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Monday, May 12, 2014

Detroit Student Trip, Detroit Bankruptcy

I'm now back from a week on the road with students that provided an intense exposure to the auto industry and to the greater Detroit area. I managed to keep them busy, at the cost of my staying even busier, as I worked on logistics on top of taking part in activities. Before leaving preparations included a day-plus with Bill Cosgrove, a retired Ford executive who worked overseas, handling the Jaguar acquisition and the restructuring of Formula One racing, and in Dearborn under CEOs Jacques Nasser and Bill Ford. We also welcomed the author Tom Wolfe (W&L Class of 1951), whose mind remains razor-sharp and tongue eloquent. His discussion ranged from California car customization in the 1960s – a 1964 Esquire article thereon brought him to national attention as an author – and early NASCAR figures (interviews with Junior Johnson and with his father, then doing his 5th stint in prison for moonshining) to his own pimped-out white Cadillac.

From NYTimes March 12, 2006
Of course I did my professor thing, including working through books by Rudi Volti and by Bill Vlasic.

Thirteen students and I drove to Detroit, and began a round of visits. These included two trips to Ford World Headquarters to meet with executives, a meeting at the Detroit branch of the Federal Reserve, visits to suppliers Federal-Mogul, BorgWarner and Brose, presentations at UMTRI, and visits to the Ford Rouge assembly plant, the Henry Ford museum, the Detroit Institute of Arts and the Heidelberg Project, a Tigers baseball game and an alumni meeting that included a presentation by a top automotive industry lawyer. We even fit in a lunch with two retired Honda Manufacturing of America executives in Ohio en route home. [For a full schedule go HERE.]

Two presentations covered the Chapter 9 bankruptcy of the City of Detroit. One surprise is that the process is moving quickly. DIP financing (debtor-in-possession) is in place to provide operating funds, state contributions are penciled in and the hits to retirees worked out. Schools are already under state receivership; state oversight of the city itself will likely continue for 20 years. All involved realize that other municipalities will follow, and so courts and creditors view the process as precedent-setting. The other surprise (particularly for students) is that neither presentation mentioned the auto industry crisis. Detroit was an auto boomtown, and that was accentuated by World War II. By 1950, however, the city was losing population. Partly through lack of leadership, and not helped by battles with the state of Michigan (the capital is Lansing, not Detroit) and the worst race discrimination outside the deep South, corporate services and middle class residents left for the suburbs and the 1980s banking mergers left Detroit a backwater rather than a regional center. Yes, there was corruption, which may have been a small of immediate financial issues, but for three decades undermined the politics of the city.

The underlying story is however one of legacy costs. As the city shrank, so did its revenues, including property taxes and the modest city income tax. Its retirees refused to die at the same pace (and who is to blame them?!). Deficits accumulated, city services deteriorated, and a vicious cycle ensued. Today the city has a population of 0.7 million, down from a peak of 2.0 million, a 65% decline. Some neighbors remain intact in appearance, but the mansions of Indian Village and the Edison district give way in the space of a signle block to burned-out shells of formerly upper-middle-class homes. Nearly-free real estate is encouraging some entrepreneurs to re-enter the city; perhaps things are stabilizing. But little employment is to be found; all too many neighborhoods have but two types of businesses, liquor stores and churches.

Back to the auto connection. The North American industry's 2008-9 crisis mattered little to Detroit, because by that point little employment remained in the city, much less automotive employment. GM's headquarters is within city boundaries (with great irony, in the Renaissance Center constructed by the Ford family), but it is an enclave that helps local businesses little. Quicken Loans relocated to downtown, but again it's a drop in the bucket, and fails to offer opportunities to the local population. It doesn't help that high school graduation rates in the city are as low as 20%. So even before our Great Recession local unemployment was pervasive, and Chapter 9 restructuring inevitable.