Can Auto Manufacturing Still Power Local and Regional Economic … Industry Report... · labor and overall pressure on U.S. wages. Employment in the auto industry has declined, following

Can Auto Manufacturing Still Power Local and Regional Economic Performance?

November 2014 Analytical Services Division

Auto Sales: Can They Continue to Drive Growth? November 2014

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Overview

The Great Recession was a transformative event for the US auto industry. The disastrous decline in auto sales and production, the ensuing federal bailout of General Motors and Chrysler, and the slow improvement in sales that was a consequence of the sub-par economic recovery all contributed to the fundamental reshaping of the industry. For municipal bond analysts, this metamorphosis was embodied in the bankruptcy filing of the City of Detroit on July 18, 2013. Given the new shape of the US auto industry, pertinent questions arise for analysts: Is the auto industry still as relevant as a barometer of economic activity? Is auto-related activity still a powerful driver of state and local economic activity? How much does the industry contribute to state and local tax revenues? In order to understand how the post-recession dynamics of the industry have altered the answers to these questions, this paper provides an analysis of the current trends in the auto industry, and the industry’s current impact on regional economic growth, and state and local government finances. We then draw conclusions about potential credit implications.

Sales Trends and Industry Outlook

The auto industry was in a lengthy state of decline in terms of international competitiveness and US domestic market share for decades, even before the Great Recession struck. The financial crisis and recession have had a devastating impact on the auto industry. In the first half of fiscal 2009, annualized sales dipped to their lowest rate since 1981. General Motors and Chrysler, the number one and number three domestic producers, declared bankruptcy, leading some to question the very survival of the sector. The controversial federal government bailout and restructuring that was crafted to respond to the crisis broke many historical patterns and established a

new version of the industry in the ashes of the old. While far from a smooth transition, since that low, auto sales have steadily increased and are now roughly equivalent to pre-recession levels.

In the first half of 2009, annualized sales had dipped below 10 million, threatening the very survival of domestic auto industry. In 2014 total US auto sales have surpassed 16 million (annualized) each month since March 2014, the levels last seen before the credit crisis began in mid-2007. Sales of domestic vehicles recently rose above 13.0 million, the highest level since Q1 2006.

Source: Fred, Loop Capital Markets

While the year-over–year growth rate of total auto sales has cooled from its torrid pace of about 10% in the summer of 2013, the growth rate remains positive and well ahead of real GDP growth. Based upon historical sales, high average age of the auto fleet, availability of financing at low rates and with lengthy terms on auto loans, a sustained period of sales between 17 and 18 million units is in sight, assuming economic growth sufficient to continue to improve labor market conditions and boost personal income growth.

Vehicle and parts manufacturing have traditionally been an important part of state economies in Midwestern and southern states. If 2014 YTD sales levels prove sustainable, there will be a positive impact on regional economic growth, employment, personal income, and in state and local collection of tax revenues.

The automobile market recovered significantly in 2014 from the impact of the global financial crisis, buoyed by economic recovery and pent-up demand. Future sales growth depends on several factors, first and foremost the continuation of economic expansion.

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Total Vehicle Sales SAAR (Million)

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Real GDP Growth vs. Vehicle Sales

GDP Growth Total Vehicle Sales Y-O-Y Growth


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The Federal Reserve and many private economists forecast continued U.S. economic growth in a 2-3% range for foreseeable future. Improving macroeconomic conditions in the U.S., evidenced by declining unemployment, gradual recovery of the housing market and low interest rates are favorable for sales growth. It should be noted that the Eurozone financial crisis adversely affected the operations of many global automakers, especially General Motors and Ford, who have a significant exposure to struggling European auto market.

The average age of all cars and trucks reached 11.4 years in August 2013, an all-time high, and remained at that level in January 2014. In 2003, the average age was 9.7 years.1

The number of vehicles scrapped in 2013 was significantly lower than in previous years, with just over 11.5 million vehicles scrapped vs. a record high of more than 14 million vehicles that were scrapped in 2012. The number of vehicles in operation was up 1.5% in 2013, a rate the auto industry hasn’t seen in the U.S. since 2004-2005.

Strong pent-up demand due to aging vehicles on U.S. roads and declining gas prices are boosting automobile sales in the nation. The high average age is resulting in high replacement demand for cars, as drivers put off buying new cars during the recession.

Despite this dynamic, the average vehicle age is expected to remain high, in no small part due to increasing quality of today’s automobiles. Looking ahead, IHS forecasts that average age of vehicles is likely to remain at 11.4 years through 2015, then rise to 11.5 years by 2017 and 11.7 years by 2019.

Moreover, an improving general economic situation and low interest rate environment are prompting banks to offer favorable financing. Low interest rates have been a major growth driver in the industry.

Total loan originations continue to grow for customers in all credit score brackets.

Based on these and other considerations, industry research firm Edmunds forecasts 16.4 million sales in 2014, with potential for numbers to ‘hit higher than that’.

Consultants LMC Automotive raised its full-year forecast for 2014 to 16.4 million vehicles from 16.3 million vehicles. LMC also forecast 2015 U.S. sales at

1 Polk/IHS Automotive

16.7 million vehicles, "with more upside potential than downside risk”.

