The Auto Industry: Journals from Detroit

My students have now a cumulative 150+ blog posts on the auto industry, plus 13 separate journals from our visits to firms and other events around Detroit. There are also scattered notes from our readings (Bill Vlasic's Once Upon a Car, Rudi Volti's classic industry intro, Cars and Culture, Tom Wolfe's The kandy-kolored tangerine-flake streamline baby and John Heitmann - Rebecca Morales' just-published Stealing Cars. Since I need to read and comment on what my students do, that's taken priority over generating new content here. I will repost roughly one post per student over the course of the summer, but take a look for yourself! You can find our Detroit schedule here and journals and all that as obvious when you visit the site.

Mack Stamping, or a Tale of Detroit's Decline

...[Mack] was a six-story structure [from] 1916...

Detroit is in bankruptcy for three reasons. One is that a city is a fixed cost enterprise, and so adjusting to a sharp drop in revenue is hard to impossible. The second is that Detroit really was the Motor City, but by the 1950s was suffering from the common fate of manufacturing, where as a general rule productivity increases outstrip the growth of demand. The third is that Detroit suffered from the disadvantage of being a first mover: the layout and location of factories reflected the environment of the 1910s and 1920s. Ford Motor Company literally outgrew Detroit, as it moved first from the Piquette Plant to Highland Park in 1910. It began work on its Dearborn Rouge complex in 1917. By the late 1920s it no longer operated inside the city [though in fact Highland Park was itself a separate city, albeit entirely contained within the boundaries of Detroit].

Chrysler's Mack Avenue stamping plant, where I worked during the summers of 1972 and 1973, is a good example of this process. The plant itself was a six-story structure that began as the Michigan Stamping in 1916, making metal and welded assemblies for multiple customers. The facility was bought by Briggs Manufacturing in 1920, in time to catch the rise of enclosed steel bodies. It became a major supplier to Chrysler, which didn't make its first car until 1925. Eventually – in 1953 – Chrysler purchased the facility. (In this Chrysler was fairly late to the game, as GM first purchased a stake in Fisher Body in 1916, and became a full-fledged internal division in 1926.) In other words, by the time I worked there, the plant was already 50+ years old. In my recollection, production only took place on the bottom two floors, while the top two floors couldn't be used; the floors in between were used to store inventory. Production required hauling material up and down freight elevators. Meanwhile, the plant was surrounded by residences and other factories; there was no open land.

http://www.allpar.com/corporate/factories/mack-avenue-engine.html
http://www.allpar.com/corporate/factories/briggs.html

 

Productivity was low not because of unions (though jurisdictional fights were a pain, foreman weren't supposed to turn on and off machines, that was reserved for millwrights). It was simply ancient technology in an ancient building. Presses for large pieces required four men; two would manhandle sheet metal into the die and get it seated properly, two more would pry it loose and put it on a table or conveyor for the next press. For a piece with a lot of curves such as a station wagon roof, my recollection is that there could be as many as 7 presses. Only in 1974 did the company begin trying to use mechanical handlers, suction cups on arms that would slide in, grab a part, and pull it out; by the end of the summer and my return to school, none of them worked reliably. In contrast, today such body panels are made in a single automatic transfer press turning out many, many more parts per hour, attended by only one or two people instead of 29 (28 on the presses, plus a foreman). Higher quality sheet metal for stampings, decades of learning how to pick up and move parts without scratching surfaces, and improvements in press design and die design all contributed. To make matters worse, the layout meant the giant machines were in the middle of the plant, whereas the road access – the shipping docks – were at the end, hundreds of feet away. (The middle of the plant had rail access, but while in the 1970s steel still came in by rail, parts were shipped out by truck.)

