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Making Re-Shoring a Reality

Keeping the auto industry on American soil

By James Amend

Pages 12-13When General Motors (GM) started scouring its global manufacturing network for a site to assemble an all-new subcompact passenger car meant to meet growing consumer demand in the U.S. for greater fuel efficiency, the Detroit automaker’s Asia-Pacific operation was a leading candidate.

An increasingly skilled workforce combined with the region’s historically low wage demands seemed to make South Korea or China a lock for off-shore assembly of the new car and, with some luck, profitably.

But limping toward bankruptcy and knowing the automaker needed to build more cars in the U.S. to keep factories in its most profitable region humming, GM executives floated a long shot offer to the UAW, during their 2007 labor contract negotiations.

In a landmark agreement between GM and the UAW, that in turn impacted contracts with Ford and Chrysler, a two-tier wage agreement reduced U.S. costs to global standards, enabling the production of cars like the Chevy Sonic to return to Michigan. This arguably set in motion today’s widening trend of re-shoring work to America that was previously considered more cost-effectively done overseas.

“This is a business model that works for us, especially in the U.S. where we’re running lean and efficiently with production capacity sized to meet market demand,” said Diana Tremblay, vice president of manufacturing at GM North America.

Tremblay calls the plan “build where you sell.” This strategy sharply reduces logistical costs, and during times like these when production levels so closely match consumer demand, assembly plants work around the clock to send profits through the roof.

Re-shoring is playing a key role in the resurgence of GM, Ford and Chrysler.

Since improving manufacturing capacity utilization by restructuring in 2009, the Detroit Three are all reporting record profitability and last year each was solidly in the black for the first time since 2004.

Results are so strong in their North American home market, the strong profits are helping GM, Ford and Chrysler survive the downturn in the struggling European region.

The “Made in Detroit” trend is spilling over into other manufacturing industries, too.

The Boston Consulting Group (BCG) estimated in a study earlier this year that large and small U.S. manufacturers will add around $100 billion in manufacturing output in the country this decade through re-shoring and create upwards of a million direct jobs.

According to BCG analysts, total job additions could reach three million and significantly dent the U.S. unemployment rate and trade deficit.

The Detroit Three plan for $18.3 billion of manufacturing investments in the U.S. over the coming years, retaining or creating more than 30,000 jobs directly and thousands of other jobs at parts suppliers and other businesses supporting the automotive industry’s work.

In Michigan, GM has invested $2.9 billion and created 8,400 jobs, including $140 million at its Orion Township assembly plant north of Detroit, to make the Sonic. The Orion investment saved 1,200 jobs.

Since 2009, Chrysler has invested about $1.7 billion in its Michigan manufacturing operations, creating or retaining upwards of 5,000 jobs.

Ford’s investments in its Dearborn and Flat Rock assembly plants, which are part of a $6.2 billion outlay for its U.S. manufacturing operations, will create 2,400 new jobs.

Dave Cole, chairman of the Ann Arbor-based AutoHarvest industry collaboration initiative and chairman emeritus of the Center for Automotive Research, said a newly competitive wage structure represents just one of the factors compelling the Detroit Three to re-shore.

“There are a lot of factors lining up here to make build-where-you-sell more sensible than ever before,” he said.

Chief among them is a movement by the Detroit Three to common global architectures, or the platform of parts and structures under a vehicle’s skin that consumers rarely see. Common architectures make assembly plants capable of building more than one product and automakers more nimble to respond to changes in consumer preferences.

The importance of flexibility to assembly today cannot be overstated. For example, Ford’s former Atlanta assembly plant built the award-winning Ford Taurus sedan and in 2006 was ranked as the most productive facility in North America. But as a one-trick pony in an industry moving toward greater manufacturing flexibility, it was shuttered in 2006.

Ford’s Michigan Assembly Plant stands in stark contrast. It too once operated as a single-product facility, feeding a seemingly insatiable demand for large sport utility vehicles (SUV) in the previous two decades by cranking out Ford Expeditions and Lincoln Navigators. With large trud-based SUVs falling out of favor, the plant’s transformation into a builder of next generation cars makes it capable of building gasoline-powered, hybrid, plug-in hybrid and full electric vehicles under one roof.

“We can significantly create new jobs, invest in our plants and people, and make a very positive impact on the U.S. economy,” Ford Chief Operating Officer Mark Fields said when he announced the Michigan Assembly investment as part of the automaker’s newest UAW contract.

Until just recently, GM’s North American and European operations would attach key points on the frames of its vehicles differently. One region would weld the frames and the other bolted them together. The small difference made platform consolidation and build-where-you-sell impossible on certain products.

“That’s just a simple little thing,” Cole said. “But when you cascade those common items through a vehicle, it makes it much easier to move production around the world.”

Common platforms also trim manufacturing costs.

At GM’s Delta Township assembly plant outside of Lansing, the investment in robotic equipment to build the automaker’s popular large crossovers could have easily been covered by the scale of the product program. But by using common platform parts from other GM vehicles, the investment in the robots was halved, freeing up millions of dollars the automaker could allocate elsewhere in its organization.

Ford’s investment plan calls for production of its medium-duty trucks to soon move to Ohio from Mexico. The Flat Rock plant will start supplemental output in 2013 of the all-new Ford Fusion midsize sedan. Ford previously produced the Fusion exclusively in Mexico.

Bringing work back to the U.S., however, poses some risk.

Automakers are eager for suppliers to ramp up production in support of their plans, but parts makers for the first time in years are seeing strong profits because demand for their products is brisk after competition in the sector shrank during the recession. If suppliers expand too much, automakers could squeeze their pricing and jeopardize their new windfalls.

Job training must also strengthen. Hourly jobs on the assembly line today often require education beyond the high school diploma. That is a fact other countries are keenly aware of as they fight to retain automobile production.

“We are at serious risk if we do not have competency in the industry,” Cole said.

The two-tier wage system making much of the recent re-shoring possible will also evolve. UAW contracts with the Detroit Three call for raises down the road. Some wage increases have already been made and by 2015, workers hired in at the lower amount could be making a full paycheck. The UAW wants those wages to kick in as soon as possible because they fear the compensation disparity might create division in the workforce.

For now, the wage structure is bearing fruit at facilities such as GM’s Orion plant. Shortly after production of the Sonic began there, GM started making a slightly larger and more luxurious Buick Verano sedan at the plant. As such, the facility is making two compact cars profitably, an achievement unthinkable just a few short years ago.

James Amend is a Metro Detroit freelance writer.