IHS Global Insight’s forecast for 2014 is 16.6 million.

Potentially robust auto sales will improve economic conditions in states with significant auto industry, boosting employment and personal income, government tax revenues and expenditures.

Current Industry Employment

The reshaping of the industry has brought it to a state where employment is significantly lower than before the recession. The average worker compensation has fallen due to the substitution of non-union for union labor and overall pressure on U.S. wages.

Employment in the auto industry has declined, following the trend in manufacturing in general, due to rising productivity, outsourcing and elimination of trade barriers, which has increased the availability of foreign produced autos. From peak employment in June 2000, vehicle and parts manufacturers shed 53% of the workforce by the time the economy hit bottom nine years later. Employment in vehicle repair and dealerships, however, has been much more stable.2

The decline in auto manufacturing employment was more severe than in the overall manufacturing sector, although increased international competitiveness of U.S. manufacturing and improving macroeconomic and auto industry conditions hold promise for a return of employment to a share of Total Manufacturing closer to the peak levels attained in 2004.

2 Bureau of Labor Statistics

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Auto Employment - Normalized Growth

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Source: Bureau of Labor Statistics


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Weekly hours metric has responded to the current level of sales by increasing to pre-recession highs, not seen since the mid-90s. However, hourly earnings continue to lag both in nominal and real terms.3 Wages in traditionally heavily unionized Midwestern auto manufacturing plants are pressured not only by outsourcing and overseas competition, but also competition from non-unionized workforce in southern states. Consequently, real hourly earnings have been steadily declining since November 2002.

US Auto Manufacturers

Despite significant changes in the industry over the last decade, the US remains one of the largest automotive markets in the world. As of the end of 2012 the nation was home to 13 auto manufacturers, producing an average of over 8 million vehicles each year between 2008 and 2012. Total annual sales were 12.7 million, on average, over the same 4-year period.

The current combined U.S. market share of GM, Ford and Chrysler 2014 YTD is 45.4%4. Including cars built in the U.S. by foreign manufacturers (Toyota, Honda, Nissan etc.), about 78-79% of cars sold in the U.S. are considered domestic.

3 Bureau of Labor Statistics 4 Autodata Corporation

A recent study quantified the trickle-down effect of automotive employment, concluding that every direct GM job supported 11.6 jobs in the rest of the U.S. economy in 2013.5 The estimated employment multiplier within Michigan was 5.5. With a smaller share of the U.S. automotive supplier base, the employment multiplier for Tennessee was estimated at a lower, but still potent, 4.4.

Based on an upbeat sales forecast, Ford increased production at its Kansas City, Missouri plant, adding production workers and enabling the plant to achieve the highest production output in the world. The increased production shift will focus on manufacturing transit vehicles like commercial vans and Ford F-150 trucks.6

Chrysler, which is owned by Fiat, has enjoyed rising demand for the company's pickup trucks and sport-utility vehicles. Today, Fiat Chrysler is the world’s seventh-largest carmaker and aiming to revamp aging factories and product lines to increase market share.7

Tesla Motors’ sales of electric cars are not as of yet a major factor in auto employment. Tesla, however, may employ up to 6,500 people in a new $5 billion factory to produce lithium ion batteries for electric cars east of Reno. Nevada officials are hoping that the

5 “Economic Contribution of General Motors’ Orion Assembly, Pontiac Metal Stamping, and Spring Hill Assembly Manufacturing Plants”, Center for Automotive Research, February 2014 6 “Ford Will Benefit From Recovery In North America”, IAE Research, 7 “Fiat Chrysler Dives Into New York Markets”, Sylvers and Rogers, The Wall Street Journal, October 9, 2014

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Vehicle and Parts Manufacturing - Weekly Hours


# Vehicle Deliveries Jan-Sep 2013 Jan-Sep 2014 Growth

1 General Motors Corp. 2,117,459 2,207,888 4.3%2 Ford Motor Company 1,887,672 1,877,715 -0.5%3 Toyota Motor Sales U.S.A. Inc. 1,698,179 1,794,788 5.7%4 Chrysler LLC 1,357,003 1,556,059 14.7%5 American Honda Motor Co. Inc. 1,159,012 1,160,605 0.1%6 Nissan North America Inc. 941,116 1,063,272 13.0%7 Hyundai Motor America 548,218 557,458 1.7%8 Kia Motors America Inc. 416,383 445,017 6.9%9 Volkswagen Group of America Inc. 431,593 404,204 -6.3%10 Subaru of America Inc. 313,407 375,485 19.8%11 BMW of North America Inc. 262,485 276,394 5.3%12 Daimler AG 236,959 259,075 9.3%13 Mazda Motor of America Inc. 220,490 240,953 9.3%14 Mitsubishi Motors N. A., Inc. 44,981 58,365 29.8%15 Jaguar Land Rover N.A. LLC 47,806 50,254 5.1%16 Volvo Cars North America LLC 48,193 43,851 -9.0%17 Porsche Cars N.A. Inc. 31,550 35,366 12.1%18 Tesla Motors, Inc. (U.S. Mkt. Est.) 14,301 13,850 -3.2%19 Maserati of N.A. Inc. 2,241 9,124 307.1%20 Ferrari of N.A. Inc. 1,539 1,582 2.8%21 American Suzuki Motor Corp. 5,949 0 -100.0%

Total 11,786,536 12,431,305 5.5%

Source: Autodata


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project will create up to 22,000 jobs overall in the state.

