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C. Gopinath

AUTOMOBILE companies in the US are not in a very happy situation. The downturn in the economy has taken its toll on consumer spending. In addition to the economy, Ford Motor Co., the Number 2 automaker, is struggling to adjust to a new strategy with a scion of the founder at its helm. It made a $5.45 billion (Rs 26,160 crore) loss last year, and announced a turnaround plan that includes cost reduction through plant layoffs and plant closures. Meanwhile, it also hopes to launch new products and fix quality problems plaguing some models. All this while it is trying to restructure its management ranks.

General Motors Co., the leading auto manufacturer, has its own set of problems. Though it made a profit last year, it is also facing slowing sales, losses in its overseas operations, and increasing costs from the discounts it has been giving in the US. There is a veritable price war in the auto market right now.

The best that we can say about the third-ranking player, Daimler Chrysler, is that while losing money, it is expected to post better than anticipated results for the January-March quarter.

Into this mess, Hyundai, the Korean automaker is jumping in, feet first. It has announced the setting up of its first US plant in the state of Alabama, which would begin production of 300,000 sedans and sport-utility vehicles in 2005, employing about 2,000 people. Korean automobiles come way down the list in terms of preferred vehicles, and this move by Hyundai gives a glimpse at the various attractive niches different automakers see in the depressed market.

Kim and Lee, in a recent article in Long Range Planning, argue that Daewoo and Hyundai, the two dominant Korean manufacturers, have followed very different strategies of globalisation. Daewoo, which only has a 20 per cent share of the domestic Korean market, has pursued growth through globalisation more aggressively. Being a small player at home, it decided that growth abroad was easier. It acquired capacity largely through acquisition in Eastern Europe and the Asia-Pacific, which helped it achieve scale economies rapidly.

In contrast, Hyundai has dominated the domestic market (had approximately 50 per cent market share in Korea). It emphasised technological independence and the development of its own models. From a position of domestic strength, it took to exports in a big way and commanded a 60 per cent share of the country's exports of automobiles. Eyeing the North American market, it first opened an R&D centre in the US in 1986 and its first manufacturing facility in Canada in 1988. However, the Canadian unit was not viable and was shut down in 1993.

Learning from that experience, it went slow and continued to build on its technical competence. Having slowly created a good reputation in the US market for its vehicles through exports, the company has now again ventured to commence manufacturing. But why Alabama, you might ask, and that would be a good question.

Alabama's attraction: Alabama is not your leading industrialised state in the US. It has an overall rank of 45 out of 50 states in the US on competitiveness, based on a study by the Beacon Hill Institute. The state runs a heavy budget deficit. It ranks pretty low on factors such as percentage of the population that graduates from high school, new business registrations, etc.

The state also ranks 43rd in per capita income. This means a lower cost of living, and the industries moving here are happy about the lower wages, construction and utility costs, etc. Only 20 per cent of the labour force is unionised. Several years ago, Alabama's political leadership decided on the Third World route to development, viz., attracting a few big players and hoping that things would somehow get better. The bet seems to have paid off.

Although Mercedes only promised to create 1,500 jobs, it is now slated to expand its workforce to about 4,000 over the next few years. Mercedes-Benz opened its first US plant in Alabama in 1993 to make sports utility vehicles, attracted by $253 million (Rs 1,214 crore) in incentives from the state government. Similarly attracted by incentives, Honda opened a factory in 2001to make mini-vans, and Toyota has located an engine manufacturing plant that will go into production next year. Economists are equivocal about the benefits of attracting big players with the help of subsidies. On the positive side, there is the attraction of visible economic activity accompanied by some employment. On the negative side, there is the diversion of funds reducing other state programmes and services. On the balance, it is difficult to conclude if the state has benefited.

How many of the jobs would have come to the state anyway, even had incentives not been offered? Would industries other than automotive have helped generate secondary and tertiary benefits more? Is it fair to offer a newcomer incentives that an existing player does not receive?

Alabama has been facing a decline in its traditional textile and apparel industries and has thus been keen on attracting new industries to its area. Thus, it has spent close to $700 million (Rs 3,360 crore) in incentives to attract automobile-related industries. At the time Mercedes was making up its mind, there were 20 states competing for its investment. The package Alabama provided was certainly attractive. Among other things, it provided the land for just $100 (Rs 4,800), gave a 20-year waiver on state income taxes, and paid the employees' salaries amounting to about $45 million (Rs 216 crore) during the time they were in training.

As a weak competitor, the state found it had to offer more than other states were offering, as it was more desperate to attract investment. And Mercedes has been a loyal player. It has expanded the plant twice, is happy with the employees as it finds them easier to train and, as they are not unionised, easier to deal with.

Industrial economists like clusters as they help consolidate a sector and improve operating efficiencies for the individual units. True to form, the coming of Mercedes has slowly created an automotive cluster far away from the auto heartland of Michigan. Many suppliers, who are tied to the auto manufacturers in a just-in-time arrangement, have also moved operations nearby. Even Boeing, the aircraft manufacturer, decided to set up a rocket plant in the state, attracted by the state-funded employment training facilities.

Interestingly, the Governor, who made the decision to get Mercedes- Benz to the state by offering the incentives, was defeated in his re-election, partly due to the controversy surrounding the decision to get the automaker.

Subsequent administrations have tried to cut back on the incentives they offer. Neighbouring Mississippi, for instance, outbid Alabama to attract Nissan Motor Co. with a $295 million (Rs 1,416 crore) incentive in 2000.

Yet, as the business daily Wall Street Journal reported in a recent story on the arrival of these new industries, the state has a desperate desire to change its image and be more investor-friendly. And that makes for a big difference when corporate decision-makers are comparing alternative sites.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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