Study: U.S. benefits most from auto supplier investments

ANN ARBOR, Mich.—Remember those appeals from car makers as the Great Recession receded, trying to coax shell-shocked suppliers to turn the factory lights back on and reinvest in parts-making capacity?

According to a new study, automotive parts makers have heeded the call—big time.

During the past decade, 2006-15, auto suppliers spent $48.4 billion building or expanding factories in the U.S., Canada and Mexico, according to the study by the Center for Automotive Research in Ann Arbor, Mich.

What's more—contrary to popular perceptions—auto-sector investment is not fleeing to low-cost Mexico at the expense of the U.S. Instead, the vast bulk of new supplier investment has come to the U.S.

The study, commissioned by a group of southern U.S. states to ascertain where North America's automotive investment is going, shows that one of the biggest concerns of the post-recession industry—insufficient supplier capacity amid surging new-vehicle production—has been resolved.

CAR's data show that parts makers invested $3.4 billion over the past 10 years to build or expand factories in Mexico. But during the same period, suppliers spent more than 13 times that amount, $44.4 billion, building and expanding auto parts factories in the U.S.

The financial figures may surprise many this summer, with job losses to Mexico serving as a heated talking point in the U.S. presidential campaign.

According to CAR's analysis, the Southeast U.S. has become a more formidable manufacturing center over the past decade, with an inflow of Tier 1, 2 and 3 suppliers. While not as geographically compact as the industry around Detroit, the Southern U.S. now has a critical mass of Japanese, German, Korean and American high-volume customers to consider.

Look at investments just in South Carolina by plastics suppliers to the auto industry for some examples.

Injection molder Engineered Plastic Components is adding new operations in South Carolina along with expanding its Leeds, Ala., facility. Baxter Enterprises and sister company Hi-Tech Mold & Engineering are setting up new operations in Oconee County at a $20.7 million investment. China's Jiangnan Mould & Plastic Technology Co. Ltd. is establishing its first U.S. facility in Greer, and the state recently attracted two German entrepreneurs, who announced plans to set up an injection molding operation called WG Plastics in Abbeville County, initially targeting German original equipment manufacturers and their Tier 1 suppliers. Several other injection molders have announced expanded capacity in the region.

Those plants will support projects such as BMW A.G.'s $1 billion expansion in Spartanburg, S.C. and Volvo Cars' first American factory in Ridgeville, S.C. Daimler A.G. just marked the groundbreaking for its $500 million plant in North Charleston, S.C., in July. The facility will make Daimler's Mercedes-Benz Sprinter vans there.

Of the three North American nations, Canada has prospered the least over the past decade, attracting only $580 million in supplier investments.

“They are hurting,” CAR researcher Bernard Swiecki says. “Canada has a number of challenging issues.”

Among them: Canada's currency tends to fluctuate, which makes some manufacturers nervous. It no longer has a big advantage in health care costs. And its supply base is now farther from the industry's growth corridors of the Southeast U.S. and Mexico.

Another point driven home by the CAR research is that supplier capacity is not moving, as the public debate often characterizes it. Rather, it is growing.

There is no question that Mexico, as a production base, is going to boom in the coming years. Nine of the last 11 new North American vehicle-assembly plants have gone to Mexico. And suppliers are investing there to support them.

But CAR's data indicate that, even as Mexico rises, vastly more investment dollars are going into U.S. locations—in the Great Lakes region and the Southeast.

In the post-recession surge of 2010 through June 2016, the auto industry, including auto makers, invested $80.7 billion in U.S. operations, compared with $25.8 billion in Mexico, according to CAR data.

Of the U.S. industry total, $15.6 billion went into building or expanding plants in Southern states, while more than three times that much, $50 billion, went into plants in the Great Lakes region.

The Great Lakes region is attracting more investment because it has a higher concentration of factories, CAR CEO Jay Baron says.

Suppliers will invest in additional plants in the South as foreign auto makers expand production there, he predicts. And that could lead to a three-sided competition for investment among the Great Lakes, the South and Mexico.

“I think the next real battleground will be the development of new supply chains,” Baron says. “That battle depends on the competitiveness of those three regions.”