Attracting Foreign
Direct Investment:
German Luxury Cars
in the U.S.
SOURCES:
This case was written by Michael R. Czinkota © with the assistance of George Garcia, based on the following sources:
“UAW Holds Talk with GM, Daimler, but All Sides Maintain Veil of Secrecy,” The Wall Street Journal, September 13, 1999, A3;
Karen Thuerner, “The Southeast Picks Up the Pace,” World Trade, September 1998; Stephen Plumb, “What Merger?” Ward’s Auto
World, December 1998; Sam Gresock, “BMW to Mark Five-Year Anniversary of South Carolina Facilities,” The State, September 5,
1999; Alex Johnson, “Chrysler Facility to Make Mercedes,” Atlanta Journal-Constitution, October 30, 1998, Wheels 02S; Ken
Gepfert, “Booming Car Sector Is Good for the Region—Isn’t It?” The Wall Street Journal, May 26, 1999, S1; Jim Parker, “South
Carolina Commerce Leaders Aim to Draw Big Companies to the State,” Charleston Post and Courier, August 25, 1999; Edward
Graves, “South Carolina Ads Tap BMW Credibility—Suppliers Quick to Point Out Automaker’s Impact on Car Parts Manufacturers,”
Atlanta Journal-Constitution, September 9, 1999, F6; “Bayersiche Motoren Werke AG: Investment in US Plant to Increase by $200
Million,” The Wall Street Journal, February 28, 1996, B6; and Bill McAllister, “BMW Plant Becomes Symbol of Free Trade,” The
Washington Post, March 1, 1996,
A9. For more information, see www.daimlerbenz.com, www.daimler chrysler.com, www.bmw.com.
T
wo southern U.S. states, South Carolina and Alabama, received what many view as
just rewards for their hospitality, generosity, and probusiness environment. These rewards came in the form
of multimillion-dollar investments for new automobile plants. The German luxury car legends BMW and
Mercedes-Benz both chose to invest in new production sites in the southern United States. For BMW, the
search ended in the summer of 1992, when management decided to locate its plant in the GreenvilleSpartanburg area of South Carolina. Mercedes concluded its closely watched search in the fall of 1993,
choosing tiny Vance, Alabama, as home for its new plants.
The German investments represent two key facets of a very competitive industry: the need to cut costs
and easy access to target markets. U.S. wages are, on average, 60 percent lower than in Germany. The U.S.
market has also been the chief driver of Germany’s export boom. To remain competitive, DaimlerChrysler
and BMW have made it a priority to move to the United States in order to set up new plants to serve the
fast-growing market more directly. Both German carmakers are now competing head to head with Japanese
producers that are already well ensconced on the U.S. production scene.
South Carolina and Alabama fought hard battles that won them thousands of future jobs, billion-dollar
financial returns, and the prestige of having landed such world-class companies. The success of these two
southeastern states in landing these auto giants comes as no surprise. The U.S. southeast has become
extremely aggressive in trying to attract foreign investment and has become the fastest growing region in
the United States. South Carolina, Alabama, Georgia, and Florida have created their own regional
development alliances that market their states to lure more projects and investments. State, local, and
county governments work together as well on the preparation and research needed. This whole collective
effort, coupled with the fact that the southeast has a strong reputation for hard-working, low-wage workers
and that unions are stronger in the north, gives this region many critical incentives.
Each investment decision was based on different details; however, the underlying case of landing a
world-class investor using any means possible is present in both examples. A closer look at the two foreign
direct investments provides the opportunity to consider some of the different details and circumstances, as
well as the similarities, that exist in luring a desirable investment.
The BMW Decision
Over three years, BMW looked at 250 locations in ten countries. In the meantime, its shrinking presence in
the U.S. import car market, BMW’s second largest market, added to the pressure of starting up a new
factory. North American sales had plummeted from 90,000 in 1986 to 55,000 in 1991. When it was clear
that BMW planned on locating its facility in the United States, a race ensued among competing states to
win the cherished investment. In the end, the choice came down to Nebraska and South Carolina.
South Carolina Governor Carroll Campbell put up a strong recruiting effort, visiting BMW in Germany
and making offers that were hard to refuse. In order to obtain the $640 million plant and the expected 6,000
new state jobs, a bit of southern finesse was used. For instance, the site most desired by BMW had 134
separate landowners. In order to ease land acquisition problems, Governor Campbell secured a $25 million
appropriation from the state legislature to buy the property. He personally telephoned reluctant sellers and
within 14 weeks, the state and local governments had spent $36.6 million to buy every single property—
including a home that one family had just finished building two weeks before they were approached. To
sweeten the deal for BMW, new roads and site improvement were included, and the runway at the local
airport was extended to accommodate BMW’s cargo planes. The state also offered a $41 million property
tax break to BMW. Furthermore, the local airport’s free trade zone status was extended to include the 900acre plant site, meaning BMW would not have to pay duties on parts imported from Germany or elsewhere
until cars actually left the plant for sale in the United States.
