Tag: Mercedes

OM in the News: Are Location Incentives Worth the Cost?

incentivesJay and I were just discussing the OM in Action box in Chapter 8 (Location Strategies) called “How Alabama Won the Auto Industry.” We are working on the 12th edition (due out Jan.1, 2016) and debating the value of the $253 million in incentives that brought Mercedes to Alabama. The recent article in The Wall Street Journal (March 13, 2015), called “Corporate Giveaways Are Not a Good Deal for North Carolina” helped enlighten our debate. For years, N.C., like many states, has had a system under which the governor can dangle tax breaks and grants to companies considering relocating to the state. As the pot of money available for these corporate incentives is about to run dry, the governor is urging state legislators to sign a bill for more funding.

The bill would increase the amount available to award this year by $15 million. If that sum sounds relatively modest, consider 2 points. First, each new grant can last up to 12 years, meaning the extra $15 million could increase the program’s payout by $180 million. Second, N.C. has already issued more than 200 grants since 2002 that will deprive state coffers of an estimated $157 million in the next 2 budget years alone. Outstanding liabilities for corporate incentives–$1 billion!

Proponents argue that other states are playing the incentives game, and businesses expect to trade tax cuts for jobs. That claim deserves a closer look. A recent report summarized the results of 55 peer-reviewed articles on the impact of targeted tax incentives, and the results are not encouraging. More than 70% of the studies found that incentives either did not substantially contribute to economic performance or produced mixed results. As an example, in 2011, $20 million of state money helped lure Chiquita Brands from Cincinnati to Charlotte. But after a recent buyout, Chiquita plans to close the headquarters, and community leaders are now working to recover as much money as possible.

There are other steps lawmakers can take that are much more likely to boost the economy: Ensure the delivery of high-quality services such as schools and roads while lowering costs, flattening taxes and repealing unnecessary regulations.

Classroom discussion questions:

1. Argue the pros and cons of such incentives.

2. Discuss the OM in Action box on Mercedes on page 331.

OM in the News: Mercedes Heads South

MB photoMercedes is moving down south, writes The Wall Street Journal (Jan. 7, 2015), uprooting its USA’s headquarters from its longtime perch in New Jersey with plans to relocate it to an Atlanta suburb. Wooed by lower costs, proximity to a Mercedes-Benz factory, and government incentives, the car maker turned down a significant incentive package from New Jersey to keep its U.S. headquarters in Montvale, where it had been running operations since 1972. Mercedes is joining several other auto makers to have moved operations and corporate headquarters to the South to take advantage of low union membership in right-to-work states, low corporate taxes, and easy access to well-maintained highways, rail lines, ports and airports.

“We think the infrastructure in the States has changed,” said CEO Dieter Zetsche. “The South is much more relevant than it used to be.”  A site selection consultant added that New Jersey has the country’s most appealing incentives policy, but it was outweighed by the cost-savings and convenience of moving to the U.S. South. He said that the move would reduce Mercedes’ costs, including real estate, energy and property taxes, by about 20%.

Mercedes has a plant in Alabama, which builds about half the vehicles it sells in the U.S. and is expected to reach an annual output of 300,000 vehicles next year.  Last April, Toyota said it would relocate its U.S. operations to a new campus in Plano, Texas. South Korea’s Kia Motors opened a plant near Columbus, Ga. in 2010. A year later, Volkswagen opened a plant in Chattanooga, Tenn. Other operations include BMW’s plant in South Carolina and Hyundai Motor’s plant in Alabama.

Mercedes’ decision to move as many as 1,000 jobs from the state is another body blow for New Jersey’s labor markets. Recently billboards pleaded “Bergen County (hearts) Mercedes-Benz #Please stay.”

Classroom discussion questions:

1. Why are location decisions such as this so important to the state and to the company?

2. Why did Mercedes decide to relocate?

OM in the News: The Mercedes-Renault Alliance

mb1The New York Times (June 28, 2014) brings us a great example of today’s alliances as a strategy for product development, a topic in Chapter 5. Daimler and Renault-Nissan just significantly expanded their automaking alliance, with plans for a production plant in Mexico that will build a new generation of compact Mercedes and Infiniti cars. The companies will invest $1.4 billion in the factory 300 miles north of Mexico City. While the vehicles produced at the 50-50 joint venture will carry different brand names and look different from one another, they will share many components.

The companies will also share some of the costs of developing the new vehicles. But they said they were not worried about cannibalizing each other’s sales. There is virtually no overlap between buyers of Mercedes cars from Daimler and Infiniti cars from Renault-Nissan. Mercedes has been cooperating for 4 years with Renault-Nissan, itself a longstanding French-Japanese alliance. Among other things, they produce 4-cylinder engines together at a factory in Tennessee. They also shared the cost of developing major components for the next generation of their flagship small cars, the Renault Twingo and Daimler Smart.

The alliance is part of a trend for car companies and, in some cases, competitors to share the enormous costs of developing and producing new models while maintaining separate brand identities. When the Mexico plant reaches capacity, it will be able to produce 300,000 vehicles a year and will employ 5,700 people. The factory will begin producing Infinitis in 2017 and Mercedes in 2018. While the companies will initially maintain separate production lines, both lines will eventually be able to produce either brand, making it easier for the companies to respond to fluctuations in demand.