For more on stamping plants, go HERE thanks to Sam Ronald

Over time the industry shed thousands of jobs – though some were added back as the market grew and as first emissions and safety requirements, and then consumer demand, led to far more complicated vehicles: air conditioning, power windows, catalytic converters, automatic transmissions, airbags and more. However, that didn't benefit Detroit. Already by the 1970s most of the output of Mack Stamping was sent outside the city – the only assembly plant was Jefferson Avenue. But Chrysler's assembly plants themselves were old. When capacity was added in the US and Canada, new plants reflected different design and manufacturing principles. First, plants were on one level – that transition was already underway by the 1920s as machines with individual electric motors displaced belts pulling power off of overhead shafts. With that the efficiency of a multi-story buidling vanished. In addition, new plants had truck access along their length, and ready access to one of the major interstates. Now Mack Stamping's location wasn't bad as it was only a mile from an entrance to I-94. But many other of Detroit's plants reflected not only the location of rail lines but also the old trolley system – and of course therefore lacked parking.

So as the demand for cars expanded following World War II, and as Studebaker, Packard and other firms shut their doors, the Big Three had to add assembly plants. For that however they needed 1,000-acre sites, for one-floor buildings with more elaborate foundations to take heavier machines, and with room for trucks to maneuver along the full length of the plant, a plant made larger with an integrated stamping plant. Existing plants couldn't be torn down, their footprint was too small and they were often locked in urban streets. Vacant land in such quantity simply didn't exist inside the city. Jobs (and the tax base) moved to the suburbs and further afield.

By 1960, the population was already falling. (The graph is from a blog by Thomas Sugrue.) But people didn't leave in a convenient fashion; while some black neighborhoods had been severed to make way for expressways in the 1950s, Detroit remained a city of multiple small communities. The city simply became less dense. That meant that the per person cost of providing schools, police and fire protection rose rather than fell, because nighborhood schools, fire stations and police precincts couldn't be closed. Fewer jobs meant lower revenue per person. And neither the state nor the Federal government were willing to provide subsidies from stopping the scissors from eventually cutting the city's jugular.

Yes, there was corruption. Is there a big city for which that was not the case? Yes, politicians were short-sighted. No surprise there, either. Yes, the Big Three were poorly managed, and stuck in a strategic position thanks to the direct and indirect subsidies to energy that meant these companies had no small cars when the first and second oil crises hit. Yes, quality was abyssmal (though in the midwest Japanese cars rusted out instantly, one reason market share in the region remained low). That however was an issue of management – at Mack Stamping I was required to hit volume targets, even if every single part was scrap because of flaws in design and machine maintenance. That wasn't the UAW's fault, and until the 1970s the premium over other areas of manufacturing was minimal. Nor was it their fault that they didn't die according to the 1950s pension schedule, but the Detroit Three funded pensions as though they would. Then there's healthcare, and while their benefits were gold-plated, the cost was driven by defects in the US healthcare system, not union contracts.

New entry – first Japanese firms, and subsequently German and Korean – accentuated the pace of exit from Detroit. That wasn't the union's fault, though politicians – in this case Ronald Reagan with his Voluntary Export Restraint – did encourage the Japanese to set up shop here, and adhered to a strong dollar policy that made imports attractive. Race was a contributing factor, as Thomas Sugrue argues – see this interview in Historically Speaking drawn from his fine book, The Origins of the Urban Crisis. But these were not what led to Detroit's downfall, nor was it anything recent – not post-1990, much less post-2007. Instead it was the scissor of fixed costs and falling revenue due to long-run industrial change.

Mike Smitka

A tongue-in-cheek blog post on air conditioning as history's most important invention did suggest one more factor: in the early 20th century living in the South was most unpleasant for many months of the year. (The Alleghanies are sprinkled with ghost towns that functioned as resorts well into the 20th century. A few, such as the Greenbrier, survived the transition.) Improved transportation made possible "snowbirds," and air conditioning made it possible for northerners to conceive of living in the South year-round. Surely without air conditioning BMW would not have located in South Carolina or Mercedes in Alabama, while many more Detroiters would have retired in situ. Ironically, the first use of air conditioning outside of industry was at the Hudson Department Store in downtown Detroit in 1924.

Suppliers Constrain Output

By Alisa Priddle, Detroit Free Press Business Writer excerpted by David Ruggles from Could automotive supply chain snap?, June 16, 2013

A combination of rebounding sales and an unprecedented number of new models in the works has stretched the auto parts supply chain so taut that the entire industry is holding its collective breath that it does not snap and jeopardize the recovery. .... “Everyone has parts shortages,” said Carla Bailo, who heads Nissan Americas’ research and development in Farmington Hills. “The supply chain is one of our biggest threats. Everyone cut back and is now ramping up. We can’t get up to speed as quickly as in the past.”