Toyota, Honda, Nissan and Hyundai are major foreign companies with assembly plants in the U.S. With a few exceptions, unionized Big 3 assembly plants are clustered in the Midwest, while foreign companies with US operations chose southern states with lower labor costs.

Parts Suppliers

The largest sub-segment of the auto parts industry is the diversified suppliers, while tire manufacturers comprise the second largest sub-segment. The largest US-based diversified parts manufacturers are:

1. Johnson Controls (seating systems, interior systems and batteries)

2. TRW Automotive Holdings (systems, modules and components, including safety systems)

3. Lear Corporation (electronics, wireless, audio)

4. Tenneco (suspension, exhaust, emission, noise control)

5. Visteon Corporation (climate control, electronics, interior, lighting)

6. Federal-Mogul Holdings (powertrain, engine, steering, braking, etc.)

Parts are sold either to original equipment manufacturers (OEMs), with sales dependent on new vehicle sales, or to parts wholesalers that operate in the aftermarket segment.

The outlook for the aftermarket auto parts industry remains positive, even as new cars sell at their fastest

rate since 2007, which benefits OEM suppliers. Most new car sales involve a trade-in or private sale, and those vehicles find their way into the hands of new buyers. The increase in the average vehicle age to 11.4 years suggests drivers will be performing repair and maintenance necessary to keep preowned cars on the road for the longest stretch in history.

Japanese-owned Bridgestone Corporation, Akron Ohio based Goodyear Tire and Rubber Co., along with France’s Michelin dominate the tire business.

Southern Michigan and Indiana have the largest concentration of vehicle parts manufacturers.

While many jobs formerly held by Americans do go offshore, some offshore jobs are returning to U.S. soil. This trend is most evident in the automotive industry–nearly every major automaker has operations in the U.S. America is the world’s largest market for automobiles, and considering the cost of transporting cars and trucks, proximity to the customer is especially important.

Also, U.S. based manufacturers have a competitive advantage in producing sophisticated electronic components for increasingly complex automotive designs.

Tax Incentive Impact on Auto Industry

The first major modern tax incentive for the United States automotive industry came in 1985 with General Motors. GM had announced its new Saturn line and began to take proposals for tax incentives in order to help attract the production facilities. Some 30 states


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put in bids with various levels of tax breaks. Eventually GM chose Tennessee, not because of its tax proposal (it did not offer the largest package), but because it was seen to be better for parts and product logistics. In 1992 BMW built a production facility in South Carolina due to a tax incentive package valued at $130 million. Two years later, 1993 saw Mercedes Benz opening a facility in Alabama with the state promising a $300 million tax incentive package. States bidding on automotive production facilities have become relatively commonplace by this point.

In 1998, Toledo Ohio lured DaimlerChrysler’s new Jeep assembly plant by offering a $280 million package including tax exemptions and credits. This deal was challenged in court by 18 local taxpayers who claimed that the laws that allowed tax exemptions and credits were illegal because they offered preferential treatment to DaimlerChrysler and unfairly shifted the tax burden. This case (DaimlerChrysler Corp. v. Cuno) eventually made it the United States Supreme Court which heard arguments from The National Governors Association advocating for tax incentives in order to maintain competitiveness with overseas labor markets. The court decided to unanimously confirm the legality of the DaimlerChrysler deal, helping to provide a more definitive legitimacy to automotive tax incentives as a standard practice.

Since 1985 there have been approximately $14 billion in tax incentives for automotive companies according to the Center for Automotive Research. These incentives have been spread over 34 states with 865 separate incentive packages noted by the Subsidy Tracker database compiled by Good Jobs First, a policy group devoted to government accountability in economic development. Analyzing this data we see that incentives are not uniformly distributed across the states, with Michigan offering the largest number of incentives by far with 283, compared to the next highest which is Kentucky with 86. Across all states that have offered incentives, the average number of tax incentives offered to major automotive companies is slightly higher than 25.

As is discernable from previous graph, Michigan has offered more major automotive company tax incentives than any other state. This is partially influenced by the state of Michigan’s strong historical ties to the auto industry. When we compare the values of the tax incentive packages Michigan has offered to automotive companies compared to state’s total tax revenues, we see that these packages have been an aggressive part of Michigan’s tax policy. In the years 2009-2011 the state of Michigan offered automotive companies tax incentives amounting to greater than 10% of Michigan’s total tax revenues.

While the tax benefits of maintaining auto industries are many, the costs involved with attracting and growing these industries must also be considered, including the amount of tax revenue forgone due to these tax incentives. At some point it is likely that the tax benefits of maintaining such an industry will merely break even with the costs.

