Detroit – from hero to zero and back?

detroit

Detroit used to be called Motor City given the 3 main auto makers activities there. From a peak of 1.8mn people in the 1950s the city has shrunk to 1/3rd that level. Detroit declared bankruptcy in 2013 making it the largest municipal bankruptcy in America. In 1960 it had the highest per capita income in the nation.Today, 40% of the city is now below the poverty line. Long term debt has ballooned to $20bn or more than $30,000 per resident.

Some 78,000 homes are unoccupied in the city, and in 2011 half of the occupiers of the city’s 305,000 properties paid no tax. The white population has shrunk from 90% of the city in the 1960s to less that 9%. The black community has grown from 4% to 83% over the same period although their population is falling in absolute terms. Violent crime in absolute terms exceeds that of New York.

40% of the street lights do not work, 67% of public parks have been permanently closed since 2008 and the police force has been cut by 40% in the last decade. Most police stations are closed 16 hours a day and response times are around one hour.

This isn’t an issue of gentrification. America’s Big 3 just had decades of making complete rubbish motor cars. Lay offs grew. American cars were ugly, poorly built and the Japanese had them licked on most points. On efficient dealer distribution, the Japanese perfected inventory management, production efficiency, reliability at affordable prices and even higher resale values. Ford, Chrysler and GM dealers became mom & pop stores shifting 20-30 cars per dealer per month with large inventories sitting on the lot. Incentives were required to get rid of dusty stock.

Toyota shifts 120 cars/dealer/month average. It’s inventories are kept to a minimum. It is a business. I remember Chrysler’s Belvedere plant was so inefficient it needed to run at 113% capacity just to break even. When Daimler bought Chrysler for a ridiculous sum of $40bn (including its $8bn pension surplus) they had no idea what they were getting into. Selling a Mercedes Benz is not even hard. People come to buy it because of brand. They sell themselves. Daimler couldn’t work out why all of Mercedes Benz’s profits went to fill the massive losses of Chrysler. What do you mean you have to pay customers to take them? BMW made the same mistake with Rover with its eventual sale  rendering then CEO Pitchitsreider to say “better an end in horror than horror  without end.”  Mercedes quality suffered and its divine franchise was in tatters.

Of late though, US car makers are building better designed cars. The Ford 500. Mustang and the upcoming Bronco.  It is amazing,. Make decent products that consumers want and you sell them. However it took bankruptcy and Chapter 11 to snap them to build for their customers. I recall a meeting where a Ford executive spoke at a conference. He spoke of how Americans like cheap super sized things to which a UK investor quipped ”so does that why you make the Ford Excursion with the precision of a Big Whopper?”

Industry Accounts of the Bureau of Economic Analysis cites that manufacturing share of employment has fallen from 25% or so in the 1960s to less than 9% today. As a share of GDP manufacturing has remained virtually unchanged at around 12%. That does suggest significant productivity gains over the last 50 years which makes sense with the advent of robotics and factory automation.

So Ford may have been encouraged to build cars back in the USA and save 700 jobs. It is minuscule in the grand scheme of things but more importantly the headlines are real and it is the ‘confidence’ it sends to broader businesses.

I am generally against the idea of subsidizing businesses. Necessity is the mother of invention. The Aussie car makers lived under the protection of massive import taxes for foreign brands. However it only encouraged complacency. Their products were not up to scratch and the foreign brands thrived for the product they were – desirable. Over time the tariffs were lowered and Aussie car makers got their product properly sorted. Less protection, not more helped them get competitive. Sadly they’d paid the price for too many years of mediocrity and now no car manufacturing remains at home.

Ultimately no matter how many jobs Trump can save from offshoring, American businesses must shape up but there is much merit in lowering taxes and incentivizing businesses to stay at home. After all countries like HK thrive thanks to lower taxes. Everyone thrives on lower taxes. People can bang on all they like about trickle down economics but don’t believe Ford’s decision to scrap a $1.6bn plant in Mexico was already on the books for termination. The project management for such scale isn’t done with a few phone calls and a stop over visit. It is years in the making and more corporates are realizing that calling Trump’s bluff is a bad idea.

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