EXECUTIVE SUMMARY

A Report on the Significance of

Toyota Motor Manufacturing Kentucky, Inc.

by

Charles F, Haywood, Ph. D.

National City Bank Professor of Finance

Gatton College of Business and Economics

University of Kentucky

The purpose of this report is to update a 1992 Study Published by the Center for Business and Economic Research (CBER), Gatton College of Business and Economics, University of Kentucky. That study, entitled The Economic,Significance of Toyota motor manufacturing, U.S. A., Inc. in Kentucky, was written by this report's author during his tenure as CBER's director. Now known as Toyota Motor Manufacturing Kentucky, Inc. ("TMMK"), Toyota's motor vehicle assembly plant at Georgetown, Kentucky has expanded more than expected in 1992, with larger than expected favorable effects on income and employment in Kentucky.

The beginning

In December 1985, Toyota Motor Corporation and the Office of the Governor of the Commonwealth of Kentucky announced that a site in Scott County, Kentucky, near the city of Georgetown and fifteen miles north of Lexington, had been selected as the location of a new plant to assemble passenger motor vehicles. Also announced was that an incentives package had been promised to Toyota Motor Corporation to enhance the attractiveness of the Kentucky location. The incentives package provided by the Commonwealth of Kentucky included the following components and costs:

Toyota's commitment was to invest $800 million to build and operate an assembly plant to produce 200,000 passenger motor vehicles with a work force of 3,000 and an annual payroll of $90,000,000.

When the CBER study was done in 1992, the annual production rate of Camry automobiles was approximately 230,000; employment was 4,300; and the annual payroll was approximately $185 million, excluding benefits costs estimated at 37 percent of payroll. That is, by 1992 actual performance by TMMK exceeded the level of operations projected when the "Agreement" was consummated in 1986.

TMMK expansions

Even before the completion of the assembly plant, TMMK announced (November 1987) that a facility to produce engines and axjes would be added to the initial plan. The capacity of the power-train plant was projected at 300,000 engines, with 200,000 targeted as the normal production level. Production of axles began in October 1988 and 4-cylinder engines 'in November 1989.

In November 1990, TMMK announced that the capacity of the Georgetown plant would be doubled from 200,000 to 400,000 vehicles by adding a second assembly line. Construction was completed in early 1994, with pilot production beginning in March 1994. In September 1, 994 TMMK initiated production of Toyota!s new Avalon on the second assembly line.

Further expansion of the power train plant was announced in January 1992.TMMK indicated that the capacity of the power train plant would be increased to 500,000 engines, including V-6 cylinder engines as well as 4-cylinder engines. The expansion was completed in the summer of 1994, and production of V-6 engines began in August.

Major additional invesunents, largely in equipment, were made at TNM in 1996 and 1997 in support of the production of the new model of the Camry and the initiation of assembly of the new Siena minivan. By the end of 1997 the cumulative original-cost investments in TNM's Georgetown facility reached approximately $4.6 billion.

In 1997 the Georgetown facility assembled 325,123 Camry sedans, 80,277 Avalon sedans, and 26,746 Siena minivans for a total of 432,146 vehicles. Manufactured were 435,709 4-cylinder and V-6 engines. Also manufactured at Georgetown, in support of the assembly of vehicles and manufacture of engines, were the necessarynumbers of axles, steering components, machined blocks, cylinder heads, crankshafts, camshafts, and rods and axles assemblies.

The following observations sum up key aspects of the TMMK success story.

1. Employment was projected in 1986 to reach a range of 3,000 to 3,200 jobs when full production was attained. Employment at the end of 1997 was 7,689 jobs.

2. The annual payroll was projected to be approximately $90 million at full production. In 1997 the payroll was $470.4 million plus employee benefits costing $125.6 million.

3.In 1985 Toyota Motor Corporation's investment was projected to be $800 million. At the end of 1997 the total investment at the Scott County plant was $4,524.4 million. Whereas a production capacity of 200,000 motor vehicles was planned in 1985, current capacity is 435,000 motor vehicles and 500,000 engines

4. In 1985 it was expected that the domestic content of the motor vehicles produced by TMMK would be 60 percent of the value of the finished product. Today, the domestic content is in excess of 75 percent.

