Alabama’s Automotive Industry and Foreign Direct Investment

YoungKyoo Ahn

kyooya@umih.edu

Last revised: Dec. 22^nd 2005.

Overview

Alabama has remarkably recorded increases in job growth and economic development over the last decade. As a result, Southern Business and Development magazine has nominated Alabama “State of Year” for the second time in a row in 2004. [1] Particularly, the automotive industry has contributed to the economic growth of Alabama. In other words, the assemblies of passenger cars and the manufacturing of parts that go into those vehicles and other supporting industries have filled the loss of jobs in the traditional industries in Alabama, such as mining, agriculture, and textiles.

The interesting thing is that outside-the US based automotive companies, such as Mercedes-Benz, Honda, Hyundai, and Toyota, invested in this state. They have invested many dollars and have created new jobs in Alabama in the past 10 years. This also shows an example that most states in the nation is now dedicated to enticing foreign investment, as part of a broader plan to attract both domestic and foreign investment, to encourage regional economic growth.

This paper explores what factors and incentives have induced those investments into Alabama and what the economic benefits have been. I also examine foreign direct investment (FDI) both in the US and in Alabama, along with the general concept of FDI. Lastly, I explore what challenges can be followed by the manufacturing-based economic development.

History: Alabama’s Auto industry

Alabama, located in the south of the US, has population of 4,447,000 (2000 Census), which was ranked 23^rd in the states. Per capita income of the state in 2005 is estimated to be $19,493. [2] Main industries are currently apparel, food, textiles, lumber and wood, and industrial machinery. In addition, target industries in the future are automobiles, aviation, electronics, plastics, and wood products. [3]

Alabama never produced an automobile prior to 1997, but it has become the third largest auto-producing state in the South by 2005, when Hyundai has begun production and Mercedes and Honda have completed expansions. [4] Major automotive companies and their brief history in Alabama are as follows;

Mercedes-Benz

Since Mercedes-Benz U.S International announced its new car would be built in Tuscaloosa, Alabama in 1993, it produced 68,800 units in the first full year of production, 1998. Since then, Benz has expanded tw0 times at their Tuscaloosa site in 2000. The Benz plant currently employs 3,000 and the latest expansion will bring employment close to 4,000. [5]

Honda

Honda Manufacturing of Alabama announced that it would construct a $440 million, comprehensive automobile manufacturing plant near the town of Lincoln, Alabama in May 1999 and started mass production in November 2001. Between 2001 and 2004, Honda announced three times its plans to expand its operations. These expansions raised the plant’s production to 300,000 vehicles and engines annually and increased Honda’s investment in Alabama to $1 billion and total employment to 4,400. [6]

Toyota

In February 2001, Toyota announced that it had selected a 200-acre site in Huntsville, Alabama for its first plant outside of Japan. Toyota Motor Manufacturing, Alabama, Inc. invested $220 million to produce V-8 engines and created 365 jobs. The company announced expansion plan two times in 2003 and 2004. The expansions included an investment of $220 million for the additional V-6 and V-8 engines and brought 450 new jobs to Huntsville. [7]

Hyundai

Another automotive investment was from Korea-based Hyundai in April 2002. At the time, Hyundai announced that it chose a 1,720-acre site in Montgomery, Alabama for the company’s first U.S automotive manufacturing facility. The $1 billion facility, producing sedans and sport-utility vehicles, employed 2,000 people. [8]

Foreign Direct Investment in the U.S. and Alabama

The definition of a Foreign Direct Investment (FDI) as a capital flow has changed. The dominant current definition of FDI by the International Monetary Fund (IMF) is that “Direct Investment is the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy. (The resident entity is the direct investor and the enterprise is the direct investment enterprise). [9] However, the U.S. Department of Commerce definition is narrower. It defines that FDI in the U.S. exists where a single foreign investor possesses ten percent or more of the voting securities in an American business enterprises. [10] Ultimately, FDI implies management control or ownership by the foreigners.

Historically, the United States commenced its role as a foreign direct investor in the late 19^th Century, though it was still a net importer of capital. In the 1960s, it became the governing supplier of direct investment to the rest of the world, representing about half of the world’s stock. In the late 1970s, U.S direct investment abroad was about four times the value of FDI in the U.S. Since then, other countries have also become chief direct investors. By 1997-1999 FDI in the U.S. had reached over three quarters of the level of the U.S. direct investment abroad. Currently, U.S. share is less than a quarter of the world total and the U.S has become a major receiver of FDI from other countries. [11] According to World Bank’s data, the total inflows into North America were US$193 billion and the total outflows from North America were US$ 110 billion in 2002. [12] In addition, key sectors of inflows were manufacturing (48%) and petroleum (30%), while those of outflows were services, banks, finance, insurance, and manufacturing; key sources of inflows are Europe (especially UK, Germany), Japan, whereas receivers of outflows are Europe (54%) and Latin America. [13]

