U.S. Automakers Thrive as Detroit Goes Bankrupt

Bloomberg – by Jeff Green & Mark Clothier

The Motor City was the car capital of the world when David Cole graduated from a Detroit high school in 1955 and headed off to college to study auto engineering. Six decades later, the “motor” has mostly moved out, he said.

Many of the factories that used to dot the city and employ thousands moved to suburbs, other U.S. states or to China and Brazil as the auto industry became global and manufacturing focused on getting faster and less expensive, said Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor, Michigan, and son of a General Motors Co. (GM) president.  

“The auto industry was forced to change, driven by industry pressure, and it evolved,” Cole said. “Detroit did not. It’s sad to see. We just took it all for granted.”

Detroit, hamstrung by $18 billion in debt, was forced to file the largest bankruptcy for a U.S. municipality yesterday. GM, Ford Motor Co. (F) and Chrysler Group LLC, the automakers that call the region home, are profitable and thriving.

“For much of the 20th century, the auto industry and Detroit were synonymous,” said Harley Shaiken, a labor professor at the University of California at Berkeley. “You couldn’t drive through Detroit but be aware of the presence of the automakers.”

“The industry has become both global and very much decentralized in the U.S.,” he said. “There’s still a vital presence in Michigan and an important presence within the city, but their fates have diverged.”

‘Much Messier’

It isn’t likely that Detroit’s recovery will be as quick and easy as the turnaround of the U.S. automakers, said Steven Rattner, aNew York financier who headed President Barack Obama’s auto-industry task force in 2009 that ultimately put GM and Chrysler into bankruptcy.

GM and Chrysler were scrubbed clean of debt by U.S.-backed bankruptcies that lasted about six weeks. Ford suffered through a painful restructuring on its own that cut debt and labor costs.

“This will be much messier than the auto companies,” Rattner said in an interview. “This will go on for a long time.”

Detroit’s ties to the fortunes of the auto industry have been fraying for six decades, as manufacturing jobs in the city fell from about 296,000 in 1950 to fewer than 27,000 in 2011. The U.S. automakers, still ruling the road in the ’50s and ’60s, moved much of their manufacturing out of Detroit as they built new factories elsewhere in the U.S. and world. That evacuation of the city accelerated Detroit’s decline.

What’s Left

Chrysler, majority owned by Fiat SpA (F), has factories to make Jeeps and Viper sports cars in the city and a 70-person office downtown, about 30 miles (48 kilometers) from the suburban headquarters where it employs more than 10,000. GM builds the plug-in hybrid Chevrolet Volt at a factory in Detroit, where it also has its headquarters downtown. Ford, based in neighboring Dearborn, built Model Ts in Detroit until 1910 and hasn’t built cars in the city since.

The automakers each said yesterday that they will continue to play a role in the city as it restructures.

“Chrysler Group believes in the city of Detroit and its people,” the company said in an e-mailed statement. “We not only continue to invest in the city and its residents by adding to our presence in Detroit, we also are committed to playing a positive role in its revitalization.”

For GM, the filing may mark a “clean start” for the city.

“A healthy auto industry will play a part in Detroit’s comeback story and GM is doing its part,” the company said in a statement.

Shares Surge

The automakers can afford to be magnanimous. Ford, the oldest U.S. automaker, founded 110 years ago, reached a 29-month high on July 15 and its shares surged 31 percent this year through yesterday. GM has gained 28 percent so far this year.

In contrast, Michigan’s largest city has seen its population decline to just 701,475 in 2012, down from a peak of 1.85 million in 1950, when it was the fourth-largest city in the U.S., according to U.S. Census data.

The city listed assets and debt of more than $1 billion in a Chapter 9 petition filed yesterday in court in Detroit. Detroit Emergency Financial Manager Kevyn Orr, who helped with the Chrysler bankruptcy, precipitated the filing after failing to reach cost cutting deals with debtors and city unions.

“Detroit has been working its way to a level of insolvency for decades — decades,” Orr said at a press conference yesterday in Detroit.

Detroit’s Spiral

“Even the casual observer has had to understand for some period of time now that Detroit” was “simply not on a sustainable footing, continuing to borrow, continuing to defer pension payments, continuing not to pay its bills on time, continuing a deepening insolvency — $18 billion,” Orr said.

Detroit’s decline started in the 1950s with the closing the massive Packard plant, said John Wolkonowicz, an independent auto consultant based in Boston and a former Ford product planner. The crumbling factory hasn’t been torn down and redeveloped. It’s an image of Detroit’s decay.

The city and the automakers got complacent, Wolkonowicz said. Until the U.S. government forced GM and Chrysler to change during the 2009 bankruptcies, they seemed destined for the same fate, he said.

“The Detroit mentality contributed to the decline of the auto industry,” Wolkonowicz said. “I worked in Detroit for a long time. I ran into so many people who worked for the car companies who could care less about the car companies or the industry. They were there because that’s the industry that was there.”

Now, with the automakers doing well financially, “there is this disconnect,” Shaiken said. “An industrial revitalization within the city would be very positive, but that reaches beyond what the automakers can do.”

To contact the reporters on this story: Jeff Green in Southfield, Michigan atjgreen16@bloomberg.net; Mark Clothier in Southfield, Michigan at mclothier@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

http://www.bloomberg.com/news/2013-07-19/u-s-automakers-thrive-as-detroit-goes-bankrupt.html