Classroom discussion questions:

1. Why do competitors enter into alliances?

2. What are the risks to Mercedes and Renault-Nissan?

OM in the News: German Auto Makers’ Major Capacity Expansion Outside of Europe

For a bit of good news regarding manufacturing jobs in North America, The Wall Street Journal (Nov.26, 2012) writes that VW, BMW and Mercedes are all  ratcheting up capacity investments beyond the troubled European market.

vw plantTaking the lead, Volkswagen announced last week that it would invest $65 billion in its global operations over the next three years; this as Germany’s robust auto industry seeks to limit its exposure to  Europe. The move cuts a contrast to the belt-tightening of cash-strapped rivals such as France’s Peugeot and Italy’s Fiat which have shed assets or shelved model and technology changes this year as plummeting European sales push those companies deeper into the red. VW’s plan marks its efforts to step on the gas in its bid to dethrone Toyota as the world’s largest auto maker. Billions will go to a new Audi plant in Mexico. VW is likewise pouring money into Russia and China.

“Despite the challenging economic environment, we are investing more than ever before to reach our long-term goals,” says Volkswagen’s CEO.

BMW, which opened a second plant in China this year, is investing an additional €500 million with its Chinese joint-venture partner to boost production there. Meanwhile, it is spending $900 million to expand capacity at its plant in Spartanburg, S.C., and last month finalized plans to build a $261 million plant in Brazil.

Mercedes, which expanded into China later than rivals BMW and Audi, made plans last year to invest €2 billion in its venture with Chinese partner and a further $2.4 billion in expanding its Alabama plant.

Discussion questions:

1. Referring to Chapter 8’s discussion of Mercedes’ selection of Alabama for its 1st overseas plant, what are the benefits to the US of these expansions?

2. What are the dangers of major capacity expansions?

OM in the News: Mercedes Heads East To Hungary

Businessweek (April 7-14,2012) reports that Mercedes has began production at its new $1.07 billion factory, located in Kecskemét, Hungary to make its B-Class compact. By heading so far east, CEO Dieter Zetsche is betting that Hungary’s rock-bottom wages will allow the automaker to wring more profit from its small-car, luxury lineup. “This could be the final big plant by a European carmaker in the region,” says one auto analyst. “ The growth and expansion have shifted to Asia and Latin America.”

Hungarian workers are paid a fifth of the about $61 per hour German workers cost, so Mercedes will use the factory to profitably meet its goal of boosting sales 27 percent, to 1.6 million vehicles by 2015. The Kecskemét plant is the first new Mercedes factory since the brand began producing cars in Alabama in 1997. Manufacturing costs at the plant are 30 percent lower than in Germany.  Lower production costs, including increased parts-sharing among models, are part of Mercedes’ plans to save €6 billion by 2017 to offset rising raw material costs and increased spending to lower carbon-dioxide emissions of its vehicles. With about 40 working hours spent to assemble the Mercedes compacts, the savings are about $2,000 per car.  Daimler aims to reduce the average hours spent assembling a vehicle in Hungary to 30.

In Europe, auto sales are poised to decline for a fifth consecutive year in 2012. The region’s automakers will likely use about 65 percent of production capacity this year, down from 71 percent last year. The unused assembly lines could manufacture an additional 10 million vehicles. Given the capacity overhang, it will take plant closures and job cuts to make auto production in Europe profitable again, says Sergio Marchionne, CEO of Fiat Chrysler, who last year closed a Fiat plant in Sicily. In February, Mitsubishi also said it will stop making cars at its factory in the Netherlands.

Discussion questions

1. Why is Mercedes “heading east” to Hungary and “west” to the US?

2. Is capacity an issue with the firm? Other automakers in Europe?

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OM in the News: Toyota’s Quality Problems

Toyota’s sterling reputation for quality took a major hit in 2009-2010 with the recall of 5 million vehicles for unintended acceleration and braking issues. The auto maker was also slow to tell federal regulators about sticky accelerator pedals and was fined a record $16.4 million…not exactly the quality image the firm had built up over the past 4 decades! These quality problems led to a temporary shutdown of all US plants and a halt in the sales of 8 popular models.

The Wall Street Journal (Oct.5,2010) has just reported that all 2011 Toyota, Lexus, and Scion models are equipped with “black boxes” to help identify the cause of accidents.

Toyota’s situation would likely cause my mentor Phil Crosby to turn over in his grave. “There is absolutely no reason for having errors or defects in any product or service”, he wrote in his 1979 book Quality is Free.

Quality, it turns out, is not to be taken for granted, even when one is the leader in the field. Mercedes faced this same recall issue in 2004-2005, when its suppliers cut corners on quality in response to Mercedes’ desire to pump up corporate profits. Its recall was 1.3 million cars, costing $600 million. You may recall seeing a photo in Ch.6 of our book’s 9th ed. of an E -Class Mercedes setting itself on fire in Tokyo.

Companies that take their eye off the quality ball find that “quality is not free”, and that it may take several years to rebuild a  reputation.

Discussion questions:

1.What was Toyota’s initial response to the “floor mat problem” (which it claimed caused the accelerator to stick)?

2.What is Toyota doing today to deal with customer complaints?

3. Name some other recent major recalls of cunsumer items. How were they handled?