Kentucky savors bounty of its Toyota prize. But was price for newest factory in `Auto Alley' too high?
IT IS a politician's delight - a sprawling, spanking-new Toyota factory set on 1,300 acres of Kentucky bluegrass, a concrete-and-steel generator of jobs, tax revenues, and economic growth. Toyota's new Georgetown, Ky., factory will be dedicated next week. The first Kentucky-made Camrys - a car praised by automotive and consumer magazines - emerged during the summer, joining the Ohio-made Hondas, Tennessee Nissans, and Michigan Mazdas that are rolling out of Auto Alley, the new Japanese-American automotive corridor that stretches from Michigan to Tennessee roughly along Interstate 75.
Toyota will eventually employ 3,500 Kentuckians. It will have a $100 million annual payroll. To get one of these prizes, American mayors and governors have been ardently wooing Japanese business, making pilgrimages to Tokyo, offering free land, tax incentives, new roads, and other perks to get the factories to locate in their districts.
``We let companies like Toyota know that they would have the resources and the work force they need,'' noted Martha Layne Collins, former governor of Kentucky, at a recent economic conference in Louisville. ``We worked hard to get Toyota.''
Is it fratricide?
In the courting process, however, states and cities often end up bidding against each other. Critics call this shortsighted and say the price too high.
``The real flaw is that these firms have every intention of coming to the United States and would do so without the incentives,'' says Susan Tolchin, co-author of ``Buying into America'' (Times Books, New York), a study of foreign direct investment in the US.
``Whether they would choose Kentucky over Tennessee is another matter,'' says Dr. Tolchin. ``But to have all this economic fratricide is wasteful.''
Tolchin points out that interstate competition for foreign business is a new phenomenon, dating only from the late 1970s. Several governors have lobbied for ceilings on incentives, and politicians such as former Governor Collins have taken heat for ``giveaways.''
But Ms. Collins says it's a simple equation for a state leader: ``Economic development is a business, and you must weigh the investment and the return. I don't see it as a giveaway.''
Indeed, the return looks very attractive. For its investment in Toyota, the state should get a 25 percent return, according to a University of Kentucky economic analysis. That would be well above the interest rate state money could have earned on bonds or stocks:
Total state investment, according to this detailed analysis, will approach $325 million by the year 2006. This includes the cost of land purchased, site preparation, highway improvements, and employee training and education.
Return will amount to $636.6 million by the year 2006. This includes tax revenue from Toyota, its employees, and its suppliers.
Toyota itself is putting $824 million into plant and equipment and $24 million in site preparation. The University of Kentucky analysis figures that supplier plants will invest another $700 million.
The jobs issue
That's not all. Using the ``multiplier effect'' - the way the new factory will cause other businesses to grow and prosper - this study figures that Toyota could create 35,000 new jobs in the state in all.
Even so, critics charge that politicians are simply making it easier for Japanese companies, known as ``transplants,'' to displace US companies. Anthony Harrigan of the US Industrial Council, a Washington, D.C.-based group that is concerned over US industrial security, says that governors ``see foreign transplants as a quick fix for their states' lagging economies.''
He adds that ``while they may be a quick fix on a local basis, these foreign-owned factories destroy more jobs than they create. American firms go under as a result of subsidized foreign competition.'' But just how this would happen in the auto industry is unclear.
On the surface, it does look grim for automakers. Forecasters say that by 1990 these new Japanese factories will be producing so many cars that they will be pressing American companies to the wall. The Automotive Parts and Accessories Association talks of ``rampant excess capacity.'' While that might be good news for auto buyers, it could mean trouble for automakers.
For now, however, the Big Three - General Motors, Ford, and Chrysler - are prospering. And their planners are fully aware that the market is going to get more competitive. In fact, all three have alliances with Japanese companies and are partners in manufacturing facilities in the US.
What happens to smaller suppliers as these foreign giants move in is very difficult to determine. Subcontractors constantly come and go for all sorts of reasons, from poor planning to displacement by competitors. Initially, at least, Japanese auto companies are relying on both Japanese and American subcontractors for parts.
Toyota officials, however, say they have no intention of simply throwing business to Japanese or Japanese-American suppliers. They say they will go for the best quality and the best price.
``We're looking for quality-oriented suppliers for long-term relationships,'' says Alex Warren Jr., Toyota's senior vice-president in Georgetown. About 200 American suppliers have already been signed up in 14 states. If American suppliers can deliver, Mr. Warren says, their proximity will make them very attractive to Toyota.
Still, Mr. Harrigan and others are concerned that while these Japanese factories might assemble products in the US, high-value components - engines, transaxles, electronics - are mostly imported.
Last April, however, Toyota started construction on a $300 million power-train plant next to the assembly plant in Georgetown. It will employ 500 workers and begin producing axles this fall, engines next year, and steering assemblies by 1991. Local content in the power train will be 75 percent. Overall, Toyota aims for 60 percent domestic content.
``This is not a transplant,'' says Toyota's Warren. ``We have taken Kentuckians and trained them to manufacture this car. Toyota offered many people an opportunity to stay in Kentucky and have good, solid employment.''
Warren points out that factory construction goes to local contractors, natural gas comes from Kentucky, and fuel comes from Kentucky's Ashland Oil.
``We have consciously tried to benefit the locale,'' he says.
Around the Toyota factory, where everyone from bosses to workers wears navy-blue shirts and khaki trousers, there appears to be a fervently pro-company spirit. At a company ceremony marking the production of the first Camry in May, Rob Wehrle, who works as a body welder, commented that ``before I joined the Toyota team, I was a person without a promising future. Toyota has given me a new outlook on life.''
No doubt part of this positiveness comes from the very extensive employee selection program that Toyota conducts. Attitude is as important as automotive job skills, or more so. Personnel director Sam Heltman puts job applicants through a series of tests that include determining whether they are team players.
``An individual who prefers to work alone wouldn't be very happy here,'' Mr. Heltman says.
Applicants must also do a six-hour assembly test and then try to improve the assembly process - to see if they can contribute to keizen, the continuous improvement in quality that Japanese companies demand.
An egalitarian culture is promoted. Although visitors are conducted into a sleek conference room with ikebana floral arrangements, Warren's desk and those of top Japanese managers are side by side and out in the open. Perks, such as executive dining rooms and reserved parking, don't exist.
One concern often expressed about employment practices at Japanese factories is that career advancement is limited, that top management remains Japanese. Warren, the top American at the Georgetown factory, notes that ``as we learn the production system, many of the 60 Japanese managers could be replaced with Americans.''
But, he adds, ``You don't come to this company with the expectation of a senior management position. I would not expect to go and live in Japan. My value is here, not in Japan.''
So with US-made Camrys now hitting US roads, Toyota officials and former Governor Collins assert that the state got good jobs at good wages. She notes that while Toyota was the prize, existing businesses in Kentucky and out of state frequently get relocation incentives, too.
And with a politician's deft turn of phrase, Collins adds, ``I'd rather subsidize Toyota than subsidize unemployment.''