A Matter of Economic Patriotism

It’s a free country or so they say.

Like every place, we here in the United States have our laws, regulations and taxes. That’s the nature of things where all governments reside, which is sometimes to the ire and discomfort of business people.

And while the U.S. remains a refuge and haven for foreign direct investment, which was the topic of our blog last week, it is somewhat ironic and interesting to note that some U.S. companies are reincorporating themselves overseas for tax reasons.

These corporate relocations, known as inversions, are becoming more common, and has both parties in Washington at least concerned. But whether lawmakers will actually act to remedy the situation, well, that’s another story.

Legal But Wrong

Speaking at Los Angeles Trade-Technical College last week, President Obama accused certain companies of “cherry-picking the rules” and damaging the country’s finances and the economy by this practice of inversion.

“My attitude is I don’t care if it’s legal, it’s wrong,” he said.

Mr. Obama is now echoing U.S. Treasury Secretary Jack Lew who has called for a new sense of “economic patriotism” and has urged Congress to take steps quickly to prevent U.S. companies from shifting their headquarters abroad to benefit from a lower tax rate.

Typically, these inversions are not causing U.S. job losses. Rather, this is a shell game in which a company sets up a tax domicile abroad which is often no more than a small office, all the while keeping the bulk of business operations here in the U.S.

Inversions take place when a large U.S. firm buys a smaller target company domiciled in a tax-friendly country like Ireland, which has a corporate tax rate of 12.5 percent compared to that of the U.S., which has an ostensible rate percent of 35 percent.

Minnow Swallows the Whale

The acquisition is structured in such a way that the U.S. company becomes on paper the subsidiary of the smaller foreign corporation. Edward Kleinbard, a professor of law at the University of Southern California, wrote in an opinion piece for Bloomberg news that such a deal is where “the foreign minnow swallows the domestic whale.”

The goal or purpose is to avoid paying the federal tax that applies when companies repatriate their low-taxed foreign earnings to the U.S.

In the past few weeks, two U.S. drug firms — AbbVie and Mylan – have moved forward with foreign takeover plans that would allow them to pay lower tax rates. AbbVie reported a global effective tax rate for 2013 of 22.6 percent, a roughly one-third discount off the U.S. statutory rate, largely as a result of its low-taxed foreign earnings.

Lew, who advocates lowering the U.S. headline rate and revamping the entire tax code, charges that companies that do inversions essentially want to keep the advantages of being in the U.S. – things like intellectual property protection, research support, financial security and reliable infrastructure — without paying for them.

Renouncing Their Citizenship

In a letter to Senate Finance Committee Chairman Ron Wyden, Lew wrote that Congress should act now to prevent even more companies “effectively renouncing their citizenship to get out of paying taxes.”

But because he is a cabinet member in the Obama administration, you can bet the Republicans are not going to dance anytime soon, even if they, too, recognize that there is a problem.

That is just the nature of Washington today, where true governance, based on give and take compromise and statesmanship between the two parties, is a very rare thing indeed.

Senior administration officials have been telling reporters that the president supports a long-term rewrite of the tax code to make the U.S. a more attractive place to locate businesses, jobs and investment. Never mind that is pretty much what the Republicans have been saying, too.

No Fix Soon

But most political observers doubt that anything will be done before the midterm elections in November, where the GOP stands a good chance to reclaim a majority in the Senate.

Mr. Obama apparently wants legislation that would essentially say that if more than half of the new firm is owned by the old U.S. firm’s shareholders, the inversion won’t be recognized for tax purposes. I think that makes a lot of sense.

The ultimate goal with any legislative fix is to keep the U.S. corporate tax base from eroding. Senior administration officials are particularly worried about “a bandwagon effect,” in which one firm in a sector inverts, raising pressure on other companies in the sector to invert as well.

