drive enough base demand for any localized assembly plant. Trade agreements are important for access to other markets in an effort to diversify demand; most countries are attempting to expand their “tariff-free” footprint through trade deals. In the end, there are few countries in the world with assembly capacity that is only focused on exports; a strong internal market is an important backstop.
Beyond an adequate supplier support mechanism and diversified demand there are other intangibles. Increasingly, access to adequate labor pools for the OEMs and their local suppliers is an important starting point. Building a farm system of well-trained workers
is a certain advantage as the skills required to operate today’s assembly lines rise. Faster cadence, increased flexibility and associates who can make decisions on the fly are important cogs to a successful operation.
Other intangibles drive this latest surge in localization. Competition is one. If your main competitor has the advantage of quick access to your potential customers, their ability to efficiently and flexibly meet their demands with no tariffs, strong economies of scale, and globally competitive quality is a decided advantage. Localization of production to North America is driven by one more criterion: Building a natural currency hedge and reducing risk. If the past decade taught this industry anything, it is that risk reduction through dual supply, focusing on logistics costs, building a currency hedge, and creating a diversified demand for one’s products are paramount to success.
What is next? As noted, there are a few European OEMs still eying North America to stake their ground here. After building assembly plants, engine plants are next. The recent OEM facility sweepstakes is not complete, it has just entered another chapter.
Michael Robinet has been a managing director of IHS Automotive since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends.