March 25 (Bloomberg) -- Sheila Cockrel remembers one early sign of Detroit’s decline: The retailer J.L. Hudson’s turned off the lights on floor after empty floor as shoppers abandoned the world’s tallest department store for new suburban malls.
“That’s nobody’s fault, that’s what happens in culture,” said the former Detroit councilwoman who now teaches history at the city’s Wayne State University. “You have these larger economic forces in play.”
Detroit so dominated U.S. car making in the 20th Century that the city’s name became synonymous with the U.S. auto industry, like Hollywood with movie making. Now one Detroit is rising from the ashes, while the other is crumbling to dust. The U.S. automakers are surging, while Detroit is in such distress that it’s being taken over by the state of Michigan today.
General Motors Co., Ford Motor Co. and Chrysler Group LLC have seen rising revenue and profit in the wake of wrenching bankruptcies and restructurings, earning a combined $13.5 billion last year. Detroit is running a $375 million deficit, with 36 percent of its residents living in poverty and a murder rate at the highest level since the Reagan Administration.
“They’re linked in history and in name only,” said Scott Martelle, author of “Detroit: A Biography” and a former Detroit News reporter who now lives in Irvine, California. “There are, what, two car factories left in the city?”
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 their factories from the heart of Motor City to new plants built in the suburbs, across the country and around the world as they sought cheaper labor and foreign sales. The auto companies’ evacuation of the city accelerated Detroit’s decline.
Chrysler has factories to make Jeeps and Viper sports cars in the city and a 70-person office downtown, about 30 miles from the suburban headquarters where it employs more than 10,000. GM builds the plug-in hybrid Chevrolet Volts at a factory in Detroit, where it also has its headquarters. Ford, based in neighboring Dearborn, built Model Ts in Detroit until 1910 and hasn’t built cars in the city since.
The Detroit area automakers followed the general trajectory of their namesake city for much of the second half of the 20th Century, steadily losing market share to foreign rivals offering superior quality and better fuel economy. In 1962, GM had 51 percent of the U.S. market. In 2009, when Obama fired the GM CEO and appointed a team to run it, the share was 19.8 percent.
Rising pension and health-care costs were slowly strangling the carmakers, requiring them to offer sales incentives and rebates to keep factories running to generate enough revenue to cover obligations to retirees who grew to outnumber workers.
As the automakers lost car buyers, Detroit lost residents. Since 1950, more than half the city emptied out as the population fell to 706,600 from a peak of 1.8 million. In the last decade alone, a quarter of Detroit residents departed, seeking better schools, services and new homes in the suburbs. Those who remain endure unreliable buses, rising crime rates and broken street lights.
The city’s shrinkage left it in the same situation as its hometown automakers -- with staff and services sized for an entity twice as large. To cover its costs, the City Council took on debt, running up a deficit that reached $327 million last year. City employees, who patterned their generous benefits on the auto industry’s glory days, are owed about $7.5 billion in pensions and other compensation -- money the city doesn’t have.
The slow, parallel death spirals didn’t break until 2009, when GM and Chrysler were rebooted in government-backed bankruptcies and Ford financed its own wrenching restructuring. GM and Chrysler received an $80 billion bailout started by the George W. Bush administration and completed by President Obama. Obama’s auto task force allowed the automakers to close plants, slash excess dealers and expunge decades of legacy costs.
The automakers have roared back since the bankruptcies. GM and Chrysler have been able to hire back workers and add factory shifts to meet demand for hot models such as the Chevrolet Cruze and Jeep Grand Cherokee. GM said in January it plans to invest $1.5 billion in North American facilities this year after already spending $10.2 billion since July 2009.
Chief Executive Officer Alan Mulally financed Ford’s turnaround by betting the company on a $23 billion loan in 2006, for which he put up all major assets as collateral, including the company’s trademark blue oval. Last year, the automaker regained control of its logo after two rating companies restored its investment-grade credit rating.
By focusing on fuel-efficiency, technology and quality, Ford went from losing $30.1 billion from 2006 through 2008 to earning $35.2 billion during the past four years. Ford also reported record North American profit and profit margin in 2012.
Since Detroit’s brush with death, the U.S. automakers have also found success in the sedan market they had short-changed for decades in favor of sport-utility vehicles and trucks. The Detroit automakers’ share of the U.S. small and mid-size car market may grow to 33 percent next year, from 26 percent in 2009, according to researcher LMC Automotive.
Auto jobs in Michigan have increased 34 percent since their January 2009 low, according to the Center for Automotive Research in Ann Arbor, Michigan. The rebound has helped U.S. auto suppliers add about 103,000 jobs in the U.S. since 2009.
Many pollsters credited the resurgence of the Detroit-area automakers, and the resulting decrease in unemployment and uptick in hiring, with helping Obama secure Michigan and adjacent Ohio in the presidential election last year.
