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Retooling Kentucky’s Automotive Industry

By Mark Green

Car sales have plunged and the big manufacturers are making headlines with layoffs, production slowdowns, plant shutdowns and multibillion-dollar losses during the worst recession in decades. The Commonwealth of Kentucky, however, sees a bright future for auto and truck making in the state.

This month Kentucky rolled out a major incentive package for retooling the state’s powerful vehicle manufacturing industry that has been in the works since last summer.

Commonwealth economic development officials have a strategy to bulk up the shrinking industry’s presence in the Bluegrass State, which many people don’t realize is one of the top vehicle producers in the nation. Kentucky is third in production of light vehicles (cars and trucks) among all states thanks to two Ford plants in Louisville, a General Motors plant in Bowling Green and Toyota’s massive operation in Georgetown.

State auto workers have built a strong resume: Kentucky produces the top-selling car (Toyota’s Camry), the top-selling truck line (Ford’s Super Duty series) and the top-selling American sports car (Chevrolet’s Corvette).

“We’re really bullish on the auto industry in Kentucky,” said Larry Hayes, secretary of the Cabinet in the Governor’s Office as well as acting head of the Kentucky Cabinet for Economic Development. “You’re going to see a bigger percentage of cars coming from Kentucky.”

An omnibus incentive legislation crafted to strengthen vehicle manufacturing was introduced Feb. 3 for this important segment of the state economy. The industry generated a 2006 Kentucky gross domestic product of $5.6 billion, which was 3.84 percent of total state GDP. More than 2 percent of all commonwealth workers are involved in vehicle manufacturing, representing more than 19 percent of all manufacturing jobs in the state.

But the vehicle manufacturing industry is consolidating and globalizing. Fewer overall models will be produced for sale across more nations in the near future, which raises the stakes for places such as Kentucky that are competing for those operations.

The state’s strategy focuses first on retooling what is already here: not just the production plants but also the nearly 450 suppliers. With the supplier-factory base modernized and secured, existing manufacturers will increase their bets in the state and perhaps decide to move more operations here, Hayes said.

State officials communicate often with industry officials – including a visit with Toyota’s decision makers last June in Japan – and believe they are positioning Kentucky well for future production choices. Recent automaker moves reflect success on that count. On Nov. 10, Toyota launched its new Venza crossover vehicle in Georgetown. And Ford has announced plans to bring production of two as-yet-unidentified small cars from Europe to Louisville in 2011.

Reinvestment incentives
Past incentive programs were aimed at recruiting new operations and new jobs, and required private companies to be investing at least $100 million. But state economic development leaders determined that a new approach was required. Competitive forces today compel the industry to work with agile suppliers who can adjust their product lines quickly. Since many Kentucky auto industry operations are 20 or more years old, administration officials decided the wise course was a program to help suppliers and manufacturers reinvest in existing operations here. There need not be new jobs involved – in fact, as much as 15 percent of jobs could be eliminated – but companies do need to be spending at least $10 million on their plant upgrades. The plan calls for tax incentives for retooling, including improved computer systems and employee uptraining. Companies can obtain some of the tax credits involved in advance in the form of loans.

Last year was not encouraging for the manufacturers. After gasoline prices topped $4 a gallon in the summer, the industry was whiplashed by the economic crisis that collapsed demand for vehicles across the board (even as fuel prices plunged 60 percent from their summer peaks).

Annualized U.S. sales rates were below 10 million vehicles in January, down from 16 million annually a year ago. In January, sales declined 54.8 percent for Chrysler, 48.9 percent for General Motors and 40.3 percent for Ford. Sales declined 31.7 percent at Toyota, 29.7 percent for Nissan and 27.9 percent for Honda.

Ford announced a $5.6 billion loss for the fourth quarter of 2008. Toyota said in December that after 70 years it will report its first loss ever. GM reported more than $20 billion in losses for four quarters through September, the most recent numbers as this issue was prepared, and offered buyouts to hourly employees. Across the nation, 936 dealerships closed in 2008.

Car alley moving south
Even so, automaking will continue. And in the United States, Kentucky officials think its locus will continue shifting from the Detroit area and Ohio to the South. Automotive manufacturing is going to continue to leave Michigan and Ohio, state officials believe, because plants there are aging and labor costs remain high.

However, Kentucky must compete to maintain its position.

“We think of Toyota (in Georgetown) as still new … but it’s their oldest manufacturing facility in the United States,” Hayes noted. The plant opened in 1988.

Ford opened its two plants in 1955 and 1969. GM moved Corvette manufacturing from St. Louis to a former Chrysler air conditioner site in Bowling Green in 1981; it underwent major renovation in 1996.

Newer production plants can retool faster to make new or different vehicles, which makes them more competitive, Hayes said. To keep the state’s present automakers competitive, he said, “The biggest challenge is to support them in building the car of the future here.”

