Determinants of supplier plant location: evidence from the auto industry

Introduction and summary The auto industry in the United States directly employs over 1 million workers, and is so large that gross motor vehicle output alone represents more than 3 percent of the U.S. economy. In discussing its fortunes, however, we often focus on the assembly segment of the industry. Assembly-related activities represent only the most visible part of this industry, the tip of the iceberg, if you will. Below the waterline lies the entire supply structure that ultimately feeds into the assembly line, at the end of which rolls off a car or light truck. That part of the industry, which encompasses everything from inputs such as steel coils to the subassembly of entire vehicle interiors, is larger, both by count of plants and employment, than the assembly part of the industry. (1) Yet our understanding of the auto supplier industry is quite limited, mostly due to the noisiness of the publicly available data for that sector. (2) From numerous trade and business press stories, we know that the way auto suppliers relate to their assembly customers has fundamentally changed over the last 20 years. The main driver was the arrival of lean manufacturing, a production system aimed at the elimination of waste in every area of production including product design, supplier networks, and factory management, in North America during the early 1980s. Since then, lean manufacturing production techniques have become standard practice for auto assembly as well as the largest supplier companies. Some auto assemblers even operate "supplier support organizations" in order to transfer technology and knowledge to improve the efficiency of operations at their suppliers. Furthermore, assemblers no longer interact directly with most of their suppliers. The number of independent supplier plants assembly companies work with directly has fallen greatly during the last ten years to 15 years. In turn, many suppliers now supply primarily other supplier plants. At the same time, the Big Three automakers, notably Ford and General Motors (GM), have increased the share of parts they procure from outside their company. For example, both Ford and GM spun off many of their own parts plants as independent companies several years ago. In addition, the remaining assembler-owned parts plants have experienced rather dramatic job reductions over the last few years (Klier, 2005). Finally, this industry, like most manufacturing industries, has become noticeably more international. As producers of cars and light trucks pursue a global manufacturing footprint, their main suppliers need to be able to meet the needs of the assemblers globally (Roland Berger, 2004). In estimating models of supplier plant location, this article contributes to the current discussion of the changing geography in the U.S. auto industry. The ongoing loss of market share by the domestically headquartered producers to foreign-headquartered producers of vehicles, both through imports as well as production in the U.S., raises important questions about the location trends for the industry (Klier, 2005). (3) Between the first quarter of 2000 and the first quarter of 2005, the U.S. share of light-vehicle sales by Big Three nameplates has fallen from 67.9 percent to 57.8 percent. While some of that market share loss is attributable to a rise in imports, most of it is explained by increased U.S. production of foreign-headquartered assembly companies. This matters for the geography of this industry as most of these "new domestic" assembly plants in North America tend to be located farther south than the assembly plants of the traditional domestic producers. In fact, the assembly plants opened most recently, such as the Honda plant in Lincoln, Alabama, and the Nissan plant in Canton, Mississippi, have been situated in the most southern area of the auto region. As the geography of the auto sector continues to change, one wonders whether Detroit can continue to be the hub of this industry over the medium-term horizon. …