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Detroit's Ills Symptomatic Of a Manufacturing Plague

By Peter Slevin
Washington Post Staff Writer
Friday, October 10, 2008

DETROIT -- First it was the outsourcing of components, and then vehicle assembly. Then gasoline prices shot up, slashing demand for trucks and sport-utility vehicles. Now, just when things seemed as if they could not get any worse here, the credit crunch and the subsequent stock market meltdown have dealt powerful new blows to the nation's already reeling car industry.

Concern that tightening credit and an overall economic downturn will lead fewer people to buy new cars sent General Motors' stock price plunging 31 percent Thursday to close at $4.76, the lowest since 1950. Ford Motor fell 21 percent, closing at $2.08.

Thursday's automobile stock sell-offs sparked new concern among economists and investors that the U.S. manufacturing sector, which had been slowly constricting, may be squeezed to an unimagined degree by the turmoil on Wall Street, posing a serious new economic threat at a time when the nation is already struggling with a financial sector collapse.

Nowhere is the pain more evident than in Michigan. Falling sales of vehicles and heavy equipment have sent ripples through the manufacturing food chain. The state's unemployment rate is now 9 percent, the highest in the nation. One in 16 home mortgages is "seriously delinquent," trailing only Florida and Nevada.

"It's devastating," said Gov. Jennifer Granholm (D), who added that Michigan has lost nearly 400,000 manufacturing jobs since 2000. "Companies . . . that are already slammed by globalization are being slammed by the credit crunch."

GM's market capitalization now stands at $2.69 billion. The day after the 1929 stock market crash, the company was worth seven times as much in inflation-adjusted dollars, according to market historian Bryan Taylor of Global Financial Data.

The current crisis is worsening a long-term trend for the U.S. auto industry. Over the past eight years, Michigan has lost 47 percent of its vehicle manufacturing jobs and 27 percent of other manufacturing jobs, according to a government analysis. Nationally, the losses have been about 21 percent in each category.

In an economic downturn, automobile companies are often the first to feel the pinch as consumers postpone expensive purchases. Industry sales dropped last month to levels not seen in almost 20 years. Ford fell 34.5 percent compared with the previous September; Chrysler, 32.8 percent; and General Motors, 15.6 percent. Even Toyota, known for fuel efficiency, saw sales drop by 32.3 percent.

Not since 1993 had automakers sold fewer than 1 million cars in a single month. Yet with fear ruling the marketplace and banks reluctant to lend money even to borrowers with strong credit, analysts believe next year's numbers are likely to be as bad.

That means lower revenue for automakers and less money to spend on needed innovation. It means fewer jobs beyond the factory gate. According to David E. Cole, a researcher in Ann Arbor, Mich., every auto plant job generates nine jobs among suppliers and the surrounding community -- four times the multiplier of a typical Wall Street slot.

Ford senior economist Emily Kolinski Morris, who likened an economy without credit to an engine without oil, said: "The dire warnings are not terribly overstated."

Inside a former Cadillac factory in Detroit, Frank Venegas runs Ideal Group, an array of businesses, some closely connected to the auto industry. He is accustomed to doing $100 million worth of annual construction work for GM, but he expects to see fewer construction cranes and is already shipping fewer steel beams for private homes.

"I used to ship 30 beams a day," Venegas said. "Today, I might only ship three a week."

The uncertainty enveloping the automakers makes it hard for vendors to bid on projects and risky to invest in equipment. The sharp decline in production often means sudden drops in automakers' need for components. That makes it difficult for suppliers to plan, not knowing whether they will be able to recoup their up front expenses.

"All of a sudden, your order decreases 30 to 40 percent and it's hard to figure a business plan for what's going to happen," Venegas said. As business leaders become tighter with a dollar, their caution further dampens the local economy.

U.S. auto companies and suppliers cut 18,000 jobs last month, with many of the losses coming in firms that produced components for trucks and sport-utility vehicles, whose allure plummeted as gas prices reached $4 a gallon.

The ripples are real. The city of St. Clair, about an hour north of Detroit, lost more than $100,000 in annual tax revenue. Among the contractors that lost business were trash haulers, carpet and laundry cleaners, shippers and vending machine operators.

In Port Huron, one hour north of Detroit, Blue Water Automotive Systems, a maker of molded plastic parts for car interiors, filed for bankruptcy protection in February. After a $16 million deal to sell the company fell apart in July, Blue Water shuttered all but one of its plants, selling the remaining one to an Iowa company.

About 1,000 employees lost their jobs, including Darren Reaume, who was laid off Sept. 25.

"I feel lost," said Reaume, 25, who is making some new financial calculations.

"How long until my car's repo'd? That's the first thing on my mind. I've got two kids and a wife. I've got to keep the electricity on and the heat on and pay my rent," he said.

His conclusion: "We can make it to the end of the year, juggling."

In Ypsilanti, 30 minutes west of Detroit, the steady downsizing of a Ford supplier knocked a $700,000 hole in the city's $14 million annual budget, part of a difficult stretch for a town that had 130 employees in 2000 and has 107 now.

"There isn't really any way we can make that up, so we have to cut," Mayor Paul Schreiber (D) said, explaining that the city of 22,000 closed its park and recreation department and now relies on volunteers.

Eleanor Walker runs a nonprofit organization in Ypsilanti called Hope America, which teaches financial literacy and works to prevent foreclosures. In her office are 50 open files belonging to Washtenaw County residents now in default. She estimates that 75 percent had auto industry connections.

"They were making $60,000 or $100,000. Now these people are making, like, $30,000 or less without health benefits and they can't make it," Weaver said. "The situation has just paralyzed them."

Charla Messner's case illustrates the double-whammy of the summer's gas price spike and the current credit squeeze. She is 11 weeks into an "indefinite layoff" at a Ford truck plant that made powerful V-8 engines, precisely the kind of gas-thirsty equipment that many drivers have stopped buying.

When the troubles hit and production dropped, Messner downsized, giving up her Ford F-150 pickup truck for a Ford Focus and trading down to a smaller home. "Just reducing my standard of living," she said.

Michael C. DiGiovanni, GM's director of global industry analysis, said the automaker is flying as blind as anyone else amid a credit crisis far more severe than anticipated. GM posted a $15.5 billion second-quarter loss. Ford lost $7.8 billion.

"We're in uncharted waters," DiGiovanni said. "Right now there's so much uncertainty, plans are being revised constantly."

Pleading hard knocks at a time when they are burning cash to design and build cars they hope Americans will buy, the Big Three automakers persuaded Congress to approve a $25 billion loan to retool aging factories. A new labor contract, largely dictated by the economic downturn, will reduce the manufacturers' costs when it takes effect next year.

U.S. auto executives, burned before by economic troubles and undone by their own shortsightedness, are banking on the next generation of fuel-efficient cars. A billboard on Interstate 94 east of the Detroit airport advertises the Chevy Volt, a hybrid designed around a lithium-ion battery.

"Fully charged 2010," the billboard says.

Michigan can only hope so.

"I think there's a light at the end of the tunnel," Annette Sykora, chairman of the National Automobile Dealers Association, told a gathering this week at the Detroit Athletic Club. "I just don't know how long the tunnel is."

Staff writer Kari Lydersen in Chicago contributed to this report.

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