One such potential decision to reincorporate overseas lies with Walgreen Co., which could raise pressure on CVS Caremark Corp. to do the same. Walgreen, which owns a 45 percent stake in European drug retailer and wholesaler Alliance Boots, could buy the remaining shares, thereby opening up the possibility of reincorporating in Europe and benefiting from a lower tax rate.

Riddled with Loopholes

Over the last 10 years, 47 companies have reincorporated abroad, compared to 29 over the previous two decades, according to the Congressional Research Service. As many as 30 inversion transactions could be moving through the deal-making pipeline right now, according to the Obama administration.

Kleinbard writes that inversions “are symptomatic of a corporate tax system that is highly distortionary, unstable and riddled with loopholes. The headline rate of 35 percent is well above world averages, effective rates imposed on investments vary wildly, and the international rules in particular are an incoherent mess.”

No argument from me on that, professor. He further writes:

“Inverting firms try to justify corporate self-help as the right response, but inversions both gut the domestic tax base and allow key players (those with international operations) to excuse themselves from the debate, while domestic firms are left holding the bag.”

Nobody likes to be left holding the bag. So let’s level the playing field with a bipartisan comprehensive tax code rehaul, which would make our nation more competitive on a world stage. We need to cut our statutory corporate tax rate by half, all the while closing loopholes for special interests.

Now you, Republicans, and you, Democrats. Get at it. Do your job. Quit talking around each other and start talking to each other. Is that too much to ask?

Saw One Coming but Not the Other

You know, I am fast coming to the conclusion that I should start calling myself an economic development “futurist” or maybe a “seer” so that I can charge more money.

Back on July 8, in my blog entitled “A Masterpiece of Economic Development,” I wrote that with the spate of recent U.S., German and Japanese automotive investment in Mexico, with new OEM assembly plants being announced with some regularity, that it was just a matter of time before the Koreans would follow suit.

Well, my prediction seems to be coming true, as Reuters reported this past week that Kia is in talks with Mexico to open a new auto assembly plant worth at least $1.5 billion.

The news service quoted Rolando Zubiran, secretary of economic development in Nuevo Leon, as saying that negotiations on the plant were under way and involved Nuevo Leon, the Mexican federal government and Kia, an affiliate of Hyundai Motor Corp.

“It’s more than $1.5 billion,” Zubiran said, referring to the planned investment. He said Nuevo Leon hoped the deal would be concluded during the first two weeks of August.
Reuters reported that sources said the plant will have an annual capacity of some 300,000 cars and will be built on the northeastern outskirts of Monterrey.

But before I get too much of the big head, I should fess up. I will admit that I was somewhat surprised that Volkswagen announced that it will invest $900 million to expand its plant in Chattanooga, Tenn., and add 2,000 jobs by 2018.

I say that because I had sensed a tension between VW management and the state of Tennessee, stemming from the company’s desire to essentially unionize its workforce so that it could get incorporate its vaunted works council business model.

There still may be some tension there, as the United Auto Workers will be establishing a local, much to the horror of some elected officials. We’ll see how this story plays out, but it apparently did not thwart VW’s plans to expand the Chattanooga plant in a big way.

So maybe if I was a real futurist, I would not be so surprised by such turn of events. Best I keep my consulting rates reasonable and not make such claims.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

FDI is Great for US

Last month, I wrote a blog entitled It’s a Scary World. The tragic events of this past week with the shootdown of a passenger airliner in eastern Ukraine and the invasion of the Gaza strip by Israeli forces only reinforces that premise.

It is a dangerous world, at least parts of it certainly are.

One of the points that I was trying to make is that despite all of our problems, the United States remains the preferred place for capital investment. In that sense, we are a port in a storm, a safe harbor.

One CNBC analyst has described the U.S., in terms of investment opportunities, as the cleanest shirt in a bag of dirty laundry. When compared to the rest of the world, I think he is probably right.

And this remains true despite the fact that we have a corporate tax rate that ranks among the highest in the world, aging infrastructure, and a dysfunctional federal government that seems incapable of tackling virtually any issues of major importance.

