THE SOUTH RISES AGAIN

"What a great day in Spring Hill!" declared Danny Leverette, mayor of this Tennessee "city," as he calls it, of 23,000 in the rolling hills 60 kilometres south of Nashville. Of course, the cheery, pompadoured U.S. Postal Service supervisor (the mayoralty is only a part-time job) admits that he rarely utters three sentences in a row without saying, "What a great day in Spring Hill!" But on Oct. 3, the hype was entirely justified. With stock markets around the world imploding, and the U.S. Congress battling over a $700-billion (U.S.) package to avert a national financial collapse, Leverette was one of the few people on the planet delivering a big, honking slice of positive economic news.

Leverette was heralding the launch of the Chevy Traverse, a zippy new crossover utility vehicle (basically, a small SUV with some of the structural elements of a car). A whole lot of suits had descended on the 6.9-million-square-foot General Motors factory in Spring Hill--more than 100 of them, in fact, including Tennessee Governor Phil Bredesen, state senators, county and local officials, GM honchos from head office in Detroit, and Chevrolet dealers from all over the U.S. There was hoopla, too--and plenty of it. In the parking lot, the Spring Hill High School marching band serenaded visitors. Inside, reporters stuck microphones into VIP faces and fired off flashes.

On a stage near the assembly line, which would soon be pumping out 700-plus Traverses a day, factory manager Mike Quinton kicked off the celebration by introducing Jeff Daron, a 23-year GM veteran, wearing a red golf shirt, who belted out The Star Spangled Banner.

Wait a sec: Celebration? At a General Motors plant? Is this the same company that has lost more than $50 billion (U.S.) since 2005, that was burning through cash at a rate of more than $1 billion (U.S.) a month even before the global financial crisis took hold in September, and whose shares recently plunged to $4.76 (U.S.), the same price (after adjusting for splits) they were in 1950?

As a matter of fact, yes. In 2007, GM temporarily closed the Spring Hill factory, then spent more than $600 million (U.S.) to gut it from wall to wall and retool it to build the Traverse. In fact, though the plant is less than two decades old, it is historic: the granddaddy of so-called greenfield plants built by the Detroit Big Three in the U.S. Southeast since the 1980s, many of them literally in farmers' fields.

For 17 years, the plant produced vehicles under the Saturn brand, the offshoot division GM founded to create, as the slogan went, "a different kind of car company." Saturn was a bold experiment that embraced both the quality philosophy of GM's Japanese competitors and their strategy of locating new factories in rural areas, far from Detroit and other troubled traditional North American auto-manufacturing centres. And what better place to set up than in a region offering low taxes, generous financial incentives and right-to-work laws that frustrate unions? European manufacturers such as Mercedes-Benz and BMW soon followed to the American South, as did thousands of small parts-supply factories.

In Tennessee, the migration has intensified under Bredesen, an energetic and moderate Democrat first elected six years ago. The state's two assembly plants--Spring Hill and a Nissan plant in Smyrna that dates back to 1983--and its roughly 900 parts-supply factories now employ 127,000 people.

The Traverse launch, and the return of more than 3,000 workers to the factory, is the second coup this year in the state's drive to expand its auto sector. This past July, Tennessee stunned the industry (as well as officials in Michigan and Alabama, the other two finalist states) by agreeing to provide Volkswagen with a whopping $577.4 million (U.S.) in incentives to build a plant in Chattanooga, 220 kilometres southeast of Nashville, that will employ 2,000 people. Tennessee economic development commissioner Matt Kisber figures that was a bargain. "We're just seeing the start of what, 10 years from now, we'll look back at and say, 'Wow, we never envisioned all of this.'"

How is it that Tennessee and other southern U.S. states can be opening new plants in the midst of a global financial crisis and plummeting vehicle sales, while Michigan, the cradle of the industry, has lost five assembly plants in 20 years, and Ontario--the No. 2 auto-making jurisdiction in North America--is struggling to hang on to the 11 it has? Spend a day or two in Nashville and Spring Hill, and the economic advantages (including a few you might not have thought of) become apparent. And there's another factor: Folks down here want it more--a lot more--and they know how to get it.