A 2012 investigation of tax incentives across multiple industries8 determined that frequently government agencies and officials don’t ever know the value of the tax incentives they grant. The same investigation found that most government entities do not have a system to track the effectiveness of tax incentives in regards to creating or keeping jobs in the manufacturing sector. What is known frequently isn’t positive for advocates of tax incentives. According to a 2013 study from the Journal of Regional Science9 “When the tax climate is properly measured as the potential liability arising from new investment in a state, we estimate that a 10 percent reduction in the effective tax liability is associated with a 3.5 to 5.3 percent increase in value added for the state's targeted manufacturing industry.” If these findings were to hold true it could mean that states need to carefully gauge how much they are willing to forgo in hopes of helping to build or maintain an industry. While there are certainly multiplier effects associated with attracting auto business, the real cost/benefit ratio must be carefully evaluated.

8 http://www.nytimes.com/2012/12/02/us/how-local-taxpayers-bankroll-corporations.html?pagewanted=all&_r=0 9 http://onlinelibrary.wiley.com/doi/10.1111/jors.12031/abstract

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Number of Incentives per State

Average

State of Michigan Auto Incentiv es

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2009 2.88 22.7 6 12.6%

2010 2.30 22.21 10.4%

2011 2.7 6 23.82 11 .6%


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Municipal Impact

Strong auto sales have numerous positive effects for municipal credits, particularly regarding the economy and financial health of affected governments.

Auto sales produce direct revenues to governments which vary depending on each entity’s taxing structure. Common revenues include sales tax from auto and auto parts purchases, personal income tax from employees, vehicle use taxes, license and fees, business taxes and on a local level, property taxes.

These auto-related revenues can be a substantial portion of overall revenues. According to the Center for Automotive Research (CAR), taxes generated from the auto sector compose 13% of state government tax revenues10. The magnitude of the impact varies drastically from a high of 23% in Oklahoma to a low 2% in Alaska.

Many factors influence the magnitude of the impact. Alaska does not have a large auto presence and also does not levy either an income tax or sales tax. Florida and Texas don’t levy state personal income taxes but do levy sales taxes.

Affected state and local economies benefit from higher levels of employment and increased wages. In many areas discussed in this report, we see sector clusters, with manufacturing of vehicles and parts as well as research and development all concentrated in one area. This clustering tends to lead to the creation of additional related businesses, a highly skilled workforce and population growth. A strong auto sector can help further diversify an economy, in cases such as Texas, or prop up an economy when it serves as one of the largest industries, as seen in Michigan.

One mitigating factor to benefits seen from improved auto sales is that manufacturers seem to be getting by with fewer employees. This means that gains from personal income tax and employment, while positive,

10 Assessment of Tax Revenue Generated by the Automotive Sector. Center for Automotive Research. 2012.

may grow at a lower rate than sales tax revenues. States which rely more heavily on the sales tax than income tax, including Texas, are likely to be less affected by this change in industry structure than states with sizeable income tax revenues from the industry.

Positive impacts are concentrated in areas which have a larger automotive presence, typically from manufacturing. This includes the historic auto manufacturing regions in the Midwest as well as areas in the South which have seen significant expansion in the regional auto industry over the past few decades.

The majority of auto manufacturing and supply plants have traditionally been concentrated in the Midwest. While this still holds true, a significant portion of new plants have chosen to locate in the South in recent years, partially driven by a combination of a low tax burden and, at times, generous government subsidies. States with auto growth in recent years also tend to be ‘right to work’ states or have a less demonstrable union presence then typically seen in the Midwest.

In all areas discussed below, we see a significant presence of research and development, which is particularly important as technology plays an increasing factor for the industry.

We evaluate a few of these states as well as one local government with concentrations in the auto industry and discuss potential impacts from continued high auto sales volume.

State of Michigan

Michigan is the quintessential entity when it comes to the auto industry. Despite significant difficulties in the last decade, Michigan is still the national leader in terms of automotive employment and production11. Almost a quarter of vehicles produced in the country are manufactured in Michigan while 15% of the state’s workforce is in the industry12.

The state’s auto exposure is staggered through all stages of production. Michigan is home to the Big 3 American car companies, Ford, General Motors (GM) and Chrysler. A dozen assembly plants are located within the state along with 35 auto part plants. Component production specialties include powertrains, engines and transmissions.

11 Bureau of Labor Statistics. http://www.bls.gov/iag/tgs/iagauto.htm 12 State of Michigan Automotive Strategic Plan. Michigan Economic Development Corporation. www.michiganbusiness.org/

Percentage of State T ax Revenues from Auto Sector 2010

Oklahoma 23% Alaska 2%

Florida 20% Hawaii 20%

South Dakota 19% Wyoming 6%

Texas 19% New Y ork 7 %

Iowa 18% Delaware 8%

Sou r ce: Cen ter for A u tom otiv e Resea r ch

Largest Concentration Sm allest Concentration


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To an even greater degree than in many of the other places discussed in this report, the concentration of auto administration and manufacturing has led to the creation of research and development centers as well as training facilities. The emphasis on research and development, coupled with the presence of industry headquarters, resulted in concentration of highly educated and well compensated professionals in the state.

The economic impact of the industry is further magnified by support-related economic production. In addition to the direct employment from the industry, the state estimates that an additional three jobs are generated in the state for every job in the automotive industry13.