5.Discounted cash flow analysis of Kentucky's 1985 incentives package indicated at that time an annual rate of return (IRR) of 8.5 percent from increased state revenue collections attributable to the direct and indirect effects of TMMK's projected level of operation. In the 1992 CBER study, adjustment of the 1985 analysis to take account of increases in state tax rates in 1990 and inflation increased the originally projected rate of return from 8.5 percent per annum to 16.8 percent per annum. Based on the expanded level of 's operations existing in 1992 and as then projected, the 1992 CBER study found that the annual rate of return on the Commonwealth's incentives package had increased to 30 percent. As of 1998, the updated annual rate of return on the Commonwealth's incentives package is approximately 36,86 percent. In the 20-year period 1986-2005 the Commonwealth of Kentucky will collect,,over and above the costs of the incentives package, approximately $1.2 billion of tax revenues attributable to the direct and indirect effects of TMMK's operations 'in Kentucky.

6. TMMK's 1997 outlays of $1,702.7 million in Kentucky for parts and materials, payroll, and plant and equipment gave rise to $4,408.1 million in total spending, $1,406.6 million in household earnings, and 34,544 jobs in the state. Outlays for the period 1998-2005 are projected to rise only by the amount of expected increases in wage rates and costs of parts and materials; after increasing to 34,797 in 2000 the employment effect is expected to remain stable at about 35,000 jobs.

7. TMNK's outlays for parts and materials in five states (Illinois, Indiana, Michigan, Ohio, and Tennessee) totaled $2,223.5 million in 1997. In the five states combined, the economic multiplier effects accounted for $5,582.6 million of total spending, $1,322.0 million of household earnings, and 49,735 jobs.

8. TMMK's expenditures in the United States during 1997 totaled $4,869.4 million. The total spending effect was $16,823.9 millior4 the earnings effect was $4,056.2 million, and the employment effect was 99,610 jobs.

9. Through the expenditures of its subsidiaries and affiliates in the United States, Toyota Motor Corporation has multiplier effects, roughly estimated in this report at $25.2 billion for thetotal spending effect, $6. 1 billion for the household earnings effect, and 150,000 jobs for the employment effect. TMMK accounts for about two-thirds of the economic multiplier effects of Toyota Motor Corporation in the United States.

Why has it been so successful?

The use of an incentives package to help convince Toyota Motor Corporation to locate an assembly plant in Scott County, Kentucky has turned out to bea success beyond anything that was or could have been creditably projected in December 1985. Some of the circumstances that have contributed to that success can be identified as follows:

1. Both sides -- the Commonwealth of Kentucky and Toyota Motor Corporation -willingly and graciously lived up to their respective commitments.

2. Approximately 42 percent of the incentives package was for an on-site training facility and -for training programs, which have contributed to the high quality of 's output.

3. Evident in the local area and region was a great deal of goodwill to help facilitate the successfw development and operation of the plant. There were numerous voluntary initiatives by private as well as government organizations to that end.

4. TMMK and Toyota Motor Corporation evidenced similar good will and have never made any kind of move that could be regarded as intrusive or as "throwing its weight around." Indeed, the opposite has been true, as and Toyota Motor Corporation have been assiduous in seeking to blend in with and be a part of Central Kentucky.

5. Excellent choices were made in the selection of managers from the very beginning of the building and operation of TMMK.

6.TMMK's output is a high quality product, in which the work force (95% Kentuckians) can and do take great pride.

7. Once the early success of the venture became apparent, success bred success.

A Report on the Significance of

to the Kentucky Economy

by

Charles F. Haywood, Ph. D.

National City Bank Professor of Finance

Gatton College of Business and Economics

University of Kentucky

The purpose of this report is to update a 1992 study published by the Center for Business ,and Economic Research (CBER), Gatton College of Business and Economics, University of Kentucky. That study, entitled The Economic Significance of Toyota Motor Manufacturing, U.S.A., Inc. in Kentucky, was written by this report's author during his tenure as CBU's director. Since 1992 the name of Toyota's assembly plant and related operations at Georgetown, Kentucky has been changed from Toyota Motor Manufacturing, U. S. A., Inc. to Toyota Motor Manufacturing Kentucky, Inc. ("TMMK"). The change of name, however, is not reason enough to update the 1992 CBER study. The reason is that actual performance during the period 1993-1997 has shown that the 1992 projections of employment and output for the years 1993-2005 were much too conservative. The CBER study in 1992 projected that TMMK would have large, favorable effect on employment and income in the Kentucky economy during the 1990's. It is now clear that, even as large as they were projected to be, such projected effects were underestimated.

