The growth of North America’s production footprint has been the subject of much debate. While the birth of the industry in North America—and in many ways the world—occurred in the Midwest, in the past decade the growth of production capacity for both light vehicle stamping and powertrain has been focused in the Southeast and more recently, in Mid-Mexico. Given that auto executives don’t take these decisions lightly (facilities are expected to have a 40- to 50-year lifetime), the geographic shift is intriguing. What is driving the decisions to move facilities in this direction?
For starters, a bit of history is important. The idea of a production cluster has been around for decades, but it was not apparent in the auto industry until the last decade. Some may find it surprising that the Detroit Three co-located facilities around the United States to underscore their commitment to the country as a whole (mainly a political decision) and to diffuse any significant reliance on one location due to labor issues. Detroit Three OEMs once had plants in Los Angeles, Atlanta, Newark, Wilmington, suburban Boston, Norfolk, and a number of other locations spread throughout the country. This sprawl is no longer viable and now OEMs increasingly look to keep production capacity closer geographically to improve logistics. Even production of the beloved Chevrolet Corvette started life in St. Louis before being relocated in the 1970s to its current home in Bowling Green, KY.
There are now three major production clusters either already formed or in the process of forming. The largest is a Midwest cluster consisting of Michigan, Indiana, Ohio and Ontario. This is arguably the most important, largest, and most critical to the Detroit Three. The second is a Southeast cluster. The hub of this cluster is Tennessee and includes Kentucky, Alabama, Georgia, the western edge of South Carolina and parts of Mississippi. This growing cluster is dominated by the German and Asian OEMs as they sought co-located capacity in North America. The last cluster, Mid-Mexico, is gaining steam. Adding capacity in Mid-Mexico is on the mind of every global OEM due to tariff-free access to 44 trading partners and low labor costs.
One important factor to keep in mind is each of these production clusters needs its own ecosystem to be efficient and viable on the global stage. When an OEM decides to locate a vehicle production facility far from its production and indirect suppliers, there is a slow-but-steady need to drive these suppliers closer. As we are aware, logistics is getting the attention it’s long deserved. Searching for low labor costs is important, yet if both inbound components and outbound finished products need to be carted hundreds of miles, valuable resources and unneeded risk become part of the equation. In addition to part and system production, the ecosystem includes the ability to heal itself with machine and tooling repair within the cluster, a perpetual skills development network, and suppliers of all tiers working to feed both vehicle and powertrain facilities. In this new era of hyper competitiveness, it is critical for a cluster to continue to develop as the industry changes.
In the end, the new focus on logistics costs, reducing currency and inventory risk, and economies of scale is driving more production toward clusters—placing those locations off the beaten path at risk going forward. As the population grows in the southern and central-western states, outbound logistics favors the Southeast and Mid-Mexico clusters. While the original Midwest cluster isn’t going away any time soon, there is clearly a benefit for the OEMs to create strong clusters in these other areas.