The auto industry’s startling implosion gained steam Wednesday as word leaked out that Ford Motor Co. would join its beleaguered rival, General Motors Corp., in axing as many as 30,000 jobs in North America over the next five years.
Ford’s Torrence Avenue assembly plant in Chicago appears safe, and many of the cuts will probably be made in assembly operations located far from the industry’s traditional stronghold in states surrounding the Great Lakes.
But economists warned that the industrial Midwest will hardly escape damage.
Thomas Klier, a senior economist with the Federal Reserve Bank of Chicago, said that the dramatic decline in the fortunes of Ford and GM over the last several years has already created devastating ripple effects among auto-parts suppliers around the region, which employ three to four times as many workers as the automakers themselves.
And as long as the Big Three continue to lose market share to foreign rivals at such an alarming rate, the pain in the Midwest is likely to continue.
“The key driver is what happens to the Big Three,” Klier said. “If you can call a bottom to their market share losses, then you can see a bottom to [the industry’s] employment losses.”
Since 2001, the Chicago Fed calculates the industry has lost more than 90,000 jobs in Michigan, Indiana and Ohio alone. Of those, 60,600 were lost from auto-parts companies.
For analysts and economists, the most troubling aspect of this skid is that it has happened in a relatively robust auto-selling market. Strong consumer spending combined with cheap financing and incentives have held North American auto volume steady at nearly 17 million units a year for several years running. Yet since 1995, the U.S. market share of GM, Ford and DaimlerChrysler has slid to 58 percent from 73 percent while the share owned by Toyota, Honda and Nissan has grown to 28 percent from 18 percent.
That, of course, is bad news for the Big Three automakers, but it has also taken a major toll on the auto-parts industry, which is heavily concentrated in the Midwest. Klier estimates that the region is home to 61 percent of all the auto-supply plants located in the U.S., including giant, but troubled, suppliers like Delphi Corp. and Visteon Corp. The Fed estimates that Delphi employs 70 percent of its 50,000 U.S. workers in the Midwest, and many of those jobs are at risk now that the world’s largest auto-parts maker is struggling to reorganize itself in bankruptcy court.
A Michigan think tank called the Center for Automotive Research estimates that each auto industry job creates 10 others as a spinoff effect. But “when the industry is shrinking, it just goes in the opposite direction, said center chairman David Cole.
“The effects are much greater than the official employment numbers or the 30,000 being laid off,” echoed Harvard Business School professor John Kotter.
“If you start adding up all the workers and families involved in the supply chain and all the way to the local 7-Eleven, the number of people who are dependent on Detroit is in the millions.”
Partly because of this ripple effect, regional growth and employment have trailed the rest of the nation throughout the post-recession recovery. William Testa, head of regional economics at the Chicago Fed, said that during the year ended in September, total employment rose just 0.6 percent regionally while national employment grew 1.6 percent over the same period.
The culprit, Testa explained, is the region’s outsized dependence on manufacturing generally and the auto industry in particular. But the impact has also been decidedly uneven, reflecting the differing fortunes of the U.S. and foreign automakers.
In a recent blog on the Chicago Fed’s Web site, Testa noted that while Michigan and Indiana both rely heavily on autos, Michigan has been hit much harder by the industry crisis. That’s partly because Indiana simply employs fewer auto-industry workers.
But Testa also points out that Indiana has done a much better job of courting the Japanese auto and parts companies that are gaining market share at Ford and GM’s expense.
According to data compiled by Klier, two of the three automotive assembly plants located in Indiana are foreign owned. The same is true for 29 percent of the auto-parts plants there. In Michigan, only one of its 15 assembly plants has any foreign ownership (a joint venture between Ford and Mazda), and foreign companies own just 17 percent of its parts plants. Given that the Japanese companies continue to thrive, these figures help explain why automotive employment has declined by 24 percent in Michigan since 2001 but only 7.7 percent in Indiana over the same period. It also helps explain why Michigan suffered an overall 6.1 percent unemployment rate in October versus the 5.4 percent rate in Indiana.
Klier points out that if the bulk of the foreign-owned assembly and parts plants were in the Midwest, the Big Three’s market share decline wouldn’t matter since they could absorb laid off workers.
“But they’re not,” he said, “and that’s why market share makes a difference.”
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As business declines with the U.S. companies, partsmakers in the Midwest have trouble winning new accounts from the Japanese, Klier said–largely because Japanese suppliers often follow longtime customers like Toyota and Honda to the U.S.
For Michigan, the good news is that the world recognizes its expertise in designing cars–whether it can sell them or not. The state has managed to attract several big Japanese research and development facilities that are hoping to take advantage of the large number of talented engineers in Michigan.
It’s also true that Toyota has looked at three sites in Michigan for a new engine plant. But in the past, Toyota has avoided states with strong unionized workforces.
Meantime, Toyota will open its sixth North American assembly plant next year in San Antonio and has broken ground on a seventh in Canada’s Ontario province.
For Michigan and the rest of the region, the best hope is recovery at the Big Three. And unfortunately, most analysts say that will require the big structural cuts that are under way.
Ford’s board of directors is meeting this week to review a restructuring plan that should be announced in January. Global Insight analyst Catherine Madden said she expects the plan to include closing four or five assembly plants–probably those in St. Louis, St. Paul, Wixom, Mich., Atlanta and one in Mexico. Ford will also likely ax four or five parts plants. The company currently has 87,000 hourly workers. But citing sources familiar with the plan, the Detroit News reported on Wednesday that Ford will cut as many as 30,000 of them by 2010.
A Ford spokeswoman said the company would have no comment on the speculation except to say that a plan would be announced in January.
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