At the beginning

In December 1985, Toyota Motor Corporation and the Office of the Governor of the Commonwealth of Kentucky announced that a site in Scott County, Kentucky, near the city of Georgetown and fifteen miles north of Lexington, had been selected as the location of a new plant to assemble passenger motor vehicles, Also announced was that an incentives package had been promised to Toyota Motor Corporation to enhance the attractiveness of the Kentucky location. The incentives pack-age was approved January 24, 1986 by the Kentucky General Assembly through the passage of Senate Joint Resolution No. 7. On February 25, 1986 Kentucky Governor Martha Layne Collins and Toyota President Shoichiro Toyoda signed an "Agreement" confin-ning the commitments between the Commonwealth of Kentucky and Toyota Motor Corporation.

The incentives package provided by the Commonwealth of Kentucky included the following components and costs.-

Ground was broken for the assembly plant in May 1986, and construction was completed in May 1988. Pilot production was initiated at that time, and volume production was achieved in July 1988. When the CBER study was done in 1992, the annual production rate of Camry automobiles was approximately 230,000; employment was 4,300; and the annual payroll was approximately $185 million, excluding benefits costs estimated at 37 percent of payroll. That is, by 1992 actual performance by exceeded the level of operations projected when the "Agreement" was conswnmated in 1986.

Even before the completion of the assembly plant, announced (November 1987) that a facility to produce engines and axles would be added to the initial plan. Construction of the power train plant began in mid-1988, Plant capacity was projected at 300,000 engines, with 200,000 targeted as the normal production level. Production of axles began in October 1988 and 4-cylinder engines in November 1989.

In November 1990, announced that the capacity of the Georgetown plant would be doubled by adding a second assembly line. That is, targeted capacity would be increased from 200,000 to 400,000 motor vehicles per year. Construction began in June 1991 and was completed in early 1994, with pilot production beginning in March 1994. In September 1994 TMMK initiated production of Toyota's new Avalon on the second assembly line.

Further expansion of the power train plant was announced in January 1992. TMMK indicated that the capacity of the power train plant would be increased to 500,000 engines, including V-6 cylinder engines as well as 4-cylinder engines. The expansion was completed in the swnmer of 1994, and production of V-6 engines began in August.

Major additional investments, largely in equipment, were made at TMMK in 1996 and 1997 in support of the production of the new model of the Camry and the initiation of assembly of the new Sienna minivan. By the end of 1997 the cumulative original-cost investments in TMMK's Georgetown facility reached approximately $4.6 billion, or 5.75 times the $800 million expected when the Commonwealth's incentives package of $147 was proposed in late 1985.

In 1997 the Georgetown facility assembled 325,123 Camry sedans, 80,277 Avalon sedans, and 26,746 Sienna minivans for a total of 432,146 vehicles. Manufactured were 435,709 4-cylinder and V-6 engines. Also manufactured at the Georgetown facility, in support of the assembly of vehicles and manufacture of engines, were thenecessary numbers of axles, steering components, machined blocks, cylinder heads, crankshafts, camshafts, and rods and axles assemblies. The expectation in late 1985 was that the Georgetown facility would be only an assembly plant, capable of turning out 200,000 vehicles.

Economic impacts in Kentucky, 1986-1992

In the 1992 CBER study, TMMK's total outlays in Kentucky for 1992 were estimated to be $574.5 million, including Kentucky payroll, purchases of parts and supplies from Kentucky vendors, and local construction expenditures. Using multipliers from input-output analyses by the Regional Economic Analysis Division, Bureau of Economic Analysis, U. S. Department of Commerce, and usually referred to as "RIMS 11" (Regional Input-Output Modeling System), three economic impacts were calculated: (1) the total output effects, which in 1992 were $1,503.0 million; (2) the earnings effects, which were $563.4 million; and, the employment effects, which totaled 17,883 jobs. In addition to the three multiplier effects, the 1992 CBER study estimated the amount of additional state tax revenues attributable to 's economic impacts. The 1992 estimate of $47.7 million was based on conservative ratios of state income taxes as a percent of earnings and state sales taxes as a percent of total spending.