During the downturn, suppliers consolidated operations — closing plants, laying off workers and reducing capacity by as much as 30%, said Kim Korth, president of IRN, a Grand Rapids consulting firm that works with suppliers. Now a smaller number of suppliers with fewer facilities and bodies is struggling to handle a 22% rebound in the auto industry. … “We’re not seeing lines shut down, but programs are being delayed,” Korth said. “We anticipate periodic disruptions due to material shortages, quality issues and troubled suppliers.”

Suppliers have always been cautious about increasing capacity in the boom-and-bust auto industry. This time, however, there’s reluctance from companies to reinvest that have achieved a lower break-even and are now enjoying profits. .... “It’s tough to increase bottom lines,” said Roland Zitt, president of Mahle Industries in Novi, which closed powertrain components plants during the recession and reduced costs. “We won’t be a bottleneck but also don’t have to be at the leading edge increasing capacity.” ….

“We’re meeting weekly,” Joe Hinrichs, Ford president of the Americas, said of his purchasing staff that works with suppliers. Ford has been adding shifts at plants, increasing capacity by 400,000 vehicles last year and preparing to add another 200,000 this year because sales are hot.

…. The annual “Car Wars” report by Bank of America Merrill Lynch says automakers are launching new models faster. After a decade of averaging 37 vehicle launches a year in the U.S., the rate is forecast to accelerate to 44 a year for the next four model years.
Globally, Michael Robinet, managing director for IHS Automotive Consulting, forecasts 500 vehicle launches from 2012 to 2016, or about 135 a year compared with 100 a year in the past and only 85 a year in 2010 and 2011.

.… With 40% of vehicles in North America being built in plants running with three crews or shifts, there are limited options if there is a problem, Robinet said. “There is not a lot of slack in the system.” … Jeena Patel, a lawyer with Warner, Norcross & Judd of Southfield, said suppliers are trying to meet contracts with minimum volumes at a time when no one thought to negotiate maximum volumes or other terms to protect them against the demands they now face. ... Korth knows of suppliers being asked to increase volume by 20,000 units a month, and they are unable to do it….

Detroit and New Orleans

Detroit’s Recovery

Edited from a May 14th, 2013 post by Marybeth Benjamin on the Econ 244 web site

The eye opening drive through the city of Detroit during our weeklong trip perfectly showcased the devastation and the challenges that the city faces. The trip was particularly poignant for me because of the striking similarities between my city, New Orleans, and Detroit.

I saw the beautiful neighborhood of Indian Village, well-maintained mansion after mansion, bordered by crumbling buildings and abandoned homes. Everywhere I looked outside of such intact neighborhoods I saw abandoned street blocks, some with only one house in livable condition. It reminded me of the moment I returned home to New Orleans a few months after Hurricane Katrina. It devastated the city, but disproportionately affected some of the poorer areas.

The similarities did not stop there: During the last decade following hurricane Katrina, the population in New Orleans decreased by almost 30%, which parallels Detroit’s 25% population decline in the past 10 years.

After viewing the city and the extent of the decline, I couldn’t help but wonder if Detroit will ever make a full recovery some day.

Oliver Liu added on May 14, 2013 that Detroit will never return to its heyday. At the Detroit Institute of Arts in the exhibition Motor City Muse: Detroit Photographs, Then and Now there were exercises in rephotography; pictures that showed the city in the mid 20th century bustling and pictures just recently taken of the same places showed just a shadow of past activity. Over time more mechanization will take place in factories and I doubt the population of the city will ever approach peak levels, which is a real problem as the city which can’t pay its debt and has large pension obligations to retired public servants.

