Full text of Chicago Fed Letter : The U.S. Auto Supplier Industry in Transition, No. 226

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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

MAY 2006
NUMBER 226

Chicago Fed Letter
The U.S. auto supplier industry in transition
by Thomas H. Klier, senior economist, and James M. Rubenstein, professor, Miami University of Ohio

Evolving relations between carmakers and their parts suppliers have resulted in local,
regional, and international shifts in the location of production. An upcoming Chicago Fed
conference in Detroit will examine these ongoing structural changes, which are affecting
the prospects for the U.S. auto industry’s continued concentration in the Midwest.

Motor vehicle production involves two
types of firms: makers of parts (suppliers) and assemblers of finished vehicles
(carmakers). The latter are better known
to consumers because they market the
vehicles with their
brand names. However,
1. U.S. motor vehicle production and employment
suppliers employ three
and a half times more
employees (thousands)
light vehicles produced (millions)
people and add about
20
1,000
60% of the value of a
finished vehicle.
800

16

600

12

400

8

200

4

0

0
1990 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 2000 ’01 ’02 ’03 ’04 ’05

U.S. auto parts employment (thousands)
U.S. auto assembly employment (thousands)
Total light vehicle production in the U.S. (millions)

Over time parts makers
have taken on more
responsibility in the
vehicle production
process so that an increasingly important
factor influencing the
competitiveness of carmakers is the strength
and constructiveness
of their relationships
with their suppliers.

This Chicago Fed Letter
NOTE: The shaded areas are recessions as identified by the National Bureau
sets the stage for a conof Economic Research.
ference on this topic,
S OURCES: U.S. Bureau of Economic Analysis and Federal Reserve Board from
Haver Analytics.
titled “The Supplier
Industry in Transition:
The New Geography of
Auto Production,” which is to take place
on April 18 and 19, 2006, in Detroit (for
details, please visit www.chicagofed.org/
news_and_conferences/conferences_
and_events/2006_auto.cfm). Structural

changes in supplier–carmaker relationships have produced geographic shifts
in production on three scales. On the
local scale, close spatial networks and
time-dependent relationships have
formed between vehicle producers
and key parts suppliers. On the regional
scale, production has shifted from the
Midwest to the South as new vehicle producers and parts suppliers entered the
U.S. market and as sales of longtime domestic players declined. On the international scale, vehicles assembled in the
United States contain an increasing
percentage of parts produced overseas.
Local scale supplier–carmaker
networks

Carmakers traditionally made most
parts themselves and purchased the
remainder through annual contracts
with the lowest bidder. Now they outsource entire integrated modules to
suppliers on multi-year contracts.
This shift in responsibility from carmakers to suppliers is reflected in employment changes. In 1990, 239,000
assembly plant employees and 653,000
supplier employees produced 9.5 million vehicles in the United States. In
2000, after a decade of record high
production, 237,000 assembly plant
employees and 840,000 supplier employees produced 12.3 million vehicles
(figure 1).

structure of an asthe delivery of parts produced elsesembly plant located
where to the assembly line.
in the auto region.
vehicles sold (millions)
Accordingly, assembly Regional scale shifts in plant location
15
plant openings or
Historically, most parts were made in
closings exert a conthe Midwest and shipped to final as12
centrated geographic sembly plants spread across the counimpact that radiates
try near population centers, such as
9
outward. Recent
Boston, New York, San Francisco, and
trends show no abate- Los Angeles. Since 1980, nearly all fi6
ment in this regard.
nal assembly plants in coastal states
The assembly plants
have been closed, and new ones have
that opened in the
been constructed in the interior of the
3
deep South during
country, primarily in a north–south corthe last few years seem ridor formed by Interstate Routes 65
0
1990 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 2000 ’01 ’02 ’03 ’04 ’05
to rely to a larger ex- and 75, between the Great Lakes and
tent on dedicated
the Gulf of Mexico. Locating assembly
Big Three
supplier facilities, of- operations in the interior has minimized
Foreign nameplate—domestic
Foreign nameplate—imported
ten located in suppli- the cost of shipping finished vehicles to
er parks adjacent to
consumers, as well the cost of shipping
NOTES: The shaded areas are recessions as identified by the National Bureau of
Economic Research. Foreign nameplates that are owned by the Big Three are
the assembly plants
parts from suppliers in the Midwest.1
included in both foreign nameplate categories.
themselves. Some of
During the 1980s, most of the new asSOURCE: Ward’s.
these dedicated supsembly plants were located in a relatively
plier operations in
small area, encompassing central Illinois,
turn are geared toIndiana, and Ohio in the north and
Suppliers are now required to deliver
ward primarily performing logistics
central Tennessee in the south. While
integrated modules to final assembly
functions, such as kitting and sequencing
the drift was southward, connections
lines on a just-in-time basis, that is, with
short order-to-delivery lead times. Ac3. Changing geography of auto parts suppliers, by plant density
cordingly, some suppliers have found it
necessary to locate production within
minutes of the final assembly plant,
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while others have located within a
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one-day driving radius of several hun●
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dred miles. Still, others have remained
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beyond the one-day radius, though they
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often depend on logistics specialists to
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facilitate timely pick-up and delivery
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2. Big Three and foreign nameplate auto sales