Total output effects include direct and indirect effects. The direct effect, of in 1992 were $574.5 million, which as noted above was the total spending of TMMK in Kentucky that year for payroll, parts and materials, and construction. The indirect effects were calculated at $928.5 million. The indirect effects included the household expenditures of workers and the on-site construction workers; the Kentucky outlays of 's suppliers for wages and salaries, materials and supplies, and plant and equipment; the local expenditures of the construction firms working at the TMMK site; the second-round expenditures by the recipients of the spending by TMMK workers, suppliers, and construction workers and suppliers; and, the third, fourth, and further rounds of spending as the dollars move from one transaction level to the next. The total output effects are the sum of the successive rounds of spending, starting with TMMK's expenditures as the first round of spending or direct output effects and the further rounds of spending as the indirect effects.

TMMK's earnings effects of $563.4 million in 1992 included direct effects of $242.5 million and indirect effects of $320.9 million. The direct effects came from $185 million of payroll and $57.5 million of construction payroll. The indirect effects included the income amounts received by households in the successive rounds of total spending described above.

The employment effects of 17,883 Jobs in 1992 included direct effects of 5,288 jobs and indirect effects of 12,595 jobs. Included in the 5,288 direct-effects jobs were 4,350 employees and 938 full-time-equivalent construction jobs. Of the 12,595 indirect-effects jobs, 5,051 were ascribed to the multiplier impacts of the speaking of households of TMMK workers, 1,283 to the spending of the households of construction workers, 4,681 to TMNM's purchases of parts and supplies in Kentucky, and 1,580 to the purchases of materials and supplies by the construction firms.

For the period 1986 - 1992, Table I presents annual data for TMMK outlays and the three multiplier effects. Also shown in Table I are the estimates of state revenues attributable to TMMK's effects on income and spending through 1992. The last figure in the right-most column of Table I indicates that through 1992 the Commonwealth of Kentucky collected $161.3 million of tax revenues attributable to the direct and indirect economic impacts of TMMK, or $14 million more than the $147 million incentives package.

Table I

TMMK's Economic Impacts in Kentucky

1986 - 1992

Economic impacts in Kentucky, 1993-1997

As significant as TMMK's economic impacts in Kentucky were during the period 1986-1992, they can now be seen as a prelude to much more substantial impacts that began to be exerted in 1993. TMMK's expenditures in Kentucky in 1993 were almost twice the volume of 1992 expenditures:$1,053.3 million, compared to the $574.5 million reported in the 1992 CBER study. Included in TMMK's expenditures in Kentucky in 1993 were $709.7 million in purchases of parts and materials and $236.0 million of payroll, not including employee benefits estimated at 40 percent of payroll. The remainder of the 1993 expenditures in Kentucky reflected local purchases and payroll related to construction and other changes in plant and equipment.

Table 2 shows the annual data for TMMK outlays and the three multiplier effects during the period 1993 - 1997. Also, included in Table 2 are estimates of state revenues attributable to TMMK's effects on income and spending from 1993 through 1997.

Table 2
TMMK's Economic Impacts in Kentucky
1993 - 1997

In 1997 TMMK's expenditures in Kentucky were approximately $1,702.7 million, including purchases of parts and materials ($1,141.7 million), payrol ($470.4 million, excluding employee benefits), and equipment purchases and related activities (estimated at $90.6 million).

As shown in Table 2, the total output effects of TMMK's expenditures in Kentucky in 1997 were $4,408.1 million. That is, total spending in Kentucky during 1997 was $4,408.1 million greater than it would have been in the absence of TMMK. Such total spending included TMMK's outlays of $1,702.7 million (the direct effects) and $2,637.2 million of indirect effects, including household expenditures of workers, spending by TMMK's suppliers and their workers, and subsequent rounds of expenditures by businesses and workers as the dollars moved from one transaction level to the next.