"G" Jeong commented on May 14, 2013 that as per class discussions during our time in the city, the decline in Detroit was not sudden. It took a long time for Detroit to become a “devastated” city. Remembering what I saw from DIA, I also agree with Oliver and Professor Smitka that it is not possible for Detroit to recover unless something happens (government involvement?). By recovery, I meant it will be extremely difficult for Detroit to go back to its 1 million population days [much less its peak of nearly 2 million].

the prof wrote on May 15, 2013 that a city has tremendous fixed costs. In addition, the down cycle was not governed by any local planning, so no neighborhood in Detroit is totally gone. As a result, it’s hard to close down police and fire stations, or elementary schools, because they need to be close to where people live.

On top of that Detroit has decades of corrupt government – Louisiana doesn’t exactly have a reputation for clean government, either, but Detroit is exceptional, with the previous mayor and various close associates in prison, or heading that way. Tens if not hundreds of millions were embezzled, and (while not necessarily due to corruption) politicians frittered away lots more on projects that with hindsight proved inappropriate to the city’s needs.

Politically the state of Michigan doesn’t want to help Detroit (and is itself hurting), and the Federal government is nowhere to be seen. A slow disaster does not qualify for FEMA assistance. There’s no money to tear down the odd abandoned house in an otherwise intact neighborhood, and that makes it harder for adjacent houses to avoid blight – they lose their resale value. Teachers can’t be paid, with the connivance of city officials the warehouse that’s supposed to hold books and supplies is empty, and with the collapse of employment families are unstable. Kids suffer, through no fault of their own.

Cruise the city and count the grocery stores. It's not hard – in many neighborhoods there are none. For those interested, read a new book (2013), Detroit: An American Autopsy by Charlie LeDuff. It’s a riveting read, but I didn’t pick it up until long after I ordered books for the term.

Paul kuveke wrote on May 15, 2013 that maybe the city of Detroit should not spend resources trying to lower its fixed costs but rather try to draw people back into the city. Detroit has a horrible reputation throughout the country (on YouTube "we’re not detroit" is a popular phrase: watch this example). While Detroit was a lot better than what I’d heard, it's difficult to counter the perception of those who've never visited. It doesn’t help that for the past few years Detroit has ranked in the top 3 U.S. cities for violent crime.

On May 17, 2013 Tyler Kaelin wrote that he agrees with Paul, Detroit has some wonderful things to offer, but it will never return to its former glory until it can escape its less then attractive past. The auto industry hurt Detroit in more than one way in this regard. People see the Detroit 3 as an extension of Detroit itself. At the congressional meetings when people became angry and frustrated with the Detroit 3, they were becoming angry at Detroit by extension.

Click on the logo for information on the Automotive News PACE "Supplier of the Year" Award

The Award Ceremoney will be Monday, April 15th at the Fisher Theater in Detroit, on the evening of the first day of the Society of Automotive Engineers. The focus of the competition is innovation among automotive suppliers to the global motor vehicle industry. Award winners have included firms from Australia, East Asia, Europe, NAFTA and South America. Over the years this included software suppliers, machine tool and other process suppliers, materials innovations, and parts suppliers to other suppliers, to passenger car and commercial vehicle manufacturers and the (repair) aftermarket.

Each finalist, selected from the pool of applicants in early fall, is visited in the November-January period by a team of 2 independent judges, who include individuals from a wide array of backgrounds, from OEM assembly plant managers to engineers to a race car driver and even (gasp!) a couple economists and a banker. The 20-plus judges meet in a closed door session in February to select winners. This past year I visited:

• BorgWarner with its compact brushless actuator for emissions control
• Brose with its kick-to-open hands-free rear lift gate opener
• Continental with its LocSync tire pressure monitor system that uses software rather than additional sensors to associate the correct tire gauge with the correct location
• Visteon with its MSF zero-leak HVAC connector

If you're not one of the roughly 300 attending the award ceremony, look for a late evening flash story on the Automotive News web site and corporate PR releases for the winners.

...mike smitka...