And yet, people and companies from all over the world still want to come here, which is a testament to who we are, a nation of immigrants, and what we have built here.

Last year, companies invested $1.46 trillion in locations outside their home country, of which $193.4 billion came to the U.S. Now this is a good thing, because foreign direct investment (FDI) is a big job creator in this country.

A recent report by the Brookings Institute on FDI in U.S. metro areas found that 5.6 million U.S. workers—about 5 percent of the entire workforce—are employed in the domestic operations of companies that are majority-owned by a foreign parent. My wife is among those ranks, having recently taken a job with a Japanese-owned company.

What’s more, a majority of foreign-owned firms that have operations in the U.S. pay 22 percent higher averages wages.

Why FDI Happens

Companies invest outside their home countries to either find new markets for their products or services or to take advantage of certain cost differences, which theoretically could mean increased profits.

When a U.S. company does that, we call that “offshoring” and to some degree we will demonize them for that practice, especially when there is accompanying American job loss.

Some of those very same companies have come to the realization that their offshoring plans were not so well thought out and profitable after all. And that’s when to some degree we will celebrate them for “reshoring,” especially when there is accompanying American job gains.

And we also celebrate when a foreign company starts operations in the U.S. that creates jobs. But keep in mind that in most cases, FDI in the U.S. happens via merger and acquisition – that is a foreign company either acquires a U.S. company outright or takes an equity position in it.

About 13 percent of FDI happens via greenfield investment, but those can often be very big projects by which many economic development organizations clamor for.

By either acquisition and merger or greenfield, the U.S. is an attractive playing field by offering the world’s largest economy with high per capita incomes, a stable investment environment, deep capital markets, strong institutions and an environment of innovation.

But foreign companies in turn offer so much to the U.S. economy by investing here in addition to the millions of jobs they create.

More than $80 billion dollars’ worth of FDI — 48 percent of the total in 2012—flowed into our manufacturing sector. And more than 18 percent of people employed in this country in manufacturing work for a foreign company. Now that is huge.

Foreign-owned companies also contribute 18.9 percent of all corporate dollars spent on R&D in the U.S. That amounts to $45 billion dollars annually, which fuels innovation and technological advances, which is the only way we can compete globally.

When foreign companies enter a market, they bring with them new production technologies, knowledge, and management practices. These spillovers spread through supply chains, labor markets, product markets, and to competitors. Economists estimate that such spillovers from FDI alone accounted for 12 percent of U.S. productivity growth between 1987 and 2007.

Foreign firms also exported nearly $304 billion worth of goods from the U.S. in 2011, accounting for one-fifth of all U.S. goods exported that year.

Most FDI in the U.S. comes from developed nations, which makes sense because business leaders in developing countries are typically more focused on growth opportunities that they have at home. England, Japan, Germany, Canada and France are the top contributors to FDI in the U.S.

I have had the benefit of working with Canadian, German, Japanese, British and Korean companies in siting plants in North America, and I can truthfully say working with foreign-based companies has been an educational and a rewarding experience. I feel almost lucky or blessed to have been able to serve them, and I hope to serve more in the future.

Watch China

According to Brookings, Chinese firms accounted for only 11,600 U.S. jobs in 2011. But this modest number masks rapid growth. From 2007 to 2011, employment in the U.S. affiliates of Chinese companies increased by over 800 percent.

Two huge Chinese projects – one in Louisiana and the other in Virginia – have been announced recently that should be history making in terms of size and scope.

From the Greater New Orleans Inc. (nice folks), I learned Yuhuang Chemical Inc. will spend $1.85 billion to build a methanol manufacturing complex on the Mississippi River in St. James Parish. The FDI project is the first major investment by a Chinese company in Louisiana.

Yuhuang Chemical will create 400 new direct jobs, with an average annual salary of $85,000, plus benefits. In addition, Louisiana Economic Development estimates the project will result in 2,365 new indirect jobs. The company says the project will generate 2,100 construction jobs. Construction will begin in 2016, with the first phase of the methanol project beginning operations by 2018.

