THE AUTOEXTREMIST

December 3, 2008

America speaks, and Washington is forced to listen.

By Peter M. De Lorenzo

Washington. The battle drums are beating along the Potomac, and the message ringing unmistakably loud and clear in the ears of Senators and congressional representatives is this: The U.S automobile industry doesn’t begin and end with Detroit, southeast Michigan and the Midwest – a city, a state and a region that have apparently become expendable to the powers that be in Washington – but rather its tentacles spread out across the union in a powerful network of small and large businesses alike, from the local auto dealer franchise in small-town America, all the way to multi-billion dollar supplier corporations in the heart of Silicon Valley.

And now that this essential part of the U.S. manufacturing base is on the brink of oblivion, the real story is finally being told, and the untenable realities and ramifications of a collapse of the domestic automobile industry are being put in stark terms that even our leaders in Washington can understand.

In just this past week, the true value of the domestic automobile industry is coming to the fore, and people all across this country are starting to take notice.

The Los Angeles Times reported on Monday about the huge portion of sales tax revenue generated by vehicle sales in California and its affect on the taxes collected by city, county and state governments. Using just one example - when Heritage Lincoln Mercury (among the largest Lincoln Mercury dealers in California and part of the Tustin Auto Center) closed its doors in the city of Tustin in August – the Times reported that a crucial source of revenue for the city, which relies heavily on taxes from automobile sales to keep afloat, was devastated.

Of the city's $20-million annual budget, about $5 million comes from the local auto center, the city's director of finance, Ronald Nault, told the Times. And with sales of Lincoln and Mercury cars and trucks down by nearly a quarter nationwide through October compared with last year, the Heritage dealership was forced to fold. But it doesn’t stop there, because many of the other dealerships in the auto center, although still in business, are seeing severe sales declines, which means even fewer sales taxes collected.

"It has definitely affected us," Nault told the Times, adding that collections from the auto center were on pace to be off 20% for the year. And with industry-wide vehicle sales falling even more sharply in recent months, the revenue shortfall could be substantially greater, forcing the city to consider spending cuts, a salary freeze, reductions in travel and the possibility of layoffs for the first time in the city's history.

The Times continued by saying that “sales of new and used cars, as well as parts and service, are the single largest source of sales tax revenue for almost every state, county and local government, ahead of gasoline sales, restaurants and department stores. (Alaska, Delaware, New Hampshire, Oregon and Montana do not collect sales tax.) More motor vehicles are sold in California than in any other state; in the second quarter, nearly 15.5% of all sales taxes here, or $193 million, came from the automotive and transportation sector, compared with about $135 million from restaurants and hotels, according to Hdl Cos., which compiles sales-tax data for government agencies.”

But, the Times cautioned, California’s second-quarter automotive sales-tax receipts were down dramatically - more than $30 million short in the second quarter alone from a year earlier - contributing to the huge budget shortfall that has led Gov. Arnold Schwarzenegger to propose a sales tax hike and spending cuts.

"This is very bad for states," Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government told the Times, who went on to point out that sales taxes are the first or second most-important revenue source in almost every state.

And to think there are people still out there who suggest that the collapse of the domestic automobile business somehow “won’t affect them.”

Let’s go on to another part of the State of California – Silicon Valley - a relative hotbed of anti-Detroit rhetoric and home to major corporations involved in the manufacturing of semiconductors.

The Mercury News reported in last Sunday’s edition that “The financial crisis hammering Detroit's auto industry is sending shock waves to Silicon Valley, where a number of companies make the computer chips that have become increasingly vital components in cars and other vehicles. And if Ford Motor, Chrysler and General Motors go belly up, as some experts fear, the repercussions in the valley could intensify.”

"As soon as the automotive industry coughs, a lot of other companies get a cold," Thilo Koslowski, who tracks that business for research firm Gartner, told the News. "That includes companies in the semiconductor industry and that includes a lot in the Bay Area... It's a relatively big market for them in Silicon Valley."

For the record, the roster of South Bay companies that supply semiconductors for carmakers include Intel, Atmel, National Semiconductor, Spansion, Altera, Maxim Integrated Products, Xilinx, Linear Technology and Cypress Semiconductor, according to the News.

And one more report about the U.S. automobile industry’s role in the American economy. Crain’s Chicago Business, a sister publication to Automotive News, did a deep dive on what the collapse of a Detroit automaker would do to Chicago – “ from South Side manufacturers to northwest suburban dealerships to downtown TV studios” – and these are some of the staggering statistics they came up with...

“As General Motors, 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,” Greg Baise, president of the Illinois Manufacturers Association told Crain’s. “It would have a much broader impact than it would have had 30 years ago.”

The reason for that is that the U.S. automakers have delegated much of their supply chain over the years, including crucial parts-making operations. Crain’s reports that 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,” reported Crain’s. “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 percent 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.”

Crain’s reported about one dealer’s fate. “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,” Arlington Heights Mayor Arlene Mulder told Crain’s. “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.”

As in Tustin, California’s case, the closure will hit Arlington Heights' budget too. Crain’s reported that “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.”

The point of all of this?

The point is that the powers that be in Washington, D.C., are just waking up to the fact that the U.S. automobile business is so ingrained and intertwined with the nation’s economy on the local and state levels that a collapse of the Detroit automakers would be a cataclysmic event that would send this nation - already teetering from a deep recession - into a full-on depression. And to pretend otherwise is just pure folly at this juncture.

This week, our lawmakers in Washington will be getting a double-shot of reality about the Detroit they were so quick to scoff at and criticize a couple of weeks ago. The fact that they spewed hoary stereotypes about the Detroit that existed more than a decade ago was painful to listen to and even more painful to watch.

But this time they will be introduced to the real American automobile companies.

American automobile companies that have been doing the heavy lifting and fundamental restructuring needed since 2000.

American automobile companies that are now on the cutting edge of advanced technological developments in fuel efficiency, safety and environmental responsibility.

American automobile companies that are building an impressive array of class-leading vehicles in all segments, with more on the way with each passing quarter.

American automobile companies that have been part of the American industrial fabric for 100 years.

American automobile companies that powered this nation’s growth and propelled the development of middle-class, mainstream America.

American automobile companies that responded in the time of this country’s gravest need and created the Arsenal of Democracy that helped win World War II.

American automobile companies that are an inexorable part of every village, town, city and state in this great nation.

Washington will be forced to listen this week by the sheer momentum that comes from ordinary citizens speaking up all across America. People who understand what these American automobile companies mean to their local communities and to their livelihoods.

Ordinary people with extraordinary understanding that this whole issue concerning Detroit’s future isn’t a Republican thing, or a Democratic thing, but an American thing.

Thanks for listening.