Chief revenues for state are the sales tax, personal income tax and business tax, all of which would be positively impacted by continued high sales in the auto industry. The Center for Automotive Research lists the state as receiving 13% of its state tax revenues from the auto industry, which includes business taxes from manufacturers. Notably, in 2010 sales tax on new vehicles ($390 million) and motor vehicle registration revenues ($877.8 million) accounted for larger total revenues to the state than income taxes ($103.7 million) or business taxes ($63 million).

State of Ohio

Ohio ranks second for total tier one automotive suppliers, motor vehicle production and final assembly plants. The state’s auto industry benefits from its strategic location, as it is within 1,000 kilometers of 70% of North American light vehicle production14. Six assembly operations are located in the state, including Ford, GM and Honda. The state’s automotive suppliers range in size from large national companies to small, locally owned shops.

Ohio and its automotive industry were hit hard by the recession. Smaller automotive suppliers were particularly affected by a combination of lower demand and lengthened payment periods from manufacturers. On a state level, the unemployment rate has since recovered and is currently below the national average. However, total employment and labor force participation are still below pre-recession levels. As part of its initiative to hasten the state’s economic recovery, Jobs Ohio, a state economic development effort, has targeted the auto industry as one of nine sectors for job growth in the state.

13 State of Michigan Automotive Strategic Plan. 14 http://jobs-ohio.com

The state’s automotive presence has been increasing in recent years with a 14% increase in automotive manufacturing employment between 2010 and 201215. According to the state, the automotive industry employs over 94,000 workers. The average wage for those in the automotive industry within the state is $61,038, which is substantially higher than the average per capita income16.

Income tax, sales tax and corporate tax serve as three of the government’s main revenue streams and would all be positively impacted by strong auto sales. Excluding business taxes from manufacturers, the Center for Automotive Research indicates Ohio’s revenue structure is heavily concentrated in autos, which account for 17% of state tax revenues. This represents a substantial portion of the state’s budget, making it highly dependent on the auto industry.

State of Texas

Texas benefits from its location bordering Mexico and containing Interstate 35 (I-35), which runs from the U.S.-Mexico border to Minnesota, with easy connections to a large portion of the country.

I-35 between San Antonio and the Dallas metropolitan area has turned into an automotive corridor for the state, aided by the presence of two considerable manufacturing plants along the route. The General Motors (GM) plant in Arlington was expanded in 2011 to enable manufacturing of SUVs, the sales of which have increased markedly in recent years. GM and Toyota serve as the top two auto-related producers in the state.

Due to the state’s substantial size, various automotive supply clusters exist in different parts of the state. Truck trailer manufacturing is centered in the Northeastern portion of the state while production of auto parts is concentrated in Cameron County in south Texas. Toshiba International Corporation, a subsidiary of the Toshiba Corporation, maintains a substantial manufacturing base in Houston which focuses on motors for electric and hybrid cars, which represent a growing portion of the market.

Research and development in the state is multi-faceted. Multiple semi-conductor firms, including Texas Instruments and Freescale Semiconductor, are based in Texas as well as various testing facilities. This presence of research and development is

15 http://jobs-ohio.com 16 http://jobs-ohio.com


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particularly important as technology is a key drier for the industry.

According to a recent report from the Texas Economic Development Corporation, roughly 34,000 workers in the state are employed in the auto manufacturing in the state with an average wage of $50,572, which is close to double the per capita income for the state17.

Auto-related economic benefits to Texas will be less obvious than seen in other states. Texas already benefits from a healthy, diverse economy, low unemployment levels and an expanding population. The state government does not levy an income tax on residents or businesses. However, growing auto related employment and above-average related income will have positive side effects for the overall economy.

The Center for Automotive Research indicates that a high 19% of state tax revenues were from the auto industry in 2010. We point out that 40% of the revenues included in the CAR analysis are from fuel taxes, which are not impacted by the distribution of new car sales. More recently, auto sales tax rose 8.6% in fiscal 2014 to $4.2 billion, equal to 8.3% of tax revenues and 4% of total net revenues for the year18.

State of Alabama

The State of Alabama has also seen expanding auto presence. Anchored by the Mercedes-Benz plant in Tuscaloosa, the state has jumped into the top five states for auto production with Honda, Toyota and Hyundai also maintaining a presence in the state. Expansion is continuing. The Mercedes Benz plant will be producing a fifth model while other plants are increasing production by adding additional shifts.

Business Facilities Magazine, a business industry publication focusing on corporate expansion and relocation, ranked Alabama as its top state for the automotive manufacturing strength in 2014.19 Training and the resulting skilled area workforce have helped lead the expansion. The Alabama Industrial Development Training (AIDT) program has partnered

17 The Texas Automotive Manufacturing Industry. The Texas Economic Development Corporation. 2013. www.texaswideopenforbusiness.com 18 Revenue Watch. Fiscal Year 2014. Texas Comptroller of Public Accounts. http://www.texastransparency.org/State_Finance/Revenue/Revenue_by_Tax.php 19 Business Facilities’ 10th Annual Rankings Report: Tennessee Races To The Top In Education; Alabama Takes Automotive Crown - See more at: http://businessfacilities.com/business-facilities-rankings-tennessee-education-alabama-automotive/#sthash.OI8VEWVD.dpuf

with Shelton State Community College and Mercedes for additional technical training initiatives.

