Bidding for cars

Something caught our eye the other day in our latest edition of AUTOWEEK magazine that helps explain why car companies welcome tax breaks of one kind or another when they want to build a new car somewhere. Missouri, as you know, has put together an incentive package that could be worth as much as $150 million dollars to the auto industry in this state with most of that money designed to convince Ford to keep its Claycomo plant at full production after the company shifts its SUV line a Kentucky assembly plant.

Missouri is in competition with several states that also want Ford to make its new line of vehicles outside of Claycomo.

AUTOWEEK asked a question that is part of the Claycomo issue: “What does it take to create a new vehicle from scratch?”

The answer: “The baseline is $1.,5 billion, using existing drivetrains. That’s where industry analysts peg the cost of General Motors’ Epsilon platform Chevrolet Malibu, for example. Add about $500 million if that car gets an all-new transmission; add $800 million to $1 Billion for a new engine. Subtract to the extent that a manufacturer borrows anything–suspensionlayout, instrument panels, seats—from existing platforms.”

So if Ford develops an all-new vehicle, it’s investing about $3 billion before it even builds the production line and hires and trains the workers to put the vehicle together.

Some critics of the Ford bill pointed to Ford’s $2.1 billion dollar profit in the first quarter of this year. In the first quarter of 2009, Ford LOST $1.4 billion. It expects to be profitable for all of this year partly because it has closed some plants and eliminated 10,000 jobs.

Missouri is offering to let Ford keep $100 million dollars of its state income withholding taxes, spread through ten years but only if the company makes a big investment at Claycomo and increases jobs there.

But the offer includes some other things that are more than money and are not included in the legislation. There’s the assembly plant itself that will cost less to retool than the cost of building a whole new plant. There are 3,000 well-trained people who work there now who will be ready for the new line. That means Ford won’t have to hire and completely train a new workforce somewhere else. There are about 40 parts makers in Missouri that supply the factory with parts,. and there are dozens of even small operators who make parts for the parts factories already in place, a parts network that won’t have to be developed in some other state.

Developing a new generation of vehicles can eat up an entire quarter’s profit–and more. That’s why the incentives the state is offering Ford–money that seems big to you and me but is quite modest to the auto industry–is only part of the package. The stakes are very high for both Missouri and for Ford.

We will learn soon if Missouri has dealt itself enough of a hand to win.

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