Earnings effects of $1,406.6 million in 1997 included the direct effects in the form of TMMK's payroll of $470.4 million plus estimated contractors'payrolls of $45.3 million and indirect effects of $890.9 million, generated by the successive rounds of total spending described above.

The employment effects in 1997 totaled 34,544 jobs, of which 8,170 jobs were the direct effects (7,689 TMMK Jobs; 481 estimated contractor Jobs) and 26,374 jobs were indirect effects at supplier and other business locations throughout the Commonwealth where the successive rounds of spending called forth increases in the production of goods and services.

Annual state tax revenues attributable to the direct and indirect effects of TMMK's Kentucky expenditures increased from $62.6 million in 1993 to $103.6 million in 1997. By the end of 1997 cumulative state tax revenues since 1986 were $571.4 million, which was almost four times the $147 million incentives package.

Table 3
Projections of TMMK's Economic Impacts in Kentucky
1998 - 2005

*Includes $571.4 million from period 1986 - 1997 shown in Tables I and 2.
Source: TMMK Outlays projected by this report's author; multipliers from Table 2 with modifications to reflect expected increases in wage rates.

Underlying the projections to 2005 is an assumption that employment at TMMK will be constant at a level of 7,850 full-time-equivalent employees between 1998 - 2005. At present, there do not appear to be any plans to expand further the capacity of the Georgetown facility. However, such was the case when is was assumed in the 1992 CBER study that employment would level off in 1995 at 6,000 jobs. The projection of 6,000 jobs for 1995 was reasonably close; TMMK employment averaged 6,262 in 1995 but did not level off. It continued to increase from 6,559 at the end of 1995 to 7,058 at the end of 1996 and 7,689 at the end of 1997. Nevertheless, the conservative assumption, as in 1992, is that a steady state will prevail through 2005 at the Georgetown facility. Increases in outlays, total output effects, earnings effects, and state tax revenues from 1998 through 2005 reflect an assumption that prices and wage rates generally will increase by an average of 2.5 percent per annwn. The result of such assumption is that the projection of direct and indirect employment effects in Kentucky rises to 34,797 Jobs in the year 2000 and remains at that level.

Cash flow analysis, 1986 - 2005

The $147 million cost attached to the incentives package provided to Toyota Motor Corporation by the Commonwealth of Kentucky was a "present value" figure. An alternative estimate in 1985 - 1986 projected that the Commonwealth would need to borrow funds to cover some portions of the incentives package and would therefore incur interest costs; the total outlay was projected to be $305.2 million spread over a twenty-year period. The thus projected costs are shown in Table 4 in the column denoted as (1) "Incentives Costs With Interest." The annual state tax collections shown in Tables 1, 2, and 3 of this report are set forth in the column headed (2) "Attributable State Tax Revenues." Subtracting column (1) from column (2) results in colw-nn (3) "Net Cash Flow."

Over the twenty-year period, 1986 - 2005, the total of Attributable State Tax Revenues in Table 4 is, as shown, $1,491.2 million. Subtracting the $305.3 million of Incentives Costs With Interest results in a Net Cash Flow totaling $1,185.90 million. The rate of return on the Commonwealth's incentives package, as now projected through 2005, is 36.79 percent per annum. The 1992 CBER study estimated an annual rate of return of 30.77 percent and compared that return to an annual return of 16.78 percent that would have been likely if the Georgetown facility had not been expanded beyond its originally planned capacity of 200,000 motor vehicles and employment of 3,000 persons.

Table 4
Rate of Retum Analysis of
Incentive Costs and State Tax Revenues
1986-2005
($ millions)

1987

By the end of 1997 there were approximately 175 manufacturing facilities in Kentucky producing automobile parts and materials. Only 55 of these plants were in operation prior to the December 1985 announcement that Toyota Motor Corporation would build an assembly plant in Scott County, Kentucky. That is, approximately 120 plants were opened in Kentucky from 1986 through 1997. Total capital investment in the 120 plants is estimated to have been $2,752 million.

The 175 parts plants are located in 56 counties (out of the state's 120 counties). Prior to December 1985 the 55 supplier plants were located in 27 counties. Only two of those 27 counties did not get at least one "new" plant after 1985. The 120 "new" plants located in 25 of the counties which had at least one parts plant in 1985 and in 29 counties which did not have any such plants in 1985.

