Who will win the Car-wars?

General Motors, the venerable American auto manufacturer is sitting on the cliff’s edge in North America with a recent 3-month loss of $6 billion. However, GM watched its sales in China skyrocket 50% for the month of April, 2009. Ironically, Toyota, the company many Americans now cheer for, has posted a $7.7 billion loss for the first quarter.

This now proves, without a doubt, that the auto industry – not just in the US – is going through a massive crisis. But it’s clear that American manufacturing has reached a critical, historical turning point. What was once good for General Motors is no longer good for the rest of the nation. The days are gone where an automobile must be designed in the Detroit region and manufactured in the Great Lakes. We have seen a shift in trade and production location from the north to the south. However, geographic arguments are only a small part of the overall challenge to the industry, especially in North America.

When the dust settles, what will the American auto industry look like?
Regardless of what some may say, there is no such thing as an “American” vehicle anymore. We are fast shifting into a global economy that requires the sharing and collaboration of multinational resources from across the globe. Consumers demand quality products at very affordable costs. Corporations have no choice but to comply with consumer demand even if it means off-shoring production and even trimming quality in order to save money. In many ways, this is the Wal-Martization of consumer goods.

The 21st-century automotive industry will be geographically spread throughout North America. Modern technology allows engineers to work from just about any location regardless of population, climate or infrastructure. However, many engineering outfits have found that locating brainpower in dynamic places improves quality and innovation. A dynamic place is a place where the educated and skilled want to work. These includes places like southern California (where most of the design studios are located), Ann Arbor, Austin, and others.

In the 1980s the Midwest watched the southern states gear up and recruit non-Detroit manufacturers, in large part due to the lack of unions in the land of Dixie. We have seen the southern United States explode in production and manufacturing capability. The two main reasons for this were lack of unions in the South as well as tax-payer funded incentives. However, the idea of receiving incentives from the public coffer can backfire.

Just about every state offers some form of tax breaks or incentives to corporations looking to construct new facilities. Every large corporation now looks to the state where they can get the most incentives. Everything else, such as skilled workforce, distribution, infrastructure – that all comes secondary. In many ways, this is just an example of robbing Peter to pay Paul. And it doesn’t work. You cannot simply take tax dollars from one area of the state and pour them into another region with the long-shot hope that an industry will grow in that certain region. This is exactly what Tennessee is doing.

However, the southern states have struggled and will continue to struggle to attract brainpower and engineering talent. What the American public doesn’t realize is that there is a lot more to the creation of a vehicle unit than mere assembly. Besides production, there is fabrication, engineering, design, testing, marketing, legal, and distribution. Even today, much of the world’s automotive intelligence and engineering is located in Southeast Michigan. This fact irks southern powerbrokers who have been so successful at bringing grunt work to their states.

We will continue to see massive amounts of automotive-related manufacturing relocate to Mexico due to the extremely low cost of production. Many of the Japanese and German manufacturers are already starting to notice the negative consequences of setting up production facilities in the United States. Nissan, Toyota and Honda have all initiated cuts and hiring freezes in their American manufacturing facilities. These companies have also initiated major contact employee programs rather than hire full-time fully-hired help.

So what happens now in the old auto belt? Certainly, Ohio as well as Michigan must figure out how they can re-deploy their engineering talent. Each seems to graduate a huge number of students year after year but this tends to benefit other places. States such as Wyoming, Arizona, Washington, and others have held job fairs in Michigan in order to gain talent. If there are no jobs in Michigan, why do they keep graduating so many students?

Even without George Bush and the GOP in power, Texas seems also to be a big beneficiary of this brain drain. But for how much longer can this continue? Remember Texas went bust in the early 1980s with low energy prices. It could happen again.

Another natural winner in the car-wars could be the southern states, but only once they consolidate their efforts to bring knowledge and engineering to the South. It is much easier to offer incentives for a production facility than to woo an engineering lab.

Critically, there still seems to be a lack of emphasis on higher education in the south. Even the best universities in the South cannot fully compete with the universities in the Midwest from a technical standpoint. Institutions such as Michigan, Wisconsin, University of Chicago, Michigan State and Indiana are still levels above the universities found in Kentucky, Tennessee and Georgia. The Midwestern schools built their solid knowledge and research background over a period of decades. This cannot easily be duplicated.

To be sure, the auto-dominated economies of Michigan and Ohio will be shrinking in the future. These states are shedding their manufacturing sectors while reinforcing their knowledge-based sectors. Over time they may find it much easier to morph into a knowledge-based economy by using previous know-how than to build a knowledge economy from scratch. Michigan, for example, may have been hit hard by this global schism in manufacturing, yet it has been left with the know-how and knowledge left over from industry in the form of a strong university system. In contrast, nowhere in the south can we find that.

In conclusion, some individual Midwestern cities may come out of this crisis better than many expect. Younger workers in the future will look at specific towns such as Madison and Ann Arbor, which offer an excellent quality of life, rather than head off to the sunbelt. This may be particularly true as they enter their 30s and look for a good place to raise their children, hopefully close to grandparents. The Midwest may be down, but not all of it is out – far from it.

Amy Fritz was born in Cambridge, England during World War II. Her mother was a seamstress and her father a pilot with the RAF. Her uncles worked in various capacities within the British automobile industry and her father became an engineer and professor.

After studying engineering at Cambridge, Fritz developed an interest in automobiles and went to work for a now defunct automotive supplier. Her occupation took her to Europe, Asia and North America, where she eventually settled as a technical engineering contractor for various auto-related companies. She is now semi-retired and living in the Denver area.