Midwest Economy Blog

Score one (Honda auto plant) for the Midwest

June 28, 2006

Honda has announced its intention to build another U.S. auto assembly plant, this one in Greensburg, Indiana, 50 miles southeast of Indianapolis (see map below). Unlike many recent assembly plant openings by foreign-domiciled automotive companies, Honda sited its plant in the Midwest rather than in a southern state. Does this announcement denote the end of the southward movement of auto sector plants in the U.S.?

As documented and analyzed by Thomas Klier and Dan McMillen in a recent issue of Economic Perspectives, as well as by Jim Rubenstein at the recent automotive conference, the motor vehicle industry continues to be concentrated in the Midwest, with 47 percent of motor vehicle employment to be found in the states of Michigan, Indiana, and Ohio. However, a look backwards reveals that the industry’s footprint has taken a decidedly north–south tilt in recent decades. According to Klier and McMillen, “Since 1979, Michigan alone has shed almost one-third of its auto industry employment. During the same period, southern states such as Kentucky, Tennessee, Alabama, and the Carolinas, more than tripled their employment in the auto industry.” Further, the push southward is hypothesized to have now expanded past the middle south states of Kentucky and Tennessee to a second vanguard in the Deep South in recent years. Since 2001 alone, Honda and Hyundai have launched or announced assembly operations in Alabama, Nissan in Mississippi, Toyota in Texas, and Kia in Georgia.

Honda’s Greensburg assembly plant will pull the nexus of North American automotive production somewhat north. To date, speculation about the location of the new plant had centered on Illinois, Indiana, and, especially, Ohio, where Honda currently maintains the larger part of its North American operations. Media discussion about the Midwest siting decision derived from reported inquiries from Honda about available sites in these states. Moreover, the company currently operates the most geographically proximate supply chain in the industry, with over 75 percent of its supplier base located within a day’s drive of its central Ohio assembly plants (see map below). For example, its Lincoln, Alabama, assembly plant receives transmissions from a Honda transmission plant in Tallapoosa, Georgia, 60 miles to the east, and its Ohio assembly plants receive transmissions from a Honda, Ohio, transmissions plant 25 miles west.

Adding to the logic of the new assembly plant location close to Ohio, Honda has also shown a strong preference for keeping engine production close to its assembly plants. For example, Honda builds engines inside its Alabama assembly complex. In Ohio, home to its largest assembly operations, it also operates its largest engine plant worldwide, producing over 1 million engines a year. Recently, Honda announced a decision to build an engine plant near its Alliston, Ontario, assembly facility. That plant has been receiving engines made in Ohio. Once that new engine plant is built, it will free up capacity at the Anna, Ohio, engine facility.

The choice of the Midwest rather than the south is a company-specific story rather than a reversal of the industry’s southward movement. Honda’s decision to site its next assembly plant in the Midwest is very consistent with the crucial role that supply chains and logistics play in today’s manufacturing environment. In this regard, the Midwest’s continued high concentration in automotive parts and related industries keeps it a contender for future siting of North American automotive production facilities.

Honda Corridor

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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