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Our research indicates that this geographic pattern is typical of the supply

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In general, engines, transmissions, seats,
and large body stampings tend to be
produced relatively close to final assembly plants. Honda’s two central Ohio final assembly plants, for example, receive
engines, transmissions, and seats from
suppliers within a 25-mile radius. Other
key supplier plants, producing parts such
as instrument panels, wheels, lighting,
glass, and exhaust systems, are found
within 200 miles of an assembly plant.
Finally, electrical components, as well
as subassembly parts delivered to seat
and powertrain plants, are more likely
to be located farther away.

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200

Miles

SOURCES: ELM International, state manufacturing directories, and supplier company websites.

300

4. Regional change in auto industry employment
2001

2005

change
(percent)

224.1
88.5
124.6
488.2
927.7

–23.0
–8.6
–11.8
–6.8
–11.9

(thousands)
Michigan
291.2
Indiana
96.8
Ohio
141.3
Rest of the U.S.
524.1
U.S. total
1,053.4

S OURCE: U.S. Bureau of Labor Statistics from Haver Analytics.

to the traditional Midwest center were
largely maintained. Since 1990, many
of the new assembly plants have been
sited in the deep South, centering on
Alabama and Mississippi.
The continued drift southward reflects
not only the siting decisions for new
plants, but also the changing fortunes
of various carmakers. Since 1980, the
share of the U.S. market held by the
traditional Big Three of Chrysler Group,
Ford, and GM has declined from 75%
to 54%. Most of the decline has occurred
since 1999 (figure 2). Foreign carmakers have been responsible for opening
14 of 18 new assembly plants since 1980,
excluding those designed to replace
older ones in the same metropolitan
area, and they have strongly favored
southern locations. As the Big Three
have closed most of their coastal and
southern plants, they have pulled back
to their traditional Midwest home. Their
U.S. production facilities are now more
concentrated in the Midwest than they
were 20 years ago.
Suppliers have followed the foreign carmakers to the South. Today, the Midwest
has 61% of all supplier plants, compared
with 28% in the South. Prior to 1980,
69% of all supplier plant openings were
sited in the Midwest, compared with only
19% in the South; however, since 1980,
only 59% of supplier plant openings have
been sited in the Midwest, compared
with 34% in the South. Again, foreign
companies have been responsible for a
disproportionate share of the movement
southward. The Midwest is home to 66%
of domestic supplier plants compared
with only 47% of foreign-owned ones,
whereas the South contains only 23%
of domestic supplier plants compared
with 42% of foreign-owned ones. As a

result, the auto corridor is increasingly divided into a northern
portion dominated by
domestic suppliers and
Big Three assembly
plants and a southern
portion dominated by
foreign-owned suppliers
and assembly plants.