Priorities are set at the top, and after education, oneof the biggest for Phil Bredesen is economic development. He's even happy to meet a reporter from a rival jurisdiction to deliver his pitch for Tennessee. "I'm not going to give you any secrets," he jokes. Well, not many.

The 64-year-old former health care executive is polished and low-key. He doesn't look even remotely like his long-haired, bearded, 19th-century predecessors, whose portraits line the halls of the elegant 1859 State Capitol Building in Nashville. And there's barely a hint of a drawl when he speaks. Bredesen was born in New Jersey, and spent much of his youth in upper New York State. In 1975, he and his wife, Andrea Conte, moved to Nashville, where he co-founded HealthAmerica Corp., a health management company that was sold in 1986. Bredesen served as mayor of Nashville from 1991 to 1999, and was elected governor in 2002, promising new industry and jobs. Four years later, he won all 95 of the state's counties, an astonishing victory for a Democrat in a conservative Republican state.

Given that legacy of bedrock conservatism, Bredesen sticks close to the political centre. For one thing, he says he won't mess with the state's right-to-work laws. These provisions--in place in 22 states, including almost all of the southeastern ones-- allow factory workers operating under a union contract to opt out of signing up or paying dues. In Ontario and much of the rest of Canada, by contrast, labour laws generally require even non-members in a unionized workplace to pay dues, given that they, too, are governed by the union contract. That just wouldn't fly in Tennessee, says Bredesen. It's a "southern American sort of independence. We don't want anybody telling us what to do."

Income taxes are an anathema, as well. Tennessee doesn't have a state personal income tax. Instead, state and local governments levy a roughly 9% sales tax. Bredesen says that personal tax rates aren't a big factor in automakers' decisions on where to locate factories, but they sure interest employees. The absence of a state income tax made life easier for its employees when Nissan decided to move its U.S. headquarters from California to Franklin, just south of Nashville, in 2006, ultimately adding more than 1,500 jobs.

So with a limited revenue base and voters who are suspicious of big government, how can Tennessee afford the $577.4 million (U.S.) in incentives it has promised to Volkswagen? First, Bredesen and Kisber argue that they are an investment, not an expense. Second, there are constitutional restrictions on direct payments to companies, so state and local governments often spend indirectly on tax breaks, job training and infrastructure (such as road and rail links). For the VW plant in Chattanooga, the state will spend $250 million (U.S.) in hard dollars, and local governments will chip in another $100 million (U.S.). But, Kisber argues, that money will generate $1.3 billion (U.S.) in tax revenues over 30 years, plus another $500 million (U.S.) a year in personal incomes. On Oct. 22, Bredesen and Kisber were scheduled to fly to Germany to woo Volkswagen suppliers, as well. "When a company like VW plants its flag, as Nissan did in the 1980s, that's just the foundation on which growth can be scaled," says Kisber.

As sweet as Tennessee's incentives appear at first, however, Bredesen says "they're not determinative." Lots of southeastern states offer them, along with the same location advantage: within a day's drive of about three-quarters of the U.S. car market. That's something that Ontario just can't match. Still, Bredesen finds that two other factors are often far more decisive: organization and attitude.

When he took office in 2003, Bredesen moved fast to ensure that all state departments co-ordinated their efforts in any pitch for new business. "A lot of people have come in and joked that the economic development staff come in and smile, put their arms around them and take them to dinner, then the revenue department takes it all back," he says. So Bredesen made sure that those two branches, along with work force development, environment and conservation, and others, are on hand in any major negotiation, or standing by to answer questions.

Drawing on his experience as a CEO and mayor of Nashville, Bredesen also says that just knowing how to think and talk like a business executive "certainly helps develop a rapport." A case in point: He secured the Tennessee Titans NFL franchise (the former Houston Oilers) for the city in 1998, even though he knew virtually nothing about football. Every politician who tries to land a major league team promises to fill a stadium with fans, he says. The Titans weren't impressed with that spiel from other cities. But what often makes the difference between a profit and a loss for a team are concession and ad sales, and Bredesen outlined exactly how he would help the team with those things. "Now you're talking their language," he says.