Total employment in the 175 parts plants In 1997  was estimated to be in excess of 40,000 jobs. The 120 "new" plants accounted for approximately 23,500 of that total. Total manufacturing employment in Kentucky increased from 255,300 in 1985 to 316,1 00 In 1997.

TMMK does not purchase parts and materials from all of the 175 automotive parts plants in Kentucky. The majority of them sell to other motor vehicle assembly plants in Kentucky and to assembly plants located in other states. In 1997 TMMK purchased parts and materials from 55 manufacturers in Kentucky. TMMK's purchases from its 55 Kentucky suppliers are estimated to make up about one-half of the total sales of the 175 plants, and it is further estimated that TMMK's purchases account for between 19,000 and 20,000 of the 40,000 jobs in the motor vehicles parts and materials companies.

The economic impacts attributed to TMMK in Tables I through 4 include only those Kentucky plants from which TMMK purchases parts and materials. Those parts plants that located in Kentucky after 1985 but which are not TMMK suppliers have not been considered in calculating the economic impacts of TMMK in Kentucky.

It might be argued that many of the 120 "new" plants followed Toyota's lead in locating in Kentucky even though there was no expectation of becoming suppliers to TMMK. Therefore, the further argument might be that perhaps an additional impact should be calculated for the "non-supplier" plants and some part of it attributed to TMMK. However, there is no need to undertake the difficult task of selecting and defending what weight should be attached to economic impact of the "non-supplier" plants. Tables I through 4 demonstrate that the economic impacts readily attributable to TMMK have made the Commonwealth's incentives package a very successful investment, indeed. The 1985 decision by the Commonwealth and Toyota Motor Corporation has proved to have been a significant part of the restructuring and relocation of the motor vehicle and parts manufacturing industry in the United States during the 1980s and 1990s. The increase in Kentucky's importance in that new structure has been dramatic.

Economic multiplier effects in selected states

In addition to its analysis of the economic impacts of TMMK in.Kentucky, the 1992 CBER study presented data on the multiplier effects of TMMK's purchases of parts and materials from plants in five other states: Ulino.1s, Indiana, Michigan, Ohio, and Tennessee. For those five states, Table 5 shows TMMK's purchases of parts and materials by year from 1988 through 1997 and the multiplier effects on total output, household earnings, and employment.

Table 5
TMMK's Economic Impacts in Selected States
1988, 1990, 1992, 1994-1997
($ millions, except employment)

Aggregating the 1997 employment effects in Table 5 Indicates that 49,735 jobsin the five states can be attributed to the effects of TMMK's purchases of parts and materials, Table 2 showed that 34,544 jobs in Kentucky in 1997 could be attributed to the economic effects of TMMK's expenditures, which included not only purchases of parts and materials in Kentucky but also payroll. The total employment effect of TMMK in the six states of Illinois, Indiana, Kentucky, Michigan, Ohio, and Tennessee in 1997 was thus 84,279 jobs.

Next to Kentucky, Michigan is the state where TMMK has had the largest multiplier effects. Purchases of parts and materials from plants in Michigan increased from $88.0 million in 1988 to $908.8 million in 1997.
As indicated in Table 5, the direct and indirect effects of TMMK's purchases in 1997 accounted for $2,251.7 million of Nfichigan's total output (=total spending) that year. Household earnings of $511.7 million and 17,403 Jobs in Michigan can be attributed to the multiplier effects of TMMK's purchases in Michigan.

Indiana ranked third, with $465.6 million of TMMK purchases in 1997. The total-output effect in 1997 was $1,176.1 million, the earnings effect was $304.5 million, and the employment effect was 12,108 jobs. These effects reflect only TMMK's purchases of parts and materials in Indiana for assembly of motor vehicles at the Scott County, Kentucky, plant. The effects do not include any effects from expenditures in Indiana by Toyota Motor Manufacturing Indiana, Inc. (TMMI) In the construction of the T-100 truck assembly plant at Princeton, Indiana, TMMI's construction expenditures in 1997 were $310.0 million, plus $10.1 million of payroll for TMMI's on-site employees.