The state’s economy suffers from high poverty rates, continued low labor force participation and above average unemployment. Continued expansion in the auto industry would increase employment and income levels, both positives for the overall economy.

However, from a revenue standpoint, the state has not historically been reliant on the vehicle sales and production. CAR reports that 12% of the state’s tax revenues came from the auto industry in 2010, over half of which is from fuel taxes. Personal income and business taxes in 2010 equaled a low 0.4%, meaning it would take a very sizeable shift in the state’s tax structure and industry concentration to realize a substantial budgetary impact.

State of Indiana

Bordering Michigan and Ohio, states with formidable auto industries, strategically located Indiana has a mixture of assembly plants and parts manufacturers. Assembly plants include Toyota, Honda and Subaru. Subaru announced in 2013 that it would undergo a $400 million expansion in its Lafayette plant, adding roughly 900 jobs. The plant is expected to expand its production to include the Impreza beginning in 2016.

The largest contributor to the state’s auto sector is Cummins Incorporated. Headquartered in Columbus, the Fortune 500 company and engine manufacturer, ranks as the state’s third largest public company with $18 billion in revenue.20 Lear Corporation, a leading supplier of automotive seating, and Contract Services Group, an approved auto supplier for Ford, are also located in the state.

While the State of Indiana would see some benefit from increased auto sales, the government already benefits from an exceptionally strong credit profile, with AAA ratings from all three major credit rating agencies. CAR reports that the state received 16% of its taxes from the auto industry in 2010. Excluding fuel taxes, this decreases to a still significant 10%. Auto-related sales tax revenues were the largest component, equal to 5.3% of overall state tax revenues. This echoes the sentiment that continued strong auto sales will benefit the state’s overall budget and economy but not be a major change for the already strong state.

20 State of Indiana 2013 CAFR.


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State of Oklahoma

What might come as a surprise to many is that Oklahoma tops the Center for Automotive Research’s list of states with the highest concentration of taxes from the auto industry. The state is more typically known for its concentration in agriculture and the oil and gas industry.

According to CAR’s data, a high 23% of state tax revenues are generated by the auto industry. Excluding fuel taxes, this drops to a still quite substantial 17%. The main drivers for this are auto sales tax (8.9%) and registration taxes (8.2%). While this data is somewhat dated, it does indicate state revenues are notably dependent on the auto industry. Continued high auto sales would be expected to result in stable associated revenues going forward. This is particularly notable as another chief source of tax revenues, oil, continues to suffer price declines. For fiscal 2012, oil and gas firms are reported to contribute $2 billion in direct tax revenues to the state, equal to 22% of total taxes.

Despite the state’s high tax revenues from the industry, the state has a relatively low concentration of jobs linked to the auto sector. Oil and gas, coupled with agriculture, remain the chief economic engines for the state.

Spartanburg County, South Carolina

While the entities discussed above are all examples of states with concentrations in the auto industry, we often see auto clusters more narrowly focused on one region or county. As local governments typically enjoy less broad and diverse economies than those seen on the state level, a concentration in the automotive sector would have an increased impact than seen with states. Spartanburg County, South Carolina is an example of a local credit which may be positively impacted by strong automotive sales.

The area economy has historically been concentrated in textile manufacturing. However, the county has been able to diversify its economy in recent decades to include more technologically intensive manufacturing centered on the auto industry. The focal point of this concentration is the presence of the BMW Manufacturing Corporation, which opened in 1994.

The Spartanburg BMW plant serves as the area’s largest employer, with over 7,000 employees, equal to 5.2% of total county employment. The plant is the sole manufacturer of the BMW X3, X5 and X6 models. BMW also recently added additional capital

investment into the facility to enable the production of a new model, X4. According to the county 2013 CAFR, approximately 70% of the plant’s output is exported to global markets.

Since the BMW plant opened in the mid-90s, the northwestern portion of the state has developed a concentration of BMW-related manufacturing. Data from the county CAFR indicates that approximately 20 BMW suppliers are also located in the county, equal to approximately half of the total BMW suppliers in the state and over 10% of those in the nation.

The area also is home to the Clemson University International Center for Automotive Research (CU-ICAR). Located near Spartanburg in Greenville, the program enrolls roughly 200 students in its automotive engineering program. According to the state’s auto industry website, roughly half of the program’s graduates remain in state after graduation.21

The county benefits from many of the advantages we see in the other examples discussed. Distribution is aided by its location along the Interstate-85 corridor, linking Atlanta and Charlotte. It is also served by the Greenville-Spartanburg International Airport as well as freight rail facilities. The state is also a right-to-work state. Sizeable incentives are also often granted by the state to encourage business development in the area.

Despite the significant economic impact from the auto industry, this does not correlate to a heavy budgetary dependence by the county. Direct governmental revenues are most affected through the property tax. The BMW is the county’s second largest property taxpayer, accounting for a moderate 2.2% of total county assessed valuation. Two additional automotive related companies are also among the county’s top ten taxpayers. In addition, strong auto sales will further bolster the county’s property tax collections as it collects property taxes on motor vehicles.

