As Car Companies Roar, Detroit Collapses


There will be resistance from city officials, but the governor of Michigan, Rick Snyder, will appoint an emergency financial manager to run the virtually bankrupt city. He commented to a local TV station that "I look at today as a sad day, a day I wish had never happened in the history of Detroit, but also a day of optimism and promise." Only sad to the extent to which, over decades, Detroit had the chance to fix its own trouble. As car companies pulled management and production out of Detroit, the city government did very little to react with lower costs and reduced services. Now, the emergency financial manager can gut city services, and probably re-negotiate contracts between Detroit, its workers and outside parties. The Detroit Free Press summed up the money part of the problem

A state review team concluded last week that Detroit could not do so on its own, facing $14 billion in long-term liabilities and a $327-million accumulated deficit at risk of growing by $100 million by July.

The announcement came on a day on which the Big Three released spectacular results, at least compared to those during the recession. Analysts expect 14.5 million cars and light trucks to be sold in the U.S. this year. That is not quite like the over 16 million sold in 2005 and 2006, but the car companies have cut costs so much the sales will make their North American operations profitable. February sales for GM (NYSE: GM) reached 224,313 vehicles, up 7.2% from the same month last year. GM's market share is 18.8%, far short of the 50% of fifty years ago. Ford (NYSE: F) sold 195,210 vehicles, up 9.3%. Chrysler sold 139,015.

The Big Three employ very few people in Detroit. GM's headquarters is downtown. Ford and Chrysler have headquarters outside the city. Car production within the city limits is negligible. As each of these pulled more and more facilities out of Detroit, the city had the chance to lower its budget. Perhaps, over the years, the city council and mayors hoped the car companies would return, or be replaced by other large industries. That was a bad mistake.

The American car companies did not absolutely have to leave Detroit. They could have kept headquarters inside the city, despite the rise in unemployment, poverty, and a drop in city services. GM stayed, so the other two could have as well.

Factory presence is more complicated. Detroit's educated labor force sized dropped. It was less expensive to locate manufacturing facilities elsewhere. But, the labor force might not have fallen so much if car production had stayed in Detroit. And the taxes from the car companies would have helped prop up city services.

The exit of the car companies from Detroit can certainly be justified by financial means. The three firms did what they believed was best to boost profits. But, as they left Detroit, they could watch the city crumble behind them. Not much of a legacy for three companies that Detroit hosted for decades.

Filed under: 24/7 Wall St. Wire, Autos Tagged: F, featured, GM