The principal reason
for the southward movement of final
assembly and supplier plants concerns
organized labor. Foreign-owned companies have been especially eager to
avoid traditional concentrations of auto
workers, especially unionized ones;
14% of foreign-owned supplier plants
are unionized compared with 34% of
domestically owned ones. The contrast
is more extreme with final assembly
plants: The Big Three plants are all
unionized compared with only three
of the 18 foreign-owned ones.
On the regional scale, this movement of
the auto industry to the South represents
a partial unraveling of the agglomeration that has dominated this industry
for many years (see figure 3).
International scale change in
production

The United States imported $77 billion
of motor vehicle parts in 2004, accounting for 27% of the total market. The
nominal value of net imports rose from
$7 billion in 1997 to $30 billion in 2004.2
The rise in level of net imports of motor vehicle parts, which has accelerated
since 2001, helps explain the break in
the traditional relationship between auto
production and auto industry employment, shown in figure 1. Production of
light vehicles changed little between
2001 and 2005, whereas employment
declined by 10% from 236,000 to 212,000
among final assemblers and by 13%
from 775,000 to 678,000 among suppliers of motor vehicle parts.
Productivity improvement has been an
ongoing contributor to declining employment. The McKinsey Global Institute
estimated that productivity in the U.S.
motor vehicle industry increased by
3.3% per year between 1987 and 2002,

compared with the national average of
2.1%.3 The larger drop in motor vehicle
parts employment is related to a number of additional forces. The market
share of vehicles imported from overseas has grown by 10 percentage points
in the last decade. These vehicles embody parts that have primarily been
produced outside the U.S. In addition,
direct imports to the U.S. of motor vehicle parts continue to grow solidly. Finally,
in conjunction with the market share
losses experienced by the Big Three,
concomitant exports of U.S. made vehicle parts to assembly facilities located
in Canada and Mexico have leveled
off since 2001.
Challenges for the Midwest

Figure 4 illustrates the extent of the
structural changes currently shaping the
U.S. auto industry. As the influence of
the traditional domestic carmakers over
the domestic market wanes, it is important to note that the carmakers whose
market share is growing and their related supplier base have a different geographic footprint. While the domestic
auto industry is doing well overall, with
production of light vehicles averaging
11.7 million units over the last five years,
the changing fortunes of individual

Michael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research; Douglas
Evanoff, Vice President, financial studies; David
Marshall, Vice President, macroeconomic policy research;
Richard Porter, Vice President, payment studies;
Daniel Sullivan, Vice President, microeconomic policy
research; William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Kathryn Moran, and Han Y. Choi, Editors; Rita
Molloy and Julia Baker, Production Editors.
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carmakers have strong geographic implications. That presents a challenge to
the Midwest region and many of its communities. Motor vehicle assembly and
parts employment in the U.S. fell by just
under 12% since 2001. However, that
aggregate number masks rather dramatic regional differences: Michigan, the
state by far most concentrated in this
industry, has lost 23% of its auto industry jobs in that time period. The traditional auto industry states of Michigan,
Indiana, and Ohio as a group lost 17.4%.
The rest of the country, in this case primarily the southern end of the auto
region, has lost only 6.8%—a decline

as the final product has to be shipped all
over the country from that one production location. See Thomas Klier, 2005,
“Determinants of supplier plant location:
Evidence from the auto industry,” Economic
Perspectives, Federal Reserve Bank of
Chicago, Vol. 29, No. 3, Third Quarter,
pp. 2–15.

that is two and a half times smaller than
what the three core states experienced
and just over half the overall U.S. decline
in auto industry jobs. As these developments play out, this industry and its
traditional core region are facing a painful adjustment to a new geography.
1

The reconcentration of assembly plants in
the heart of the country was driven by an
increase in the choice of models available
to the consumer that far outpaced the
growth of the market, resulting in much
reduced production runs per model. As a
result, individual models tend to support
only a single assembly plant. That plant is
then best located in the heart of the country,

2

For details, see Thomas H. Klier and
James M. Rubenstein, 2006, “Competition
and trade in the U.S. auto parts sector,”
Chicago Fed Letter, Federal Reserve Bank
of Chicago, No. 222, January.

3

McKinsey & Company, McKinsey Global
Institute, 2005, Increasing Global Competition
and Labor Productivity: Lessons from the U.S.
Automotive Industry, report, New York,
November, p. 9.