On the other hand, twelve southeastern states including Alabama, Florida, Georgia, Kentucky, North Carolina, and Virginia, have been major beneficiaries of FDI. The southeast has received the highest dollar amount of foreign investment of any region; in 2003, it occupied 20.3% of total FDI - gross book value, in the U.S. [14] Likewise, the number of jobs created in the southeast by FDI was greater than that in any other region; its percentage of total number of employees in the U.S. was 25% in 2003. [15] In addition, Alabama occupied 7% of the southeast’s FDI in 2003; between 1994 and 2003, however, its increase rate in FDI - gross book value, 75%, was higher than that of the southeast and the U.S., respectively 40% and 65%. [16]

What led Alabama to be a winner in the competition with other states?

Generally, there are several reasons that foreign investors decide to invest in the U.S. The reasons are usually as follows: (1) to acquire gate to the world’s largest market, (2) to get access to the U.S. technology and know-how, (3) to protect assets against negative political, economic, and social risks in home countries, (4) to utilize lower costs of production (labor, materials, energy, etc), and (5) to evade trade barriers and possible protectionist legislation. In addition, in the standpoint of the U.S., the huge and persistent trade deficit encourages FDI in the U.S. [17]

Alabama, strategically, presents the following factors as its advantages over the other states to induce foreign or domestic investments: multi-modal transportation and distribution infrastructures, a capable workforce at competitive salaries, excellent training system, the lowest electricity costs, a low cost of living, a public-private partnership, and the lowest state income and property taxes and incentive programs. [18] However, some of these reasons would also be relevant to other southeastern states. Nevertheless, more persuasive reasons, in the case of Alabama, are incentives packages including tax breaks, excellent training programs, and public-private partnership for economic development.

First of all, Alabama provided tremendous incentives and tax breaks for inducing the automotive investments. For example, the incentives package to induce Mercedes-Benz’s investment in 1993, when the state competed with thirty states, amounted to $153 million. The offer surpassed $100 million of North Carolina, which was a presumed forerunner until then. It included training workers, clearing and improving site, upgrading utilities, and buying 2,500 expensive vehicles. Even though the state had difficulties with financing the incentives, it has steadfastly stood by the deal. [19] To land Honda in 1999, Alabama again 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, along with $55.6 million in tax breaks. [20] In 2002, when Hyundai decided to build an automotive plant in Alabama after considering about sixty U.S sites, the state also provided Hyundai with $252.8 million incentives package. [21]

Next, the state has had proven training programs. Alabama Industrial Development Training (AIDT) was established to recruit, assess and train qualified potential employees at no cost to industries. [22] They also provide job-specific pre-employment and on-the job-training programs. Over the last 10 years, AIDT has played significant roles in the growth of the automotive industry in Alabama; it delivered thousands of excellent workers for automotive companies throughout the state. Moreover, AIDT even sent staff and trainers to Japan and Korea to learn their manufacturing processes. [23] The Alabama Department of Postsecondary Education (DPE), seventeen state-sponsored universities, and sixteen independent colleges and universities have also provided various job trainings.

Another crucial factor is that the state and local governments and the private sector are pro-business and cooperate to make the project a reality. That cooperative network comes from many sources: Alabama Development Office (ADO); Economic Development Partnership of Alabama (EDPA); Alabama Industrial Development Training (AIDT); CSX Railroad; Alabama Power; Montgomery Area Chamber of Commerce; and many other local an state offices. [24] In addition, the City of Montgomery even sent out a coordinator to organize a “Family Support Program”, helping to relocate foreign families. The coordinator has arranged, guided and assisted them with everything required for them to settle in. [25]

Economic Benefits and Challenges

On the other hand, there has been a great deal of thoughts about benefits and costs of FDI at the state level, rather definitive research. Obviously, many of benefits and costs would be related to the characteristics of any investment like its magnitudes and riffle effects. A conference which was held in Atlanta on FDI in the southeast in 1981 shows examples on benefits and costs: such as, expanded employment - training costs, more high wage industries - promotion costs, capital inflow and economic activity – inflationary effect on housing, land, labor, and capital, increased tax revenues – demands on utilities, and new employment and management – loss of community feeling. [26]

In Alabama, the automotive industry created 30,180 direct jobs and 53,530 indirect jobs in 2002, which was ranked fourth in the South. The jobs translated into a direct payroll of $1.4 billion and an indirect one of $1.6 billion. In addition the auto industry has positively influenced both Alabama economy and its workers. In 2003, the average weekly wage for motor vehicle manufacturing was $1,274 (about $64,000), compared to $725 for all manufacturing industries and $620 for all industries in Alabama. By 2005, vehicle assembly employment had grown to 10,300 from 4,100 in 2003 and its share of the state’s employment will be 16.25%. [27] Also, according to a research conducted by the Office for Economic Development at University of Alabama in Huntsville in 2003, auto industry workers paid $101 million in state taxes and $46 million in sales taxes. [28]

