Chicago's Stake in Detroit
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By Bob Tita And Monée Fields-White
Crain's Chicago Business
Dec. 01, 2008
The collapse of a Detroit automaker would send shock waves through Chicago, from South Side manufacturers to northwest suburban dealerships to downtown TV studios.
As General Motors Corp., Ford Motor Co. and Chrysler LLC seek a multibillion-dollar lifeline from the federal government, many Illinois companies and workers are holding their breath. The state's stake in Detroit is huge: Illinois trails only Michigan, Ohio and Indiana in the number of auto-supplier jobs in the U.S. More than 80,000 jobs statewide are directly tied to the auto industry, government figures show, and one estimate puts the total number of workers with direct links to automakers at more than three times that number.
The industry pumped more than $16 billion last year into the state economy through assembly plants, parts makers and car sales. If a Detroit automaker goes under, thousands of jobs will be lost, hundreds of businesses hurt and millions of dollars drained from the local economy.
"I would hate to imagine the trickle-down effects of the job loss if these companies are allowed to just close up," says Greg Baise, president of the Illinois Manufacturers Assn. "It would have a much broader impact than it would have had 30 years ago."
That's because automakers have outsourced much of their supply chain over the years, including parts-making. Illinois has about 200 auto-parts manufacturing operations today.
Those plants employ tens of thousands of workers; three auto assembly plants employ another 7,000. Total employment attributed to the auto sector — including related businesses such as those that supply or service parts makers — is about 267,600, or roughly 4% of the state's total workforce, according to a 2007 study by the Center for Automotive Research, an industry think tank in Ann Arbor, Mich. (The group gets some funding from the auto industry.)
Declining auto sales already have led the Big Three carmakers and their suppliers to cut production. "We have had three significant across-the-board staffing reductions this year and almost monthly reductions in the hourly workforce," says Andy Mickus, director of operations at BorgWarner Inc.'s Bellwood and Frankfort plants, which make parts for automatic transmissions.
BorgWarner, which moved to suburban Detroit from Chicago in 2005, is especially vulnerable because it makes most of its sales to the Detroit Three. Nearly half of sales at the Bellwood and Frankfort plants are from General Motors; 16% come from Ford, and about 8% from Chrysler. Mr. Mickus oversees 422 hourly and salaried employees, down from 687 at the end of 2007 and 769 in 2006. Unless the industry improves, "there will be additional reductions" at his plants in the first quarter, he says.
Small parts-makers face an even darker future. "We don't have any orders," says Steven Pelke, chief operating officer of Calumet City-based Kay Manufacturing Co., which produces transmission components for Ford and General Motors. He laid off about 30 of his 75 employees this fall and expects to be idle for most of December. He's scaled back on purchases and other spending. His sales staff is still pursuing new orders. "We're almost shut down," he says.
The biggest local suppliers, companies such as Illinois Tool Works Inc. and Tenneco Inc., also are feeling the pain. The foreign and domestic auto industry accounted for about 10% of Glenview-based ITW's more than $16 billion in 2007 sales. Ford, General Motors and Chrysler accounted for about 35% of Tenneco's $6.2 billion in 2007 sales.
Tenneco CEO Gregg Sherrill says the collapse of one or more of the Detroit assemblers would jeopardize the Lake Forest-based company's ability to serve its remaining customers by draining operating cash and leaving a glut of manufacturing capacity.
"These guys are still major players," Mr. Sherrill says.
Automakers are major customers for local steel plants, too. Charles Bradford, a steel industry analyst in New York, estimates that as much as 90% of the 5 million tons of flat-rolled steel produced annually at ArcelorMittal USA's Burns Harbor plant in Indiana is channeled to the auto industry. The Chicago-based steelmaker indicated recently it may lay off up to 2,444 workers at the mill by the end of January because of slumping demand.
A third or more of the U.S. car dealers affiliated with Detroit will go out of business if a Big Three company collapses, industry observers predict. If true, that would be devastating here. About 300 car dealerships in the Chicago metro area alone are tied to a Big Three company.
"A Chapter 11 filing by GM or any other automaker would be devastating," says John Phelan, owner of Jack Phelan Chevrolet in Lyons and Jack Phelan Dodge-Isuzu-Suzuki in Berwyn. "People would be asking the question: 'Do I want to buy a car from an entity that might not be in business three years from now?' "
Mr. Phelan, 58, has been in the business for 26 years. He sold 800 cars at his Chevy dealership last year but expects that number to drop by 150 this year.
