Regional News

Trouble Rolls on for Detroit Three

CHICAGO - When General Motors Corp. last week lobbied Detroit's two pension funds to invest in its prominent downtown headquarters to help raise $500 million, some saw it as an illustration of the severity of the fiscal pressures facing the U.S. auto industry.

The proposal, somewhat coldly received by the pension funds - "This little fund is too small for this deal," one trustee was quoted as saying after GM's presentation - came amid a flurry of bad news for the Detroit Three last week.

Standard & Poor's and Fitch Ratings warned that GM and Ford Motor Co. could run out of cash by the end of the year, with Fitch downgrading Ford's rating to CCC from B-minus, and Standard & Poor's putting both GM and Ford on negative CreditWatch. By Friday, GM's stock had declined to its lowest point in 60 years, and Ford's stock also fell to a decade low.

GM issued a statement denying it would seek bankruptcy protection even as reports surfaced that it was exploring a merger with Chrysler LLC. Chrysler is a privately held company that does not release its financial data, but is said to have lost around $510 million during the first quarter of this year, and seen sales decline 25% so far this year, the worst of all three companies.

"The credit crunch has kind of brought everything to a head," said David Cole, chairman of the Center for Automotive Research at the University of Michigan.

The problems come despite a $25 billion loan package for the industry that Congress approved two weeks ago. Already a group of Michigan state representatives, auto industry leaders, and U.S. presidential candidate Sen. Barack Obama, D-Ill., are pushing for that package to be boosted to $50 billion.

For Michigan, long accustomed to dealing with the decline of its top industry, the escalating problems could aggravate an economy already considered one of the worst in the nation.

On the local level, municipalities where many of the local plants and suppliers are located could face their own set of problems. On Monday, for instance, GM announced it was closing a plant in Grand Rapids. The auto company also said it would accelerate the closing of two more plants, one in Janesville, Wis., and one in Moraine, Ohio. All three plants make parts for large and midsize trucks, which had been some of GM's most profitable vehicles, that this year have experienced biggest drop-offs in sales amid rising oil prices.

"Cities where these plants are located have exposure to the cyclicality of domestic auto manufacturing, and the loss of these plants has both a long-term financial effect and more immediate economic repercussions," said Fitch analyst Melanie Shaker. "Local governments, particularly in Michigan, are already strained, and have been dealing with these issues for years, but they might have had some fiscal reserves or financial flexibility before that have eroded over the last year, and that makes them more sensitive."

For both the state and local governments across Michigan, plant closures or consolidations mean declines in sales, income, and property tax revenue collections, analysts said. Job losses mean an increase in the number of uninsured, which already stands at about 11% of the population, further straining struggling hospitals.

Michigan hospitals spent a record-setting $2.6 billion on community benefits in 2007, according to the Michigan Health and Hospital Association, and a big chunk of that stems from the increase in free care they are providing.

"The auto industry affects employment, net income, business taxes," said Mitchell Bean, executive director of the legislature's House Fiscal Agency. "It's pretty complicated. And because the auto industry is pretty high-value-added relative to some other industries, there's more of an impact on state" gross domestic product.

As a key credit factor for analysts covering Michigan and its local governments, the auto industry's health is always taken into account when reviewing the state's fiscal profile.

But in some ways, the state has become used to handling the auto industry's "slow and painful" decline, said Ted Hampton, an analyst with Moody's Investors Service. "They've been dealing with it so long it's become a fact of life. A silver lining may be that the government has become rather well versed in handling difficulties in the auto industry's decline."

And despite all of the industry's current problems, the future holds promise - if the automakers can weather the current crisis, Cole said.

"The future is brighter than it's ever been," Cole said, citing pent-up consumer demand for cars that is certain to return, as well as the manufacturers' new-found cost efficiencies and ability to raise prices on certain vehicles. "There are tremendous opportunities over the longer term. The difficulty in the shorter term is, can they get to the other side of the river before they run out of cash?"

While GM has several proposals to help raise $5 billion in cash over the next three years, the company has said it is likely to try to raise some cash by mortgaging, or even selling, its prominent downtown Detroit headquarters known as the Renaissance Center, a set of seven interlocked tubular buildings on the Detroit River.

The company has courted the city's two pension funds as possible investors, but it appears they are not interested. Detroit's general employees fund has said it would not hear the proposal, while the police and fire pension fund members said it was unclear when, if ever, they would vote on the proposal.



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