Tennessee was a close fourth in 1997 in the volume of TMMK's purchases, with $437.8 million. TMMK's purchases in Tennessee increased markedly between 1992 and 1995, rising from $66.1 million to $397.8 million. In 1997 's total-output effect was $1,061.2 million, the earnings effect was $249.5 million, and the employment effect was 10,790 jobs.

Table 6
TMNM's Economic impacts in the United States
1993-1997
($ millions, except employment)

Source: TMMK Expenditures from Toyota Motor Manufacturing, North America, Inc. Effects calculated by multipliers updated from 1992 CBER study

The lower panel of Table 6 -- TMMK expenditures w/o construction -- shows, so to speak, the on-going economic impacts of TMMK's operations. Readily apparent is the strong expansion of TMMK's expenditures in the United States during the period 1993 - 1997, rising from $2,310.5 million in 1993 to $4,416.2 million in 1997. The effects on total output in the U. S. economy increased from $7,971.3 million to $15,236.0 million. Household earnings reflecting the direct and indirect effects of TMMK's expenditures rose from $1,924.7 million to $3,678.7 million. The number of jobs in the United States attributable to the direct and indirect effects of TMMK's expenditures increased from 59,150 in 1993 to 90,340 in 1997.

In March 1998 the University of Michigan published a study entitled The Contribution of the International Auto Sector to the U.S. Economy, The study was sponsored by the Association of International Automobile Manufacturers, Inc. (AIAM) and was prepared at the University of Michigan by the Office for the Study of Automotive Transportation of the Transportation Research Institute and by the Institute for Labor and Industrial Relations. One of the study's findings was that 450,000 jobs in the U. S. economy - 1996 could be attributed to the direct and indirect - effects of the production of motor vehicles in the United States by nine international companies: AutoAlIiance, BMW, Honda, Mercedes-Benz, Mitsubishi, NUMMI (joint venture of G.M. and Toyota), Nissan, Subaru-Isuzu, and Toyota. As Indicated in Table 6, TMMK's employment effect in the United States totaled 95,631 jobs in 1996.

The Michigan study used a different economic impact model (REMI) than the one (RIMS II) used in the 1992 CBER study and in this updated report on TMMK. Therefore, strict comparability of this updated report with the Michigan study should not be expected. Nevertheless, it may be meaningful to note that the 95,631 jobs attributed in Table 6 to TMMK in 1996 equal 21.25 percent of the total employment effect found in the Michigan study for the nine AIAM companies.

Several considerations suggest that the 21.25 percent may be close to the mark for TMMK's relative contribution to the U. S. economy despite the difference in methodologies. Employment at TMMK made up 15.9 percent of the direct production employment reported by the Michigan study for the nine AIAM companies as of 1996, The number of motor vehicles produced in 1996 by TMMK was 16.3 Percent of the total nwnber of vehicles produced in the United States by the nine AIAM companies. Moreover, the average value of the motor vehicles produced by TMMK in 1996 (Camry and Avalon) was greater than the average value of the motor vehicles produced by the seven other AIAM companies in production. (Mercedes-Benz was not yet in production in 1996.) Also, it is believed that the average domestic content of the Camry and Avalon in 1996 was higher than the average domestic content of the vehicles produced by the seven other AIAM companies. That is, on a per-car basis TMMK was spending significantly more for parts and materials in the United States than the average per car for the seven other AIAM companies. Also, TMMK,s investment in Scott County, Kentucky, plant constituted 26.2 percent of the total investment of the nine AIAM companies in U. S. production facilities as reported in the Michigan study.

Toyota Motor Corporation in the United States

Table 7 lists and presents key information on thirteen subsidiaries or affiliates of Toyota Motor Corporation doing business In the United States during 1997, At the end of 1997 the investments of Toyota Motor Corporation in these 13 subsidiaries or affiliates was $7,912.7 million, with $4,524.4 million at Employment totaled 23,202, including TMMK's 7,689 at the end of 1997. The 1997 payroll in the United States was $1,369.7 million, of which accounted for $470.4 million.