Michigan Governor Rick Snyder this month appointed Kevyn Orr, a former Jones Day lawyer who helped guide Chrysler’s bankruptcy, to undertake similar work as Detroit’s emergency financial manager. Orr has said he will seek cooperation from the city council, which opposed the state takeover, and try to negotiate more favorable terms from the city’s bondholders to lessen the burden of nearly $15 billion of long term debt.
Detroit’s automakers began turning away from their namesake city after World War II as it became apparent their old multi-storied factories within the city limits had become obsolete, said George Galster, an urban affairs professor at Wayne State University and author of “Driving Detroit: The Quest for Respect in the Motor City.” Flat factories built on vast tracts of land were more efficient at pumping out cars fast.
“The auto companies found that when they wanted to build new factories, which had these huge acreage requirements, there was simply no land left within the borders of the city of Detroit,” he said. “So after the war, there were dozens and dozens of auto-related manufacturing facilities built in Metro Detroit, but none in the city of Detroit. I mean zero.”
As plants and people left, so did the property taxes and income taxes they had supplied. Workers followed the factories to the suburbs, looking for a shorter commute, better schools and a better quality of life.
The shift, amplified by discriminatory lending and home-sale practices, opened deep racial divides in Detroit. The city flipped from 84 percent white and 16 percent black in 1950 to become 83 percent black and 11 percent white in 2010, according to the U.S. Census. The actual numbers are telling: In 1950, Detroit had 1.5 million white residents. By 2010, that had fallen to 75,585. Black population grew to 590,226 from 300,506 during that time.
The segregation fueled racial tensions that have riven the city throughout its history. Detroit’s infamous 1967 riot was the fourth time in the city’s history that federal troops were deployed to quell racial conflict, Galster said.
Even the Motown record label moved from Detroit to Los Angeles in 1972.
Over the last decade, black residents have also begun abandoning the city, with 180,502 departing between 2000 and 2010, according to the U.S. Census. The talent drain left Detroit more vulnerable when the Great Recession hit in 2008, said Robert Dye, chief economist at Comerica Inc., namesake for the Detroit Tiger’s downtown stadium.
“In a recession, low-skill jobs tend to go away and it’s the high-skill jobs that come back first and that’s where the mismatch is,” Dye said. “The legacy of the Great Recession is going to be particularly challenging for places like Detroit where a tremendous number of workers were displaced.”
That’s the challenge for Roy Roberts, a former GM executive who was tapped in May 2011 to become the emergency financial manager for Detroit Public Schools, under state control since 2009. The district has lost more than 110,000 students in the last decade and that accelerated during the recession as home prices in the suburbs plummeted.
“People are moving across the border in droves -- and they take their kids with them,” said Roberts, who retired from GM in 2000 as group vice president of North American sales, service and marketing.
The automakers are moving some office workers into the city and making donations to try to improve neighborhoods.
GM, Ford and Chrysler today said they joined with auto racing magnate Roger Penske and four other companies to donate $8 million to provide 23 ambulances and 100 new patrol cars to Detroit’s fire and police departments.
Chrysler has moved 70 workers into Detroit, in a 1920s office tower it calls Chrysler House. It added a third shift of workers at its Jeep factory and is investing $198 million in an engine plant in Detroit. Yet Chrysler’s employment in Detroit has fallen to 5,700 from 8,600 a decade ago, said Jodi Tinson, a spokeswoman.
“Detroit can only be rebuilt through mechanisms like this,” Sergio Marchionne, Chrysler chief executive officer, said at the engine factory announcement last year. “You’ve got to invest in plants and businesses in the area to effectively cause the repopulation of your residential areas.”
GM employs 4,532 people in the city at its Renaissance Center headquarters and Chevy Volt factory, down from 6,611 a decade ago when the automaker still owned the GMAC finance company. In 2011, GM made a $27.1 million donation to Detroit high schools through its foundation.
“We believe our responsibility as a corporate citizen goes much deeper than having a Ren Cen address,” said Greg Martin, a GM spokesman. “GM and its employees will do our part as we continue to live, work and donate our time and money to raise the quality of life in this great city.”
Ford is giving $10 million to strengthen Detroit neighborhoods.
“Ford has an important relationship with the city spanning decades and we believe a strong Detroit is critical for a strong Michigan,” said Jay Cooney, a company spokesman.
Ultimately, Detroit can’t join the automakers on the road to recovery unless the remaining residents go along for the ride, Cockrel said.
For now, the city has come to resemble the vacant lot that once was the site of the Hudson’s department store of Cockrel’s youth. The big store was demolished in 1998 and now steel girders poke through the roof of an underground parking garage, waiting for a new use to emerge.
“If things don’t work out here, it’s not going to be good for anyone’s image,” Cockrel said. “There’s a whole group of people who aren’t part of the conversation. There needs to be a path forward for those people to have a job, buy a house and have a decent school to send their children to in the city.”
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