From the Greater Richmond Partnership, I learned that Shandong Tranlin Paper Co., will invest $2 billion over five years to establish its first U.S. advanced manufacturing operation on an 850-acre site in Chesterfield County.

This FDI announcement is being touted as the single largest Chinese greenfield project in the U.S. to date, with an estimated 2,000 new jobs to be created by 2020.

Tranlin, which has an annual productivity of 400,000 tons of refined pulp, 700,000 tons of machine-made paper, 400,000 tons of organic fertilizers, and 2.4 billion food and medical packaging boxes, has developed a technology to make paper, using agricultural residuals, such as corn and grain byproducts normally left in farm fields after harvest.

The U.S. government has been hesitant to allow China to gain a foothold in certain U.S. industries, citing reasons of national security. China does have a history, after all, of hacking and industrial espionage, patent infringement and counterfeiting. (However, I do not believe that most Chinese companies engage in these illicit practices.)

The Federal Reserve has already approved a number of Chinese-owned banks to establish operations in the U.S. and it’s clear that a growing number of Chinese companies are recognizing that there are greener pastures here.

To that end, they should be welcomed and greeted as valuable investors to this good thing of ours. Welcoming and attracting FDI has become the American way and for good reason — these companies help grow our economy and keep us more competitive.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

Road and Bridge Blues

If I were to simplify the process of corporate site selection, which is far from being simple, I would boil it down to four main areas of subject matter to be investigated and documented.

One is human resources. We will decipher both quantity and quality of an available workforce and the attendant costs at any given location. I always liked the term “human resources” – even if it does sound a bit sterile — because people truly are a resource for any company.

The second is infrastructure. We’re essentially looking to see if the basic building blocks are in place (or can be in place) – whether it be roads, utilities, schools, and other physical assets – in a community for a company to have long-term sustainable operations there.

Real estate would be number three. It almost always comes down to whether a building or a site can work or be made to work. The real estate component is often hand in glove with infrastructure.

Finally, I would label my fourth silo of information with the ubiquitous term “other,” which admittedly is a vague cop out. Here we are examining other factors that can have substantial impact on future operating costs and therefore could very well play a determining role in where a project finally lands.

We’re talking about things such as energy costs, taxes, quality of life, logistics, business climate, a lot of different stuff.

During the 3 ½ years that I have been writing this blog, which is designed for both a corporate and an economic development audience, I’ve touched on many of these cost factors and how they may figure into the decision making process.

(Later in this blog entry, we’ll expound on infrastructure – the state of roads and bridges in rural America — and human resources with the latest strategic moves by the United Auto Workers.)

While every project is different, because the needs of companies are frequently different, there remains a commonality to the type of information we seek and steps taken in a process designed to eliminate locations and thereby let the proverbial cream rise to the top.

So to recap, human resources, infrastructure, real estate and my not so telling “other” are things that I am slicing and dicing with the help of some trusted specialists. And that holds true not only for a corporate client on a site search but also for an economic development client on a strategic plan.

Deficient or Obsoletes

Even the most unskilled eye among us can recognize obsolete or aged infrastructure. We have all driven on roads that are either in a state of disrepair or just woefully inadequate for the volume of traffic on them.

I know I have driven across more than a few bridges in my time, especially in rural settings, where I gave a sigh of relief once I got to the other side.

This past week, the national transportation research group TRIP released a report that found that 55 percent of the nation’s rural roads were rated poor, mediocre or just fair. And 23 percent of rural bridges were either structurally deficient or functionally obsolete. The group also reported that the rural road fatality rate is three times higher than all other roads.

“The development of rural America — the primary and rapidly increasing source of the nation’s energy, food and fiber — is being hindered by a transportation system that has significant road and bridge deterioration,” says Rocky Moretti, TRIP’s director of policy and research.