Table 7
Toyota Motor Corporation
Subsidiaries/Affiliates in the U, S.,1997

I. Coordination and support of manufacturing operations in U. S. and Canada

2. Production of Camry, Avalon Sierna,  and power units

3. Production of T I 00 truck (not in production at end of 1997)

4. Production of engines (not in production at end of 1997)

5. Aluminum and iron castings

6. Styling design

7. Product development, testing, and research

8. Truck beds, stamped parts, catalyfic converters

9. Support services (partially transferred to Erlanger, KY, 1996)

                            10. Production of forklifts

               11. Racing engines and high performance parts

12. Distribution and sales administration for imported and U. S. produced motor vehicles

13. Production of Corolla, Prizm, pick-up truck (50% owned by GM; 50% by Toyota)

Source: 1997 Toyota U. S. A. Demographics Datebook, TMCS External Affairs Group, New York

 

However, a rough estimate would be that, at the present time, TMMK accounts for perhaps as much as two-thirds of Toyota Motor Corporation's economic significance in the United States. On that basis, adding 50 percent to the figures in Table 6 would give a "ball park" estimate of the total output effect, earnings effect, and employment effect of Toyota Motor Corporation in the United States. For 1997 those estimates, including construction, would be $25.2 billion of total output effect $6.1 billion earnings effect and about 150,000 jobs,

In addition to the subsidiaries and affiliates shown in Table 7 for the United States, Toyota Motor Corporation has several Canadian subsidiaries, including: Toyota Canada, Inc. (importation and sales of motor vehicles) with 497 employees; Canadian Autoparts Toyota, Inc, (production and sales of aluminum wheels) with 185 employee; and Toyota Motor Manufacturing, Canada, Inc, (production of Corollas and parts) with 2,200 employees.

Further, as if there is no end to Toyota economic significance in the United States, there were 1,455 Toyota dealerships in the United States at the end of 1997. The calculated net worth of the dealerships was $7,324.7 million. The number of employees was 80,826.

Summary

The 1985 decision to invest in an incentives package to help convince Toyota Motor Corporation to locate an assembly plant in Scott County, Kentucky has paid off handsomely for the Commonwealth of Kentucky. Even if only the original plan has been realized, the benefits would have been sufficient to justify the incentives package. The benefits have been multiplied several times by the expansion decisions made since 1985, The following observations sum up key aspects of the TMMK success story.

1. Employment was projected in 1986 to reach a range of 3,000 to 3,200 jobs when full production was attained at the Scott County plant. Employment at the end of 1997 was 7,689 jobs.

2. The annual payroll was projected to reach approximately $90 million at full production. In 1997 the payroll wus $470.4 million plus employee benefits costing $125.6 million.

3. In 1985 Toyota Motor Corporation's investment was projected to be $800 million. At the @ of 1997 the total investm. ent at the Scott County plant was $4,524.4 million. Whereas a production capacity of 200,000 motor vehicles was planned in 1985, today's capacity is 435,000 motor vehicles and 500,000 engines.

4. In 1985 it was expected that the domestic content of the motor vehicles produced by TMMK would be 60 percent of the value of the finished product. Today, the domestic content is in excess of 75 percent.

5. Discounted cash flow analysis of Kentucky's 1985 incentives pack-age indicated at that time an annual rate of return (IRR),of 8.5 percent from increased state revenue collections attributable to the direct and indirect effects of TMMK's projected level of operation. In the 1992 CBER study, adjustment of the 1985 analysis to take account of increases in state tax rates in 1990 and inflation increased the originally projected rate of return from 8.5 percent per annum to 16.8 percent per -annum. Based on the expanded level of TMNK's operations existing in 1992 and as then projected, the 1992 CBER study found that the annual rate of return on the Commonwealth's incentives package had increased to 30 percent. As shown in Table 4 the updated annual rate of return on the Commonwealth's incentives package is now approximately 36.86 percent. In the 20-year period 1986-2005 the Commonwealth of Ktntucky will collect, over and above the costs of the incentives package, approximately $1.2 billion of tax revenues attributable to the direct and indirect effect of TMMK's operations in Kentucky.

6. TMMK's 1997 outlays of $1,702.7 million in Kentucky for parts and materials, payroll, and plant and equipment gave rise to $4408.1 million in total spending, $1,406.6 million in