One of the big determinants for BMW was South Carolina’s excellent technical school system. Under
the investment agreement, the state customized its training program for the company, even sending
instructors to Munich, Germany, to study the equipment that would be used. In all, the state had promised
to spend $3 million to train workers for BMW alone, a considerable sum when one takes into account that
in 1992 South Carolina spent $5.8 million on technical training for the entire state. In addition, local
businesses
offered
to
pay
up
to
$3 million for additional training.
The constant stream of amenities and special treatment that South Carolina extended to BMW was
especially critical to completing this deal, according to industry analysts, given the fact that BMW is a
conservative corporation not prone to bold moves. The firm does not just want to be accepted, it wants to
be welcomed. Carl Flescher, a vice president with BMW North America, stated: “I’ve only been down
there for about ten or fifteen days and I am very impressed. The embracing of this whole thing is incredible.
You go to the Holiday Inn and there is a sign that says ‘Welcome BMW.’ You pulled up to the Hertz rental
car and they know who you are. People are genuinely friendly, open, and elated.” Governor Campbell
summed up the whole mission best: “The name BMW is generally associated with excellence and quality
and that by itself is a benefit. Other companies will say, ‘Well, wait a minute, BMW is rated as one of the
best, and they chose South Carolina. So, they must be doing something right.’”
When BMW chose to locate in South Carolina, it joined a group of European firms (including BASF,
Rieter, Marzoli International, and Michelin) that had already discovered the state’s comparatively cheaper
and skilled workforce as well as its hospitable, probusiness atmosphere. In fact, South Carolina’s
Spartanburg County, the home of BMW’s plant, hosts over 100 foreign-affiliated companies, and about
half of South Carolina’s workers are employed by foreign-owned firms, one of the highest percentages in
the country.
In 1995, BMW began U.S. production of a new, more affordable model (the 3-series sedans) aimed at
the American market, specifically graying baby boomers. The plant was up and running ahead of schedule
and producing 300 cars a day within several months of start-up. By 1996, suppliers had invested more than
$70 million in the county and hired over 600 people. The plant’s success resulted in some unexpected
attention during South Carolina’s 1996 Republican presidential primary. A few leading candidates chose
the plant as a showcase of their free-trade stances in this highly internationalized state. Candidate Bob
Dole, on site, commented: “This is one perfect example of what can happen when you trade.”
The first three years, however, did not come without difficulties. BMW found itself at the center of
several conflicts, including efforts by Greer City in Spartanburg County in 1993 to annex BMW into the
city, and disagreements between Spartanburg and Greenville counties about spending $16.7 million in state
funds for widening Interstate 101 near the plant site. Another controversy evolved when a car tax break
available to BMW employees leasing cars from the company was revoked by the South Carolina Senate
Finance Committee in 1997.
BMW’s impact on South Carolina’s economy has been quite tangible and continues growing as shown
in Table 1. Since its startup in 1992, BMW’s capital investment has grown to over $1.2 billion, and its plant
capacity has grown to over 62,000. One of the company’s biggest contributions has been through its
payroll. In 1998, company employees maintained a payroll of $127 million, an average of $50,800 per
employee. A total of 3,000 jobs with suppliers have also been created. When combined with its 38
suppliers
in
South
Carolina,
over
5,500
new
jobs
have been created with an investment of $1.6 billion in capital.
BMW spends $1 billion buying goods and services every year in North America. Half of that investment
goes to 500 companies in South Carolina. BMW is also credited with expediting improvements to Interstate
85 and generating nearly $20 million in tax revenue over 1995 to 1998 that has improved the county’s
schools. Commerce Department spokeswoman Helen Munnerlyn said BMW’s greatest contribution might
be proving that a high-profile, international corporation could successfully do business in South Carolina.
She stated, “BMW has made it possible for South Carolina to be a respected location. I’m not sure you can
actually measure that.”
The Daimler-Benz Investment
Daimler-Benz’s Mercedes automobile division was search-ing for a U.S. location to construct a $300
million plant that would manufacture its new sport utility vehicle, the Mercedes M-Class, which has offered
stiff competition to the Ford Explorer and the Jeep Grand Cherokee. Initially, Mercedes’s search included
170 sites in 30 states. Alabama knew that to win the investment, its offer would have to be outstanding.
One Alabama state official recalls the message from a Mercedes consulting firm representative: “Everyone
knows what South Carolina gave BMW. My client feels they are better than BMW!”
The race was on. In the end, Alabama won the “industrial crown jewel,” as Governor Jim Folsom, Jr.,
referred to it. Mercedes was impressed by the entrepreneurial, nonbureaucratic attitude of Alabama’s state
government. The firm also liked the access to interstate highways, railroads, and ports; adequate available
labor; proximity to schools; quality of life; and of course, a lucrative package of financial incentives. A
partial list of these incentives includes $92.2 million to buy and develop the site, create a foreign trade
zone, and build an employee training center; $77.5 million to extend water, gas, and sewer lines along with
other infrastructure elements; $75 million to purchase 2,500 of the new vehicles for use by state employees;
$60 million in government funds to train Mercedes employees, suppliers, and workers in related industries,
enriched by another $15 million from the private sector; and $8.7 million in tax breaks—in all, Alabama
offered a package of more than $300 million. Along with the financial incentive package, the state’s
commitment to build this one-of-a-kind facility correctly and on time was cited as an important factor in the
automaker’s decision.