Roads to Market

In Texas, where I live, there are Farm to Market Roads and Ranch to Market Roads, which are designed to transport product from agricultural areas to towns and cities. They are abbreviated “FM” and “RM” on signs.

But when you think about it, virtually all roads, in both urban and rural settings alike, are roads to market, as they are connecting you to an aspect of commerce – whether it is your commute to work or the places where you shop.

And because many products remain agriculturally based in origin, particularly our food and energy, it is important that we have a robust and well-maintained road system in rural America. I happen to believe this is the one of the better ways for rural communities to compete for corporate capital investment projects and essentially make themselves less isolated.

In short, if you going to move product from a rural setting, and absent a practical rail option, let it be on improved roads where a truck can make good time in bringing goods to market. A first-class road system also ensures that our nation can better compete on a global scale.

“Employers understand all too well that when rural roads crumble, bridges deteriorate and safety declines, virtually every aspect of the American economy suffers,” said Stephen E. Sandherr, the chief executive officer of the Associated General Contractors of America. “The best way to boost our economy, support private sector growth and cut unemployment is to pass a new surface transportation bill.”

The TRIP report, “Rural Connections: Challenges and Opportunities in America’s Heartland”, stated that the highway fatality rate on the nation’s rural roads was 2.31 deaths for every 100 million vehicle miles of travel, three times the fatality rate on all other roads.

The study ranked states based on their rural fatality rates, rural road conditions and the state of their rural bridges. Not surprising, the states ranked as having the worst rural roads experience tougher winters. When water freezes and thaws, it plays hells on road surfaces.

The TRIP report illustrated “that the U.S. must continue to invest in transportation infrastructure to ensure that whether people live in rural, suburban or urban areas they have access to economic opportunities and a high quality of life,” said Bud Wright, executive director of the American Association of State Highway and Transportation Officials.

My own personal experience is that I have been on many a potential development site that was served by poor roads in need of upgrading as well as other inadequate infrastructure. Absent an approved plan of improvement with timelines, we usually will pass on such sites as the risks simply outweigh the benefits.

The Old Tennessee Two-Step

Back in February, the United Auto Workers suffered a bitter setback to organize its first foreign-owned plant in the South when workers at the Volkswagen plant in Chattanooga rejected UAW representation by a 712-626 vote.

I proclaimed afterward in a blog that the union was effectively dead. Little did I know or suspect that the union and the company might set out to do the old Tennessee two-step with one another.

So last week, in what can only be described as an unorthodox move, the UAW said it had reached a “consensus” with VW management by which the company will recognize the union if it signs up enough workers at a newly created local. What “enough” is, I’m not quite sure at this point.

But by creating UAW Local 42, the union hopes to avoid the need for another election and the accompanying “third-party interference,” which it blames for losing the earlier vote. The UAW is saying that no employee will be required to join the local and that no dues will be collected until after a collective bargaining agreement is reached.

“We have a consensus,” Gary Casteel, the UAW’s secretary-treasurer, told the Associated Press. “This is not something the UAW is doing unilaterally. It’s been thoroughly discussed with VW over an extended period of time.”

Volkswagen wants a German-style works council at the plant to represent both salaried and blue-collar workers, but the company’s has said it can’t do so without the involvement of a union.

BREAKING NEWS: VW announced Monday that it will assemble a new family-hauling crossover at its Chattanooga plant and invest $900 million to expand the factory in a push to double U.S. sales of VW-brand vehicles by 2018. The company will add about 2,000 jobs.

What is going to be interesting to watch is whether the Republican-controlled state Legislature, which is heavily anti-union, will approve a $300 million incentives package for the plant expansion. There are those hotheads who are opposed to the awarding of incentives precisely because of the VW/UAW relationship

“VW ignored workers’ decision to reject the union, inviting the UAW in anyway,” Justin Owen, CEO of the Beacon Center of Tennessee, told the AP. “It doesn’t deserve a penny of our money.”

Leave it to say, this is an evolving story worth watching.