Chattanooga, Tennessee

Chattanooga, Tennessee is the home of a Volkswagen plant. In operation since 2011, the plant assembles the Passat. According to Volkswagen, the plant employs more than 3,200 employees and contributes to an additional 9,500 indirect supplier positions. The company has invested roughly $1 billion to date in its facility and forecasts $12 billion in income

21 www.scautoindustry.com


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growth in the state due to their presence and $1.4 billion in tax revenues for applicable governments.22

Volkswagen’s presence will be expanding. The plant has been chosen to manufacture a VW SUV model as well, with production expected to be begin in 2016. Reports suggest an estimated 2,000 in additional hires.23 In addition, a new national research, development and planning center is scheduled for development.

Additional growth in auto manufacturing would be a welcome boost to the area economy which continues to lag, with an unemployment rate significantly above the national average. Total employment level is down roughly 10% from its pre-recession high. Income levels remain depressed with per capita median income and median household income below state averages.

Several types of city revenues would stand to benefit from an expanding auto presence including its property, franchise and gross receipts tax. The exact outcome is unknown as Volkswagen is not listed amongst the city’s top ten taxpayers in its latest CAFR.

Conclusions The auto industry, driven to bankruptcy just 5 years ago, is experiencing somewhat of a renaissance, with total sales reaching pre-recession levels. Sales growth is driven by continued economic expansion, rising employment and personal income. Strong pent-up demand, record high average vehicle age, favorable financing and recent decline in gas prices are contributing to the vehicle sales boom.

Innovative design, such as Ford’s revolutionary 2015 all-aluminum F-150 truck and the competitive advantage of U.S. based manufacturers in producing sophisticated electronic components for increasingly complex automotive designs are positives as well.

In our opinion these favorable conditions will continue, which is why we expect auto sales to remain above 16 million in 2015.

Even though loan balances have risen, we don’t believe that there is a danger that the ‘bubble’ in the auto lending market will suddenly burst, causing a precipitous decline in auto sales.

22 http://www.volkswagengroupamerica.com/facts.html 23 New Volkswagen production Chattanooga's 'ticket to the future'. Times Free Press. October 18, 2014

However, the industry has fundamentally changed over the past five years. Despite the significant increase in auto sales, the industry remains smaller than before the recession, but also healthier. Average wage levels have fallen and the employment base is significantly smaller. With this in mind, how strong a factor in the appraisal of municipal credit quality is the auto industry in today’s world?

Broadly speaking, the industry is still an important factor in terms of tax revenues for a small number of states and a major factor for certain local communities. The industry is more diffuse geographically. Due to expansion in southern states in recent years, the industry now affects a larger number of states and communities, but the impact is less concentrated. The auto industry is also more diverse than it was in its heyday. A broader range of activities is now handled in the U.S., including research and development, auto financing and technology, which make the industry more well-rounded.

In states with heavy concentration of auto activity, broadly defined to include research and development, manufacturing and production activity and numerous related activities like parts suppliers (including glass, plastics, and electronic components), the strength of autos and the promise of additional improvement in production offer the hope of badly needed new revenues to restore rainy day funds, meet pension requirements, and reduce debt. In few cases where those priorities have been met, the strength of auto industry might lead to the partial restoration of various programs.

While lavish incentives to attract auto companies to locate in a certain state remain controversial, as the recent bidding war to attract Tesla Motors battery factory demonstrates, it appears that offering incentives for auto manufacturing pays off over the long haul. Without initially offering a generous package to Mercedes-Benz, it is unlikely that Alabama would have become the state with 5th largest automobile industry.

Robust auto sales will improve economic conditions in those states, boosting employment and personal income, government tax revenues and expenditures in historic auto manufacturing regions in the Midwest as well as areas in the South which have seen significant expansion in the regional auto industry over the past few decades.


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The biggest impact of resurgence of automotive industry and the resulting increase in sales tax, personal income tax and business tax revenues will be in Michigan, Ohio and Indiana, with Michigan state and local issuers benefiting the most. While Indiana will benefit from growing auto industry as well, the state already enjoys an exceptionally strong credit profile.

Among southern states, increased tax revenues will have more beneficial impact on Alabama than on Texas, where auto industry represents a smaller share of the economy.

APPENDIX: Lending Practices and Fed Concerns

Due to changing economic conditions, the relative shares of new car financings through loans, leases or cash have also changed over the years. Prior to the Great Recession new car sales through loans accounted for about 70% of total sales. By 2009 the share of new car sales financed through loans hit 71% and then started a slow decline, so that today, loans account for 66% of all new car sale financings.24 Leasing, on the other hand, rose to about 29% of all new vehicle financings. What is striking is the rise in loan financing of used car purchases (from 39.7% in 2009 to 65.8% today). Not surprisingly, along with a boom in auto sales, we are seeing the average FICO scores for car buyers declining.

According to the Federal Reserve Bank of New York25, auto loan balances have increased for thirteen straight quarters. Auto loan balances are up by $30 billion, boosted by $101 billion in auto loan originations, the highest volume of originations since 2006Q3.

The share of auto loans that were 90+ days delinquent was about 3.3%.

In the second quarter of 2014 auto loans represented about 8% of total household debt balance in the U.S. Mortgage loans accounted for 70% of the total debt, while rapidly rising student loans and credit cards accounted for 10% and 6% of total debt balance in Q2 2014, respectively. The percentages are not substantively different from Q2 2013.