Michael Ettleson, part-owner of Ettleson Cadillac-Buick-Pontiac-GMC in Hodgkins and Ettleson Hyundai in Countryside, was approached recently by a broker offering to buy his GM dealership to make way for a Wal-Mart parking lot. They couldn't agree on a price, "but the offer was interesting for me," he says.
For Mr. Ettleson, the crisis began in October, when his sales fell 50%. "Car sales overnight came to a halt," he says.
Lattof Chevrolet of Arlington Heights closed its doors Oct. 10 after more than 70 years in business at the same Northwest Highway location. The company, which once had $30 million in annual sales, was in its third generation of family ownership. The closure put 65 employees out of work.
"It's a shame to see this," says Arlington Heights Mayor Arlene Mulder. "Lattof Chevrolet for years was synonymous with the town of Arlington Heights. Everybody bought their cars there. . . . It was a Lattof who helped us build a hospital in our town 50 years ago."
In addition to the sentimental loss, the closure will hit Arlington Heights' budget. In the first six months of this year, the village of 77,000 had tax income from sales of cars and auto parts totaling $730,000, down from $838,000 in the first six months of 2007 and $915,000 in that period in 2006. The village has an annual operating budget of $60 million.
While much attention has been focused on the Big Three's struggles, much of of misery has been outsourced to the nation's auto parts makers. Read how this is affecting local parts makers. Arlington Heights has seen Nissan and Lexus dealers open on Dundee Road, which Ms. Mulder hopes will blossom into a new auto row.
Other towns, including Countryside, Libertyville and Schaumburg, are seeing declines in sales tax revenue, as well.
Three dealerships, selling Dodge, Pontiac and Lincoln-Mercury brands, closed in Countryside during the past year, says the village's finance director, Gail Paul. Ten dealerships remain, offering 12 brands, she says.
Largely as a result of the three businesses shutting down, sales tax revenue dropped more than 4% for the first seven months of the fiscal year, which started May 1, she says. Almost half of the sales tax comes from auto dealers and other auto-related businesses, she says.
"We have been dependent on car dealers for many years, and our sales tax has been stagnant for I'd say the past six years," Ms. Paul says.
National automotive advertising spending through August fell 5.7% year over year, to $248,000 per dealer, according to national figures. That's bad news for local media outlets. Chicago TV stations derived about $350 million from auto-related advertising last year, and the 2008 pace is about 20% below that, with most of the decline occurring in the second half, according to one Chicago station's estimates.
Automotive-related advertising accounts for 20% to 30% of the advertising pie at newspapers and TV stations, says Jerry Cizek III, president of the Chicago Auto Trade Assn., a trade group for about 500 local dealers.
WLS-TV/Channel 7 gets 18% to 20% of its advertising revenue from auto dealers, says Station Manager Emily Barr. She estimates that auto-related ad spending is off 50% this quarter from the year-earlier period. "It's not pretty," she says. "You really can't sugarcoat it."
WMAQ-TV/Channel 5 General Manager Larry Wert says overall ad spending at his station is down 20% this quarter.
While Ms. Barr says she's not planning layoffs, Mr. Wert says "all of these things are contributing to our need to re-engineer, which includes our cost model."
Cantele Sedivy & Associates Advertising Inc. in Wheaton says auto-related advertising, which represents about 35% of its business, is down about 50%. "This whole year has been a tough year," says Mike Sedivy, a partner.
Last year, Leo Burnett Co. became the lead creative agency for GM's Buick, Pontiac and GMC divisions. In July, GM Chief Executive Rick Wagoner announced unspecified cutbacks in advertising and marketing spending even after the company's advertising spending during the first half of 2008 had dropped 6% to $1.2 billion.
"We've implemented most of those reductions," says a GM spokeswoman, adding, "Going into '09, all budgets have been tightened, including this one."
Leo Burnett declines to comment.
Of course, the most direct impact is felt by the assembly line workers.
Ronda Holliday, one of more than 100 Ford employees laid off from the company's Chicago Heights stamping plant in November, declined a buyout offer because her years of service with the company put her near the top of the call-back list if orders pick up.
Production workers like Ms. Holliday, of Merrillville, Ind., earn $24 to $26 an hour.
"I'm hoping and praying that I made the right decision and will be called back," says the 41-year-old single mother of three.
©2008 by Crain Communications Inc. |