That empathy has paid off with automakers. "The local governments here are very easy to deal with," said GM North America president Troy Clarke after the Traverse launch. "They seek to understand your business. It's not a matter that we have to become an expert in government and policies. It's easy to do business in this state."

Long-time residents of Spring Hill lunch at the Old School Cafe, spread over three classrooms in the former Spring Hill High School, which shut down in 1992. It's the kind of eatery where a waitress insists on adding a free side order of hush puppies to a special of fried catfish, white beans and turnip greens. Landlord Tim Neal, 60, has lived within 15 kilometres of Spring Hill all his life. He also runs a heating and air conditioning repair business that he started in 1972 and that now employs five people. The auto factory has certainly brought a lot more people and money to town--when Spring Hill was selected for the Saturn plant in 1985, its population was less than 1,000, and there was just one traffic light on Main Street. Now, there are a half dozen (although, if you hit all greens, you can drive through town in 10 minutes). Is Spring Hill better off now? Neal smiles slightly. "It's been interesting," he says.

The architecture around here is pretty much Anytown, USA, which is to say, a hodgepodge. Highway 31 narrows into Main Street at both ends of town, and there are the de rigueur clusters of fast-food outlets at each end--both with a McDonald's. In between, you'll pass five churches on Main Street alone, all with ample parking. Dozens of modest 19th-century brick and wooden houses survive, but cookie-cutter subdivisions are sprouting to the east and west. At the south end, there's a new half-million-square-foot big-box plaza, which includes a SuperTarget, PetSmart and several other national retailers.

Highway 31 divides into four lanes south of the plaza, and you'll soon see the antebellum Rippavilla Plantation on your left, and a sign directing you to the GM factory on the right--the plant was deliberately built below the level of fields in front of it. Stepping into the visitors' centre for the first time is a bit quaint. It's still chock full of Saturn memorabilia, including a photo of then-GM chairman Roger Smith and then-United Auto Workers president Owen Bieber driving the first S-series sedan off the assembly line in July, 1990. Spring Hill was supposed to be a fresh start for both the company and the union. Assembly-line workers at GM plants across the continent were offered the chance to apply for new jobs in Tennessee.

Hundreds of the original employees are still there (after being temporarily laid off for a year, with partial pay from GM), and many have fond memories of the Japanese-style team approach that Saturn tried to emulate. Teams ranged in size from six to 18 workers, and traditional job classifications and detailed contractual work rules were eliminated. Managers at every level had a union counterpart, and workers were involved in hiring and designing their own jobs. Deborah Julius, now 54, arrived in 1992 from a Chevy Camaro and Pontiac Firebird factory just outside Cincinnati. She recalls thinking, "Can this be done? Are you dreaming?" But Julius says the labour-management partnership really worked. "We were empowered."

Adjusting to the slower pace of life in a small town was harder. "It was a culture shock," says Julius. "Everything closed at 8 o'clock." Still, she says, "I've never regretted the move."

By 2004, however, two fundamental problems became apparent. One was that the smaller Saturns made at Spring Hill weren't selling. The other was that the factory itself wasn't flexible enough--it couldn't switch quickly to producing other models (the Traverse factory is a so-called flex plant). That year, UAW members voted to revert to a more traditional union-management relationship. In 2005, GM announced it would shut one line at Spring Hill, one of 12 factories to be closed or partly closed in a cost-cutting drive (it later relented and kept the line open temporarily). By April, 2007, though, GM had decided to shut down the whole plant.

But Bredesen had already put the wheels in motion to secure a replacement model. The factory had an edge: It was one of the youngest of the 12 targeted plants, and the work force had won several quality awards for their work. Bredesen convinced Tennessee legislators to make it easier for existing plants to qualify for a 7% tax credit on spending for machinery. "This is the kind of thing that's part of modern business," says GM's Clarke.

