Economic Impact

In 2015, of the 17.5 million vehicles sold in the U.S., approximately 65 percent were produced in the United States. That same year, the auto industry directly employed approximately 1.55 million workers and supported an additional 5.7 million jobs in repair shops, part supply stores, and car dealerships.

As such an important part of the U.S. economy, understanding the factors that influence the automobile industry is not just helpful-it is essential. A vehicle's domestic manufacturing composition plays a key role in determining its overall impact on the American economy. This knowledge empowers consumers and automakers alike to make better economic decisions about where a car is made, and which offer the greatest commercial benefits to the country.

Improving the Label

One of the first things a consumer looks at while car shopping is the price and options label. Since the enactment of the American Automotive Labeling Act (AALA) in 1994, automakers are required to provide information on the label detailing the amount of U.S. and Canadian parts content, the country of assembly, and the engine and transmission's country of origin.

AALA data, while useful, is not the most accurate means of assessing a vehicle's contribution to the U.S. economy. It presents a number of limitations; U.S. and Canadian content are combined into one number, and automakers are allowed to round-up a part that is potentially only 70% U.S./Canadian to 100% U.S./Canadian.

Kogod's method improves on the AALA data by incorporating a more comprehensive research methodology, providing consumers with a more accurate view of their vehicle's composition.

How does the index work

The index uses seven points derived from publicly available data.

The components of the index are based on research into the economic value of different components of auto manufacturing that was done by the Center for Automotive Research in Ann Arbor Michigan. For example, the highest ranked cars are made by U.S. based manufacturers using American engines and transmissions, and a with a high AALA percentage of U.S. and Canadian parts.

The seven criteria are as follows:

1. Profit Margin: This was measured based on the location of an automaker's headquarters. If an automaker's global headquarters is located in the US, the model receives a 6. If it is not, it receives a 0. The assumption here is that (on average), 6% of a vehicle's value is profit margin, so if it is a U.S. automaker, the profits remain in the country.
2. Labor. This category considers where the car is assembled. If a model is assembled in the US, it receives a 6. If not, the model receives a 0. We assume that approximately 6% of the vehicle's value is labor content.
3. Research and Development (R&D). This category looks at the location of a car's R&D activities. If the model is a product of a US company, it receives a 6. If it is the product of a foreign company but is assembled in the U.S. it receives a 3; if it is a foreign import it receives a 1.
4. Inventory, Capital and other expenses. If assembly occurs in the US, the model receives an 11; if not, it receives a 0.
5. Engine. If the engine is produced in the US, the model receives a 14; if not it receives a 0.
6. Transmission. If the transmission is produced in the US, the model receives a 7; if not it receives a 0.
7. Body, Chassis, and Electrical Components. 50 % of a vehicle's score is assigned to this category. The AALA percentage is divided into two to derive this score.

2016 Results

The index shows that vehicles produced by automakers headquartered in the US rated higher overall in the index. This is for two reasons: (1) profit derived from their sale was more likely to return or remain in the United States; and (2) a majority of a U.S. company’s R&D activities are located in the US.

The index also finds that foreign companies were more likely to use fewer US-produced parts, even if they utilize American manufacturing locations. US economic impact is lower, as the vehicle’s home country receives much of its profits. While the data contained in the AALA is important, a true index of “localness” must recognize other things such as company’s country of origin, as well as the location of its research and development activities.