Steve St. Angelo, president of Toyota Motors Manufacturing Kentucky, said state economic development policy is an important component in Toyota’s decisions about where to locate manufacturing operations.

He said former Gov. Martha Layne Collins and all succeeding administrations since have been responsive and supportive to Toyota, which has $5.4 billion invested in Georgetown, where 7,000 employees earn more than $550 million annually producing Camrys, Venzas, Avalons, engines and various major components.

Toyota also has its North American headquarters in Erlanger and a parts-distribution center in Hebron that add another 2,000 jobs. The company estimates its operations are directly responsible for at least 20,000 Bluegrass State jobs.

“The fact that over a hundred of our suppliers are located here in the state helps keep logistic costs down and gives Kentucky an advantage,” St. Angelo said. “We have hundreds more suppliers that are located in neighboring states such as Ohio, Indiana and Tennessee, which means Kentucky is an excellent place to manufacture vehicles. Proximity to suppliers means we can get our parts just in time.”

Ford spokesperson Angie Kozleski said the company works closely with its suppliers as well as with city and state officials.

“We continue to work very closely with our government partners to ensure that we are able to operate our facilities as competitively as possible,” Kozleski said.

Months in the making
Despite the bad economic news in recent months in the U.S. automaker sector, Kentucky officials are optimistic. “(Automakers) believe that there is a strong future for their companies and their product,” Hayes said.

Kentucky state government agrees, and is in the process of putting its incentives where its mouth is. Kentucky economic development officials talked to all the players: the auto and truck manufacturers, the suppliers, corporate site-selection specialists, economic development directors at all levels, members of the Kentucky Association of Manufacturers and anyone else who might have expertise or insight.

Hayes asked staff to examine the incentives surrounding states offer and compare them to Kentucky’s, looking for gaps in the commonwealth’s benefits and those of its “competition.”

The auto manufacturers told them that their strategy moving forward is to operate more nimble manufacturing platforms that they can retool quickly to change the models they produce when market conditions shift. They also need suppliers who can be as nimble as they are.

Perhaps electric cars, too
Kentucky has hopes for a fifth vehicle manufacturing plant, if officials with Integrity Automotive can arrange their financing. They’d even broken ground last August on a 200-acre site in Franklin for a 1 million s.f. electric car factory. But then the national financial crisis intervened in September and activity halted.

Integrity is a joint venture with ZAP – it stands for zero air pollution – a California company that has been producing its small, low-speed vehicles in China. Kentucky last year modified its speed limit laws to make the ZAP vehicles legal on certain roadways.

Hayes said state officials have written to indicate their willingness to support the company’s efforts to gain U.S. Department of Energy grants and loans, access other credit and line up the financing it needs to move forward. With financing, company officials have said they could have a factory employing 1,000 operating in about a year.

Kentucky is also hoping to bring home a hybrid car battery-making project that would involve research at the state’s top universities. A top University of Kentucky administration official cautiously acknowledged that a possible deal is in the works.

It could be a major coup if the commonwealth can put it together. A Business Week article at the end of January reported that carmakers all think battery production holds the potential to jolt them into profitability. Car battery technology is described as a fundamental economic linchpin of the 21st century.

That was a message last fall at one of three Energizing Kentucky conferences initiated by the presidents of the universities of Kentucky and Louisville, and Berea and Centre colleges to push creation of a state energy policy. Keynote speaker Thomas Friedman, New York Times columnist and global trend watcher, told the audience that battery technology will be to this century economically what oil was to the last. The nation that wins the technological competition to create and produce the best electric car battery will receive a sustained economic jolt of its own, Friedman told hundreds of Kentuckians.
“Gov. Beshear wants Kentucky to be the epicenter of new battery techonology,” Hayes said.

While the credit crash has hurt vehicle sales, the Louisville market is faring comparatively well versus the nation as a whole, according to Tracy Farmer, owner of four Kentucky dealerships: Oxmoor Hyundai, Oxmoor Ford-Lincoln-Mercury, Oxmoor Mazda and the newly relocated Oxmoor Toyota. He also has two dealerships in Florida, a state he describes as “an economic disaster when it comes to cars.”

The Louisville economy is stronger than the nation as a whole, Farmer said. Meanwhile, Hyundai’s new job loss protection program has been a tremendous success, increasing the brand’s sales 14 percent in January while competitors had decreases of up to 50 percent. A large number of active and retired Ford workers in the Louisville area have access to employee discounts, helping sales.

Thousands of employees at Toyota in Georgetown also positively affect Louisville sales. Farmer’s Toyota dealership saw improved sales, too, he said.

He agrees with state officials that carmaking has a strong future and expects sales figures to improve when credit becomes available again. “If they take care of the banks, it’ll help car sales.”