Midwest Economy Blog

"Roads to Renewal” Conference

April 27, 2009

In the current environment of automotive plant shutdowns, the pursuit of economic adaptation and revival has become urgent for many communities whose livelihoods largely depend on the automotive industry. On April 15, knowledge experts, policymakers, and community representatives gathered at a conference event in Chicago. Its purpose was to explore opportunities to sustain and build on automotive assets in such communities, attract foreign direct investment, support automotive and energy-related research and development (R&D), build advanced manufacturing facilities, and diversify into other related industries. One notable audience participant was Ed Montgomery, newly appointed (National) Director of Recovery for Auto Communities and Workers.

The conference’s morning sessions addressed the forces impacting the Midwest automotive region, along with lessons midwestern communities might draw from the South. Sean McAlinden of the Center for Automotive Research presented a graphic overview of the region’s auto-intensive counties, as well as the market position and outlook for the North American auto industry. Over the past ten years, payroll jobs in the automotive sector have been halved because of wrenching industry restructuring. Communities in Michigan have experienced an outsized share of these declines. Moveover, McAlinden’s long-term analysis and forecast of automotive sales suggests that U.S. light vehicle sales are currently in the early stages of a deep cyclical trough.

The afternoon program asked how communities are responding and adapting to the loss of automotive activity. At one of the afternoon sessions, four economists offered their observations and advice to those communities that are transitioning to a post-automotive economic base. George Fulton, research professor at the Institute for Research on Labor, Employment, and the Economy at the University of Michigan, highlighted the sharp dependence of Michigan’s economy on the Detroit Three automakers (Chrysler, Ford, and General Motors). By his measure, economic concentration in the Detroit Three is 16 times greater in Michigan than the remainder of the United States. In that light, it is perhaps not surprising that Michigan’s overall employment growth has closely tracked Detroit Three domestic automotive sales since 1991, up to and including the recent plunge in sales. For Michigan, Fulton predicts that the sales plunge will be accompanied by a loss of 239,000 jobs from the end of 2008 to the end of 2009—the largest job loss since at least 1956. By the end of 2010, Michigan’s automotive industry will employ barely one-half of its 2007 work force.

In assessing Michigan’s longer-term prospects, Fulton offered a detailed industrial analysis that showed that a fair number of industries have been growing recently. Despite the fact that 641 industry sectors experienced falling job levels in Michigan from 2002–07, 298 industries not only had net hiring outcomes but actually outperformed their counterparts in the overall United States. However, a downside to his findings are that average wages in declining industries outweighed average wages in growing industries by $14,000 per year. In searching for Michigan’s industries of the future, Fulton recommended not only those offering high wage jobs but those having a strong export component, long-term growth potential, and regional advantage (or assets) in providing products or services. In Fulton’s opinion, the automotive industry fulfills these criteria except for its long-term growth potential in Michigan. Instead, Fulton grouped Michigan’s promising industries into three categories: knowledge-based industries (including auto engineering and R&D), tourist-oriented industries, and those sectors supporting higher-income retirees.

Another helpful perspective was presented by George Erickcek, of the W. E. Upjohn Institute for Employment Research. For Michigan and many other Midwest communities, what has been happening in the Detroit-Three-related automotive industry is too big to ignore; in particular, the recent negative experience is much more magnified in intensity, and what that portends for the long term weighs heavily on them. Car and light truck sales reached 16.1 million units in 2007, but are now forecast to go as low as 11 million units in 2009. In responding to plunging sales, Detroit Three producers have curbed year-over-year production by over 60 percent, and the top Three Asian-domiciled producers (Honda, Nissan, and Toyota) have done so by over 50 percent. The long-term outlook for the Midwest reflects structural decline rather than a swift return to activity. As recently as 2001, the Detroit Three controlled 74 percent of U.S. auto sales. By 2008, the share had fallen to 48 percent.

The employment size of the domestic auto supplier industry exceeds that of auto assembly by a factor of three. Domestic auto parts suppliers have been especially impacted by falling orders from the Detroit Three, and they widely report that long-term relations with the Detroit Three have soured in disputes over pricing and delivery terms. In seeking survival strategies, many domestic auto parts makers have attempted to diversify away from the Detroit Three to Asian- and European-domiciled assembly companies with production facilities in North America. More generally, Erickcek referenced the recent Klier and Rubenstein book which outlines three survival strategies available to parts suppliers: They must survive as 1) producers who integrate automotive systems of other suppliers and deliver them to assembly plants, 2) high-tech module developers, or 3) low-cost parts makers.