The plant began production in early 1997. Annual volume was an estimated 70,000 cars, half of which
were sold in the United States. Direct employment generated by the plant stood at 1,600 by 1999.
Additional employment has also come via suppliers. According to the Economic Development Partnership
of Alabama, the plant has created over 1,300 jobs among eleven major suppliers. Further job growth is
coming from additional areas. The overwhelming market demand for the award-winning Mercedes-Benz M
class resulted in a $40 million expansion of the Alabama plant as well as a 20 percent increase in
production for 1999. The plant’s capacity has grown from 67,000 in 1997 to a projected 80,000 in 1999, as
shown in Table 2.
Daimler-Benz’s merger with Chrysler in 1998 has had a noticeable impact on the Alabama plant. The
merger
caused
an
increase
in
jobs
at
the
plant,
and
its
80,000
M-Classes were sold primarily in the United States. Daimler will expand a Chrysler facility in Austria that
produces Jeep Grand Cherokees and equip it to build the Mercedes vehicle. One problem after the merger
is the status of the Alabama factory as a non-union plant. Chrysler Corporation has over 76,000 workers
who belong to the United Auto Workers union. The UAW union is trying to insist that Daimler convert its
non-union plant in Alabama to a union shop. Daimler has continuously pledged “neutrality” on the issue.
Alabama believes it invested wisely. One study found that the $300 million it spent to lure the German
investment will yield shining returns of $365 million during the first year of operation and $7.3 billion over
the
next
20
years.
But
there
are
limits
to
the
lure
of
state
incentives. One state official commented, “Ultimately it comes down to the company’s personal choice.”
Says Mercedes project leader Andreas Renschler, “Whether you get $10 million more or less in one state
doesn’t make any difference. We sensed a much higher dedication to our project.”
Many experts contend that states are “buying” industry at too steep a price. The financial incentives
necessary to land the BMW plant, including a $1 per year land lease, will cost South Carolina $130 million
over 30 years. Then-governor Jim Hunt of North Carolina criticized much of Alabama’s incentives package
to Mercedes, saying “We do not need to risk the future of the franchise to recruit star players.” In
particular, Hunt pointed to what some refer to as the “Benz bill,” which allows 5 percent of corporate
income
tax
from
the
plant and 5 percent of the plant employees’ taxes to be used to retire Mercedes debt. The cost of incentives
for
the
Mercedes
plant,
on
a
per
new
job
basis,
is
18
times what Tennessee paid for a Nissan plant in 1980 and 4 times what Kentucky paid for a Toyota plant in
1985.
Some economists argue that rich incentives often fail to yield adequate returns for a city or state.
Corporate welfare, they say, diverts money better spent attracting businesses through improved
infrastructure and schools. “It’s nothing but a zero-sum game,” said former U.S. Labor Secretary Robert
Reich. “Resources are moved around; Peter is robbed to pay Paul.” Proposals to halt the growth in financial
incentives offered to large corporations, often foreign, include a tax on all incentives received by a
corporation to move facilities.
The attitude of “not giving away the franchise,” however, is increasingly being seen by decision makers
as detrimental, especially in days of corporate downsizing, where politicians are judged on how many jobs
they create in the private sector. A report by an international site-selection consultant, commissioned by
North Carolina after losing the chance to land BMW, found that the state “is increasingly seen as a
nonparticipant in incentive practices at a time when incentive practices are growing in importance.” So the
question “How much is too much?” is complicated by the fact that growing expectations and necessities
may seemingly warrant the types of grandiose offers that are portrayed in the Mercedes and BMW cases.
QUESTIONS FOR DISCUSSION
1. Do you believe that states should encourage foreign direct investment? Why or why not?
2. Do incentives determine whether or not a company will invest in a particular country?
3. How should a state government determine the upper limit of its investment support?
4. Do foreign direct investment (FDI) incentives place locally established firms at a disadvantage?
TABLE 1
BMW by the Numbers, 1998
Total employees at plant
Annual payroll
Size of plant
2,500
$127 million
2.1 million sq. feet on
1039 acres
Total capital investment at plant
$1.3 billion
Number of suppliers
38
Investment by suppliers in South Carolina $335 million
Jobs created by suppliers since 1992
3,000
SOURCES:
South Carolina Department of Commerce: Spartanburg Area Chamber of Commerce; BMW.
TABLE 2
DaimlerChrysler by the Numbers, 1998
Total employees at plant
1,600
Annual payroll
$78.5 million
1.7 million sq. feet on
1,002 acres
$420 million
16
$130 million
1,300
Size of plant
Total capital investment at plant
Number of suppliers
Investment by suppliers in Alabama
Jobs created by suppliers since 1997
SOURCES:
Alabama Department of Commerce; Tuscaloosa Area Chamber of Commerce; Daimler-Benz.