Downsizing

While interrupted from time to time by the business cycle – exceptionally so at the moment – automotive demand has expanded steadily since the end of WWII in the US, Japan and the EU. As a consequence the normal challenge for auto companies has been expansion. That process was not always orderly, as the different divisions of the larger firms fought for product for their dealers. Such product overlap is particularly severe at Toyota and GM, with the most sales channels. For dealers there is modest downside; additional models mean additional inventory. But each dealer hopes to pick up some incremental sales. Unfortunately that includes sales cannibalized from other sales channels – Pontiac sales robbing from those of Chevrolet – and so the benefits to the manufacturer are smaller. Overall however the bias (as in most franchising systems) is to have too many sales points and too many products from the standpoint of the system as a whole. As disorderly as the expansion path may appear, with firms responding to "hits" by their rivals with product that may mesh poorly with the overall vehicle lineup, reversing that process is much more difficult. Doing it in an orderly manner is well-nigh impossible.

Financial implications aside, trimming capacity presents formidable strategic challenges. First, the menu of vehicle programs must be developed with a 6-8 year time horizon. The allocation of engineering resources is a complicated dance, and has to also mesh with assembly capacity. A firm can work on only 1-2 vehicles in a size class at a time, and delaying a program until later then means some future program must be moved forward or otherwise shifted. So the dance has to position the players with a vision of where the firm wants to be 8 years down the road. That is hard enough when most vehicles programs are merely (?!) developing a replacement to existing product. Downsizing will almost inevitably mean that a firm is set to develop the wrong vehicles in the wrong order.

Second, if products are located rationally in consumer space, canceling one model creates a hole in the overall product lineup. That means that there are greater benefits from moving adjacent vehicles to the head of the development queue. So one less model increases the pressure to re-engineer two or more adjacent vehicles. Doing that of course costs money rather than saves money, so a hole must remain. Such a hole affects dealerships; if a particular sales channel is starved for product, then it will be more difficult for the dealers to maintain the presence in the market in overall staffing and advertising needed to support vehicles that ought to sell well. Downsizing, in other words, can amplify an initial decline in sales. And that's without taking into consideration any negative publicity from media coverage of the process.

Third, developing vehicles entails teamwork; downsizing means breaking up teams. Trying to "cherry pick" the good engineers is hard, and hurts morale – and of course a team without spirit is not much of a team, as is a team that has never played together before, even if (especially if?) it is composed of all-stars. Voluntary buyouts may force a company to "buy back" workers if too many in a give area quit. And in either case a firm will find it difficult to continue recruiting young engineers and other functions where learning the trade takes time.

Fourth, uncertainty looms large. CAFE (fuel efficiency) mandates skew incentives for where to allocate resources, with an impact that varies from firm to firm depending on their mix of domestic and imported vehicles. "Green" incentives that accrue to vehicles that may in fact not be very efficient, the lack of an energy policy that creates uncertainty in the path of energy prices (and which in the US makes diesel more expensive rather than cheaper than gasoline), and the presence of state and local economic development incentives that make a new plant for a company with an expanding market share cheaper than an old plant for a firm with a declining share all make life more complicated.

Then there are legacy costs. Incumbents in the US already had large number of retirees, due to the cumulate impact of increases in longevity and increases in productivity, that left them with an unfavorable ratio of retirees to workers. Downsizing makes things worse. New entrants have no such problems. They have virtually no retirees, their healthcare costs are further lowered by the relatively young age of their workforce, and they have "modern" benefit plans rife with deductibles and co-pays, things that were of little or no concern when such benefits were negotiated by the incumbents in the 1950s.

Finally, what scale is needed for survival? Electric vehicles, hybrid diesels, hybrid gasoline vehicles, natural gas vehicles, fuel cell vehicles – it is unclear which of the next generation of propulsion plants will prove fruitful. All require significant expenditures now that will not generate revenue in the near term. A large firm can have multiple platform teams, very small cars in Korea, small cars in Germany, midsized-cars and light trucks in the US, real-wheel drive projects in Australia, and so on. There are potentially large benefits from that, though to date the track record of "world" cars is poor, in part because regulatory barriers and variations in manufacturing infrastructure make it expensive and time-consuming to adapt a European car for the US market.