24 “Time to worry about Auto Lending?”, Wells Fargo Economics Group, September 24, 2014 25 Quarterly Report on Household Debt and Credit, Federal Reserve Bank of New York, August 2014

Since 2009, the auto loan balances have risen. Originations in terms of dollar values have almost doubled since 2009 for buyers with credit scores below 660. Most of the growth is due to an increase in the average size of auto loans rather than an increase in the number of loans. The average loan amount for borrowers with credit scores of 680 or lower has increased the most (3% YTD in June), and for borrowers with credit scores of 760 or higher there is moderate increase in the loan sizes over the last year.26

26 “Equifax Reports Auto Loan Growth Continues, Subprime Bubble Not Occurring”, October 6, 2014

0

20

40

60

80

100

120

($ B

illi

on)

Total Auto Loan Originations by FICO Score

760+

720 - 759

660 - 719

620 - 659

<620


13

In the second quarter of 2014, 54% of new auto loans were originated by auto finance companies.27 In dollar terms, that accounts for about $187 billion of the total $355 billion in U.S. auto loans in 2013.28 This prompted increased supervision of nonbank auto lenders. In September 2014 The Consumer Financial Protection Bureau proposed an in-depth oversight of about 40 of the largest lenders like Toyota Motor Corp, Ford Motor Corp, Honda Motor Corp and Nissan Motor Corp, among others. A growing auto-lending concern is that customers are induced into costly add-ons that significantly increase loan size. According to the New York Fed, in 2009 auto lenders made about $43 billion in subprime loans to borrowers with weak credits. In 2013 that number was $78 billion.

Another regulatory concern is whether lenders and auto dealers are increasing the cost of loans through extra interest rate charges. In December 2013 Ally Financial agreed to pay $98 million to settle auto lending probe amid allegations of overcharges to minorities.29 Ally also agreed to be monitored by the Consumer Financial Protection Bureau and the Department of Justice to prevent further allegations of discriminations. Similar litigations include, among others: Decohen v. Capital One $3M settlement for allegations of not properly addressing debt cancellation agreements30 and $2.75M settlement between Wisconsin Department of Justice, Legal Aid Society of Milwaukee and Wisconsin Auto Title Loans for insurance-like club memberships in addition to short-term loans with high interest rates31.

Delinquency rates have increased during the second quarter of 2014 compared to the same period last year as reported by TransUnion.32 The highest delinquency rates are reported in Alaska, Michigan, Montana, and Nebraska. The largest declines were in Hawaii, South Dakota, and Oregon. There were only six states that had lower or same delinquency rates: California, Oregon, Hawaii, South Dakota, Kansas, and Oklahoma.

27 “Looking under the Hood of the Subprime Auto Lending Market”, Federal Reserve Bank of New York, August 14, 2014 28 “U.S. Consumer-Finance Regulator Plans Auto-Lending Examinations. About 40 Lenders Expected to be Supervised by CFPB”, Wall Street Journal, September 16, 2014 29 “Ally Financial pays $98 million to settle auto lending bias probe”, Los Angeles Times, December 20, 2013 30 “Capital One Reaches $3M Auto Loan Class Action Settlement”, topclassactions.com, January 14, 2014 31 “Settlement checks to be issued to 23,000 auto title loan customers”, Journal Sentinel Milwaukee Wisconsin, January 12, 2014 32 TransUnion: Auto Loan Delinquency Rate and Debt Drive Higher in Q2”, September 9, 2014

In terms of age groups, borrowers under the age of 40 have highest 60+ day delinquency rates.

Borrowers between the ages of 40 to 49 borrow the highest dollar amount of loans.

We don’t believe that there is a danger that the ‘bubble’ in the auto lending market will suddenly burst, causing a precipitous decline in auto sales. Auto loan delinquencies have declined to 3.3% from about 8% at the end of 2009. During the same period, student loan delinquencies, for example, have grown from about 8% to close to 11%. Unlike credit card and student loans, auto loans are collateralized, which makes recovery rates much higher. Consumers are also less likely to default on auto loans in order to avoid car repossession.

Some of the deterioration in credit scores reflects relaxation of extremely stringent credit standards in the wake of the global financial crisis. We do not view trends in the auto loan market with concern due to continued economic expansion, the resulting increase in personal income and consumer confidence, along with supportive interest rate environment.

60+ Day Auto Loan Delinquency Rates for Various Age Groups

Age Range Q2 2013 Q2 2014Percent Change

Under 30 1.07 % 1.28% 19.09%

30-39 1.13% 1.29% 13.7 0%

40-49 1.02% 1.15% 12.7 7 %

50-59 0.7 0% 0.7 8% 10.87 %

60+ 0.47 % 0.53% 11.65%

Av erage Auto Loan Balances for Various Age Groups

Age Range Q2 2013 Q2 2014Percent Change

Under 30 $14,263 $14,7 7 7 3.60%

30-39 $17 ,194 $17 ,849 3.81%

40-49 $17 ,903 $18,840 5.24%

50-59 $16,840 $17 ,67 3 4.94%

60+ $15,107 $15,7 07 3.97 %


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