Also Watch Cleveland

Even before LeBron James announced his return to Cleveland on Friday, residents there have been seeing signs of a substantial recovery, with billions of dollars are being plowed into new hotels, a casino, a convention center and a riverside promenade in the revitalized downtown district.

Tourism is up, with 16.2 million out-of-towners having visited the city last year and more expected for 2014. And also last week, the Republican National Committee picked the city to host its 2016 convention. No doubt about it, good things are happening in Cleveland, and LeBron coming home will only help create more optimism.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

A Masterpiece of Economic Development

Over the past couple of years, I’ve been watching with great interest events play out in Mexico, and I have written several blogs on the burgeoning automotive industry there.

(See Why Mexico Works for Automotive published earlier this year and A Defining Combination in Mexico, which I wrote in 2013.)

In the “Why Mexico Works” blog, I wrote about some of the recent “greatest hits” of auto industry expansion in central Mexico including:

• Audi’s new $1.5 billion central Mexico assembly plant, now under construction
• Nissan’s $2 billion plant in Aguascalientes
• GM’s $691 million expansion in Mexican operations
• Mazda’s new $650 million plant in Salamanca
• Honda’s new $ 800 million plant in Celaya, Mexico, adjacent to a new $470 million transmission plant.
• Chrysler’s $1.23 billion expansion its Saltillo plant

And Now Two More Mega Projects

That trend is continuing in hyper drive with the announcement last week that luxury carmaker BMW AG will spend $1 billion to build a 150,000-unit-capacity plant in San Luis Potosi in central Mexico. The plant will begin production in 2019 and will employ about 1,500.

The BMW announcement came less than a week after Daimler AG, and technology partner Renault-Nissan said they will spend $1.36 billion to construct a factory for compact luxury cars in Aguascalientes. The planned joint venture facility — adjacent to the newly opened Nissan plant — will build 300,000 Mercedes and Infiniti vehicles.

Mexico, not long ago a backwater for automotive, is now on pace to become the world’s No. 1 auto exporting country to the United States as early as next year, eclipsing both Japan and Canada. Auto production in Mexico advanced 7.2 percent to 1.31 million vehicles during the first five months of 2014 following last year’s record output of 2.93 million, according to the Mexican Automobile Industry Association.

Plants in Mexico will probably build about 3.1 million vehicles this year following factory openings during the last eight months by Nissan, Honda Motor Co. and Mazda Motor Corp., which between them will turn out an additional 600,000 units.

And now the Germans are following suit with announced plants by Audi, BMW and Mercedes. I predict that in the coming months, the Koreans, either Hyundai or Kia, will unveil plans for a Mexican assembly plant. It’s bound to happen.

There are a couple of driving factors as to why Mexico has become an automotive hotspot, one of which should be obvious and the other maybe not so obvious. Let’s take a shot at the obvious one first.

Fat City

Anyone with any business acumen should know that Mexican workers are paid substantially lower than their U.S. counterparts. Indeed, the average Mexican worker assembling vehicles or making parts earns $7.79 per hour including benefits, according to the Center for Automotive Research. Compare that to $37.38 in the U.S. and $39.04 in Canada.

“When you look at the cost of labor and quality coming out of Mexico, it is hard to beat the proposition that Mexico can deliver to corporations,” Fred Diaz, Nissan senior vice president of sales and marketing told the Detroit Free Press earlier this year.
Lower operating costs typically translate into fatter margins. Welcome to business 101.
Blame It on NAFTA

Maybe a not so obvious reason why Mexico is winning automotive investment is the current trade scenario that now exists. Not only can automakers export vehicles into the U.S. (the second largest auto market in the world) duty free ala NAFTA, but they also have an advantageous launch pad for exports to Latin America and Europe.

In making its announcement last week, BMW said Mexico’s “large number of international free trade agreements — within the NAFTA area, with the European Union and the MERCOSUR [South American trade bloc] member states, for example — was a decisive factor in the choice of location.”