Given the recent upheaval in the automotive industry, Erickcek noted, displaced workers face strong headwinds in terms of expected earnings losses upon re-employment, slow expected recovery in job openings in the coming years, and age discrimination for older workers as they seek re-employment. Still, even in these difficult times, job opportunities exist because new products are being introduced, new markets are being serviced, and aggressive companies are taking market share from their competitors. To illustrate, Erickcek noted that over the current decade, net job creation in Grand Rapids, Michigan, has typically been negative but that new job openings have tended to exceed net job loss by wide margins.

How can the communities that have been affected by the downturn in the automotive industry help match their recently displaced workers with the new jobs? First, Erickcek recommended that they base their initiatives on a firm understanding of the local labor market and on the particular skills and abilities of displaced workers. Local efforts to identify a newly emerging industry sector and to subsidize its growth in the community is an extremely risky strategy. Instead, communities should determine their community investments in infrastructure and work force training by identifying interactions (and the intersection) of three key elements: the effects of the regional economic structure, global factors, and technological factors on the community and its economic base. In closing, Erickcek cautioned communities from jumping on the bandwagon in trying to attract the “next best thing,” such as life sciences, without a strong foundation for success. Competition is fierce for such prospects, and these industry sectors are often strongly anchored to existing clusters. Importantly, many of such industries are top- heavy with highly educated professionals so that “job chains” may not reach the community’s unemployed and underemployed work force.

Ned Hill, Professor and Distinguished Scholar of Economic Development at Cleveland State University, offered his considered assessment of the realities facing communities with strong ties to the automotive industry. Hill reported trends in automotive production from North America showing that much automotive work will continue to be done in the U.S and North America in the coming years. While world automotive production has grown rapidly since 1999, North American production remains sizable, with modest shrinkage and import penetration.

For companies and plants, Hill emphasized that the keys to survival have changed little from recent years. Successful plants and companies are those that operate with flexible work force policies and that employ workers who labor with flexible work force rules. In the current environment, low debt levels and ready access to capital are important factors in survival. On the national and global stage, Hill argued that the long-term value of the dollar also influences the health of assembly plants. According to Hill, the pending “card check” of the proposed Employee Free Choice Act (EFCA) that is under consideration in the U.S. Congress may exert a pernicious effect on automotive investment in the Midwest, north of Interstate 70. If passed, Hill contended that new plants will gravitate as far as possible from those communities that tend to support labor union representation.

In advising Midwest communities that are being impacted by automotive plant closings, Hill noted that a lot has been learned from the region’s steel plant closings in the 1980s and from defense plant closings. One lesson, said Hill, is that legacy costs—such as overly generous pension benefits and health care—must be shed if new companies are to survive and invest. Hill also cautioned towns and states and the federal government to avoid “lemon socialism.” That is to say, governments are especially inept at knowing which plants and companies that can survive; heavy subsidization of chosen “winners” is usually wasteful and prolongs the agony of readjustment.

In looking to assist new industries, plants, and investments, there is no silver bullet. Yet, communities must mobilize quickly and move toward new realities and opportunities. In doing so, communities must pay attention to market trends and forces, and reinvigorate the assets of their people (their skills) and their infrastructure. In identifying assets to protect when a plant has closed, Hill emphasized that land is the critical asset. Communities would do well to bring land back to the market for redevelopment through brownfield cleanup and land banking. In contrast, towns should be skeptical of fads. Who isn’t targeting wind, bio, solar?

Even with good practices, said Hill, we still have much to learn about community revitalization. The experiences involving mass worker layoffs in the 1980s were not kind. Approximately, one-third of workers retired, one-third successfully adapted, and one-third fell into poverty. Redevelopment has not always been successful. And when it has been, revitalization has often taken a long time—up to 20 years.

In my concluding presentation, I observed that each community has somewhat unique opportunities, assets, and challenges. For this reason, a “one size fits all” revitalization strategy will surely fail. All communities must start with a sound factual assessment of its own situation. In charting its policy course of action, a community must draw on credible information concerning the many demographic and economic trends that are at play. In choosing among policy actions, a community must be cognizant of the successes and failures of similar choices that have been made by others. 

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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