Given the relentlessly grim news about GM's finances and the entire U.S. economy lately, Julius and other workers are grateful to have their well-paid union jobs. "I watch CNN," says Julius. "I feel extremely blessed." She earns more than $28 (U.S.) an hour under the UAW contract, plus benefits, installing the front bumper on the Traverse. Divorced in 2001, Julius owns a three-bedroom house a few minutes' drive south of the factory, where she lives with the youngest of her three sons, who graduated from high school this past May.

Some of the other workers in the Spring Hill plant aren't nearly as well paid. The UAW also represents hundreds of employees who work for two suppliers that deliver parts to the plant and help prepare them to be installed. Many of them literally work right next to GM employees, yet their basic wage rate is just $14 (U.S.) an hour.

The cost pressures are even more intense in Tennessee's non-union auto suppliers' factories. This past July, employees at a Johnson Controls factory in Columbia, just south of Spring Hill, that make seats and consoles for the Traverse, went on strike for eight days to win their first contract, even though 170 out of 172 of them had signed UAW cards. They were making $10 to $11 (U.S.) an hour, but had to pay $60 (U.S.) a week for health insurance, and they were only allowed to go to the bathroom during designated breaks. Now that they're unionized, hourly rates will increase to $13 to $16 (U.S.) over three years.

How can Ontario hang onto auto jobs and factories against competition like that?

The auto industry is still Ontario's economic Goliath--the province's 11 assembly plants employ some 45,000 workers, and more than 500 auto parts factories employ another 80,000. Together, these facilities represent about 20% of the province's manufacturing output, and more than 85% of their production is exported. Of course, when Goliaths fall, they fall very hard, and Ontario's automakers and parts suppliers have staggered lately--General Motors in particular.

In June, furious CAW members blockaded GM's Canadian headquarters for 12 days after the company announced it would shut down its Oshawa truck plant in 2009 and axe 2,600 jobs. Just a few weeks earlier, GM had promised the plant would remain open until 2011. The closure could have forced GM into early repayment of a portion of up to $435 million in long-term interest-free loans from Ottawa and Ontario--some of them extending 50 years. (The loans are to assist the company's much-touted Beacon Project, which will upgrade its Oshawa car factory's paint shop, as well as help fund a new V6 engine line in St. Catharines and refurbish the Cami crossover SUV factory GM operates with Suzuki in Ingersoll.) As a tradeoff, GM promised to invest $245 million in a powertrain factory in St. Catharines. In July, it also agreed to boost its buyout offers to employees and to add two models to the Oshawa plant (later bumped up to three), which is scheduled to start producing Chevy Camaros later this year.

Still, the industry outlook went from grim to worse over the summer, with a string of bad news. First, Toyota announced in September it would delay launching a second shift at its new, $1.1-billion RAV4 crossover plant in Woodstock. That would have added 800 workers to the 1,200 already employed there. A few days later, Ford announced it was losing 500 jobs at its assembly plant in Oakville. Then, Volvo Construction Equipment Co. said it would eliminate 500 jobs at its road-grader factory in Goderich and shift production to Pennsylvania. A week after that, DDM Plastics in Tillsonburg, which makes moulds and parts for Ford and Cami, said it would lay off more than 400 of its approximately 600 workers. And on Oct. 14, Daimler announced it would close a truck plant in St. Thomas.

What's Ontario's problem? By far the most pressing one is the soaring Canadian dollar--or, rather, the sagging greenback. The loonie climbed from 63 cents (U.S.) in 2001 to parity with the U.S. dollar last year. For the number crunchers in Detroit, that meant the average wage of a Canadian assembly line worker increased from about $20 an hour (U.S) to $32.50 (U.S.)--considerably higher than in the U.S. Southeast. "It's converted our once-large cost advantage into a slight cost disadvantage," says CAW economist Jim Stanford. The double whammy: The greenback's decline has also lowered the yen and euro costs for Japanese and European manufacturers in the Southeast.