Audi Chairman Rupert Stadler said the very same thing last year. He cited Mexico’s free trade agreements with 44 countries (compared to the U.S. comparable agreements with 20 countries) as a primary reason why his company chose to build a $1.3 billion plant near San Jose Chiapa.

The Dominator

The Audi plant is slated to open in 2016 and is not far from parent company Volkswagen’s plant in the state of Puebla. The Audi announcement in 2013 should have been the big wake-up call to economic developers in the Southeast that not only is Mexico a formidable player, but it is currently in a dominating position.

Also last week, the German newspaper Stuttgarter Zeitung reported that Robert Bosch, one of the world’s largest car-parts makers, will invest 400 million euros (US$546 million) in Mexico and create 3,000 new jobs there by 2017. The newspaper quoted Bosch Chief Executive Volkmar Denner in its report.

As part of the expansion plan in Mexico, Bosch will build a research and development center.

Yesterday’s Wine

I would expect much of this will be a major topic of discussion at the upcoming Southern Automotive Conference, to be held Oct. 8-10, in Birmingham, Ala., my old stomping grounds.

This is an event sponsored by automotive manufacturing associations in Alabama, Tennessee, Mississippi, Georgia and South Carolina. I find it interesting if not a bit perplexing for the conference organizers to claim that “the southeast United States has the fastest growing automotive industry in North America.”

No doubt that was true not so long ago, but that’s becoming yesterday’s wine. Granted, this is a promotional language for an event, and maybe I should give them a pass simply because of that. Still, it doesn’t convey the whole truth or what has been happening on the ground as of late.

There could be several explanations – either the person who wrote the promo is unaware that Mexico is a part of North America. (Heck, there are people in this country who don’t know that New Mexico is a part of the U.S.) Or maybe that person is just uninformed about the billions of dollars currently being invested by automakers in Mexico.

That is not to say that the Southeast has been forgotten by the automotive industry. BMW’s announced Mexican plant follows the company’s decision in March to invest $1 billion to raise annual production capacity 50 percent at Spartanburg, S.C., by 2016 to 450,000 vehicles.

When the South Carolina plant expansion is complete, more BMWs will roll off the line there than from any other facility in the world.

But despite a substantial track record of success in the Southeast, no new major automotive assembly plant project has been announced in the region since Volkswagen began production in Chattanooga, Tenn., in April 2011. And this comes at a time when Mexico is winning those very projects.

A True Boom

Back in March, the Detroit Free Press reported that its research showed that between 2013 and 2015, Honda, Mazda, Nissan, Chrysler and Volkswagen planned to invest $6.58 billion in Mexico. Those numbers, of course, would not take into account BMW’s $1 billion project and the $1.36 billion to be invested by the Daimler-Nissan partnership.

Add the latest numbers and we’re looking at OEM investment approaching $9 billion in a two-year span. Now assume that there will be untold tens and hundreds of millions of dollars invested by suppliers like Bosch that are either expanding operations or starting new operations to service the new and soon-to-be assembly plants in Mexico.

Take that all into account and have yourself a true industry sector boom, the likes of which is only being rivaled by what is happening in oil and gas in this country.

Sean McAlinden, a senior economist for the Center for Automotive Research, told the Free Press that what is happening with the automotive industry in Mexico is a “masterpiece of economic development.”

I could not agree more, even if I do wish I would have said it first.

They Will Not Be Deterred

Not so long ago, I viewed Mexico with a jaundiced eye, as a corrupt, dangerous narco state that should be avoided. The drug cartels certainly are real and a problem, particularly around the border, which has seen its share of violence.

But it has become increasingly clear that the world’s automakers are not deterred from investing billions in the central part of Mexico, as they have weighed the risks and have decided to go ahead and take the plunge, all the while taking certain security precautions.

Ultimately, this speaks to the core of what corporate site selection is all about – weighing the risks against the advantages. Site selection is part art and part science, and I believe best left to those specialists (which would include Barber Business Advisors) who have the knowledge and experience to make it work.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.