Even though Alabama so far has accomplished great success in terms of economic development, it is necessary to diversify the structure of industry, rather than to focus excessively on auto manufacturing, in order to continue the economic growth. Diversifying strategic products and industries would help the state prevent from being a victim of product cycle theory in the future. In addition, the state has to overcome social issues such as income disparity and poverty, accompanied by industrialization. Another challenge that Alabama now confronts is the deficiency of intellectual side of the industry; that side includes the design, styling, and research and development (R&D). [29]

Conclusion

Alabama has grown through successful economic development in the past decade. Particularly, the automotive industry has contributed to the growth of employment, the rise of worker’s income, and the increase of government’s revenue in Alabama. Even though the state was sometimes criticized that the incentives packages were excessive, the economic developments have changed the primary industry-based state to the center of auto industry in the South. The successful story was mainly due to the cooperation of state and local government and private sector, state-funded training program, considerations for foreign workers, along with incentives packages exceeding competing states. Additionally, many foreign-based auto companies in Alabama show the current trend that the U.S has currently become not only a key supplier of FDI to the rest of the world, but also a major recipient of FDI from other countries. However, to maintain economic growth, the state should overcome several challenges such as the diversification of industry and products, and lack of intellectual side in the auto industry. Most importantly, the state has to endeavor to overcome socio-economic issues such as income disparity, not to recur the failures of many industrial cities that had concentrated on manufacturing.

References

[1] Economic Development Partnership of Alabama. (Dec. 14^th. 2005 of Access). http://www.edpa.org/pdfs/Automotive%20Industry%20Profile.pdf

[2] Wikipedia, the free encyclopedia. (Dec. 14^th. 2005 of Access). http://en.wikipedia.org/wiki/Alabama

[3] Ibid.

[4] Economic Development Partnership of Alabama. (Dec. 14^th. 2005 of Access). http://www.edpa.org/pdfs/Automotive%20Industry%20Profile.pdf

[5] Ibid

[6] Ibid

[7] Ibid

[8] Ibid

[9] Lipsey, Robert E. Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data. (Dec. 14^th. 2005 of Access). http://www.nber.org/papers/w8665.pdf

[10] U.S. Department of Commerce. Bureau of Economic Analysis. (Dec. 14^th. 2005 of Access). http://www.bea.doc.gov/beahome.html

[11] Ibid

[12] Towards Earth Summit 2002. (Dec. 14^th. 2005 of Access). http://www.stakeholderforum.org/policy/economic/fdi.pdf

[13] Ibid

[14] U.S. Department of Commerce. Bureau of Economic Analysis. (Dec. 14^th. 2005 of Access). http://www.bea.doc.gov/beahome.html

[15] Ibid

[16] Ibid

[17] Tarleton, Jesse S. Foreign Direct Investment: Some Implication for Public Policy at the State Level. (Dec. 14^th. 2005 of Access). http://www.sbaer.uca.edu/research/wdsi/1997/pdf/248.pdf

[18] Alabama Development Office. (Dec. 14^th. 2005 of Access). http://www.ado.state.al.us/loginflash.asp

[19] CFED. Business Incentive Reform. (Dec. 14^th. 2005 of Access). http://www.cfed.org/focus.m?parentid=34&siteid=46&id=177

[20] The Site Selection. Week of July 15, 2002. (Dec. 14^th. 2005 of Access). http://www.conway.com/ssinsider/bbdeal/bd020715.htm

[21] Site Selection Online. May 2003. (Dec. 14^th. 2005 of Access). http://www.siteselection.com/issues/2003/may/p282/

[22] Alabama Development Office. (Dec. 14^th. 2005 of Access). http://www.ado.state.al.us/loginflash.asp

[23] Site Selection Online. May 2003. (Dec. 14^th. 2005 of Access). http://www.siteselection.com/issues/2003/may/p282/

[24] Ibid

[25] Ibid

[26] Tarleton, Jesse S. Foreign Direct Investment: Some Implication for Public Policy at the State Level. (Dec. 14^th. 2005 of Access). http://www.sbaer.uca.edu/research/wdsi/1997/pdf/248.pdf

[27] Economic Development Partnership of Alabama. (Dec. 14^th. 2005 of Access). http://www.edpa.org/pdfs/Automotive%20Industry%20Profile.pdf

[28] Birmingham Business Journal. January 2004. (Dec. 14^th. 2005 of Access). http://www.bizjournals.com/birmingham/stories/2004/01/26/focus3.html

[29] Ibid