Of course there is excess capacity in the market alongside too many models. The ease of entry means that will not change in the medium term – remember, there are 14 producers in NAFTA, not to mention importers. Dealers face their own problems, particularly for those in urban areas, as the internet undermines the value of a large, expensive physical footprint. Downsizing individual firms affects suppliers in an uneven manner, but few suppliers depend on a single customer. Viewed from the other end, a Toyota or a Honda is reliant on the health of suppliers for whom one or another Detroit firm is a major customer.

In short, downsizing can unravel along multiple dimensions. And probably will.

Cash for Clunkers

Here is an op/ed originally published in the Richmond Times-Dispatch on February 14, 2009 entitled "Detroit's Drop-Dead Day". Go here to see it on their site.

LEXINGTON [Virginia] When the good news is that Honda's U.S. sales are down only 28 percent and Toyota projects losses of only $5 billion, it's clear the auto industry's problems extend well beyond Detroit. Market pro jections by car companies for 2009 vary by 30 percent, while light truck sales are up -- for now. Which cars will sell is no clearer than how many will sell. Yet, in its December "bailout" to the industry, Congress mandated that Detroit produce turnaround plans by Feb. 17 and show progress in implementing them by March 31, or get thrown into bankruptcy.

The reality is that credible planning is impossible. And in an industry with high fixed costs from parts producers -- which employ three times as many workers as the car companies themselves -- down to dealerships, a 40 percent decline in sales means everyone is losing money. Those without a cash cushion will go under. In the past few months 40 suppliers have declared bankruptcy; hundreds of dealerships have closed their doors. The entire "value chain" of the industry is in parlous health, but is so interconnected that if too many firms fail, the normally orderly process of bankruptcy will spiral into a chaotic shutdown of all manufacturing, taking with it 1 million jobs in short order.

LET'S BE frank: There are no easy solutions. Improved engineering processes allow firms to launch new products more rapidly than ever. A vehicle that sells well soon faces competition from all sides. Even before the recession, chronic excess manufacturing capacity and bloated dealer inventories plagued the industry. One indication was the launch by the Japanese and Germans of SUVs and pickups, which they've found hard to sell. There's been excess capacity across producers and product segments, and not just in Detroit.

Then came the bubble. During the four years leading up to our current downturn, the stock of vehicles expanded by 22 million units, leaving us with 248 million vehicles for 202 million drivers. Now population growth adds 2 million drivers a year, and expanding businesses top that off with another million units of demand. The market might more reasonably have grown by 12 million units -- not by 22 million. The overhang created by the bubble isn't just in housing.

One temptation is to try to pile on government-financed incentives. But as the industry well knows -- and the Detroit Three know better than most -- artificially boosting demand with discounts and sales to rental car fleets carries a steep cost: It "buys" sales from the future and leads to an outpouring of used cars a few years down the road. So purchasers receive poor prices on their trade-ins. That, in turn, leads to a perception that these vehicles are low in quality when, in fact, poor trade-in prices reflect supply-and-demand. Incentives thus come back to bite the industry, but high levels of discounting are addictive, as sales plummet the moment they're removed.

ONE POLICY that might help is a version of "cash for clunkers." This would help eliminate the market overhang created by the bubble to get rid of old cars rather than trying to pile on more new ones. To make sense, however, it must really be targeted at clunkers -- and hence should offer more cash for older vehicles. It might start at $500 for a 10-year-old vehicle, bumping the payment up $100 per year, with $1,500 for vehicles aged 20 and above. The new Department of Transportation vehicle tracking system would help ensure that these vehicles are recycled into scrap, and DOT and the EPA also have the expertise to jiggle the details to get rid of a target number of vehicles (say, 2 million).

This policy would be no panacea; if pursued too aggressively, it could make it harder for lower-income Americans to buy a vehicle. Nor are all old cars inefficient; the subcompacts of the 1980s got tremendous mileage. Owners might prefer to drive such clunkers rather that accept cash. But unlike other proposals, this policy would not distort new car purchasing decisions and would thereby avoid another downturn in sales the moment the program ended. Improve access to finance for credit-worthy borrowers, yes! -- and the recent targeting of TARP funds to the finance arms of General Motors and others has helped. But to offer an alcoholic strong drink -- that is, to pile on more discounts -- not only won't work: It's just plain wrong.