Basic wage rates aren't everything, of course. Stanford says that Ontario still has some of its traditional cost advantages, and they're substantial. Canada's public health care system saves automakers about $5 (U.S.) an hour in health benefits for active workers, and even more for retirees (although the Detroit Big Three have started to off-load much of the cost of their obligations to U.S. retirees). Stanford adds that Canadian auto plants are still about 10% more productive than U.S. factories, "in part because of newer technology--we had very strong investment in Canadian plants from 1994 to 2002, when the dollar started soaring--and in part because of more flexible work rules."

Those traditional advantages aren't nearly enough, unfortunately. A 2006 study by the Canadian Automotive Partnership Council, a joint federal-provincial-industry-CAW body formed in 2002, concluded that the advantages disappear once the Canadian dollar climbs above 75 cents (U.S.), so even the loonie's plunge below 84 cents (U.S.) in early October didn't close the gap. Worse, even with the dollar below 75 cents, the incentives in the Southeast more than offset Ontario's advantages. The bottom line is that Canada's trade balance in automobiles has plunged from a record surplus of almost $15 billion in 1999 to a $7-billion deficit last year. Industry employment, which peaked at 155,000 in 2001, has declined by about 30,000.

It's not as if Ottawa and Ontario haven't tried to reverse the slide. In February, federal Finance Minister Jim Flaherty announced a new $250-million Automotive Innovation Fund. In 2004, Ontario unveiled its Automotive Investment Strategy, and Dalton McGuinty's Liberal government says the strategy has leveraged $500 million in funding into $7 billion of investments by the Big Three, Toyota, Honda and several parts manufacturers over the past three years. Two other programs, the Advanced Manufacturing Investment Strategy and the Next Generation of Jobs Fund, have auto components.

There's also nothing like a little proactive election anxiety to light a fire under politicians. In early September, just days before Prime Minister Stephen Harper called a vote for Oct. 14, federal Industry Minister Jim Prentice pledged up to $80 million from the Auto Innovation Fund, to help Ford reopen a dormant engine plant in Essex, near Windsor, and turn it into a flex facility. In early October, with the Conservatives sliding in the polls, Harper tossed another $200 million over four years into the Auto Innovation Fund. But Stanford and other critics say that election stunts only draw more attention to a disturbing lack of strategy and leadership. Since Harper took office in 2006, the Partnership Council has met just twice.

So what more needs to be done? "I don't believe we need to match U.S. investment subsidies dollar for dollar," Stanford argues. "However, those subsidies are definitely enough to overwhelm our other advantages if we do nothing." One relatively simple strategy that could pay huge dividends: Subsidize 20% of the costs of major new auto plants, splitting the bill evenly between Ottawa and the province. That was roughly the approach under the federal Liberals, from 2003 to 2006. Another Partn ership Council study concluded that governments get their money back within four years through new tax revenue and other sources.

You also have to believe that intangibles count for something, especially after hearing GM North America president Troy Clarke gush about how easy it is to do business in Tennessee. He's going to have to make some tough decisions about where to locate new production over the next few years--and which factories to close. Does he think Ontario is still in the game?

Clarke's answers deserve full marks for diplomacy. Yes, GM is critically short of capital, and "you have to become that much more thoughtful about where you place your bets." But, hey, Ontario has a lot going for it. The work force, he says, is "world-class," noting that in September, the consulting firm J.D. Power and Associates presented GM's Oshawa car assembly plant and CAW Local 222 with its rarely given Founder's Award. "Trade agreements like NAFTA have made doing business across our borders a lot easier," he adds. Governments are helpful, too, and "I think we enjoy a great relationship with the CAW," he says. "We have a very candid business dialogue."

A super salesman or two--or several--among the politicos and the bureaucrats in Ottawa and Queen's Park would help as well. But an official in Industry Canada said no one in the department would want to talk about the Ontario advantage before the Oct. 14 election (after we went to press). Ontario Industry Minister Michael Bryant was unavailable even for a phone interview. Phil Bredesen he is not.