Can Detroit Be Saved?

Detroit is known by many names: The D, Motor City, and Motown, among others. But this once sprawling metropolis of nearly 2 million has over the past few decades become more synonymous with poverty, crime, unemployment, and urban blight. With a population half the size of its glory days, the city now struggles to find a new identity as the auto industry–its economic engine–continues to shrink.

Challenges abound for this struggling city and its mayor. Dave Bing, elected in May to complete Kwame Kilpatrick’s term after the latter resigned amid charges of corruption, is contending with the city’s approximately $300 million deficit and a more immediate budget shortfall that he says could leave Detroit without operating capital by the end of the year.

Despite all the bad news in Detroit–and there has been plenty–hope remains. In fact, one of the keys to revival can be found in TechTown. This 9-year-old nonprofit organization is providing new companies with services, support, and resources needed to grow and thrive. The 100,000-square-foot business incubator facility–Michigan’s largest–was a former car factory built in 1927. Now, it’s home to nearly 90 companies–about 40% of which are African American-owned.

Carla Walker-Miller, one of TechTown’s residents, says the incubator gave her the support she needed to help grow her business. “I wouldn’t be as comfortable in business as I am right now and I wouldn’t be as hopeful,” says the president and CEO of Walker-Miller Energy Services L.L.C., a supplier of electrical equipment and provider of energy optimization services. “TechTown gives us the wherewithal to dream bigger and to accomplish bigger than we would have otherwise.”

Walker-Miller, whose company generated some $4 million last year, has been in TechTown for five years, having taken advantage of its mentoring services, as well as phone support and access to conference rooms to hold meetings.

TechTown helps foster innovation and entrepreneurship –vital components for a new Detroit that can no longer be a one-trick pony banking on the restructuring of a devastated automotive industry. “Instead of having 90 companies today, when you come back in three years’ time, our challenge is to have 500,” says Randal Charlton, TechTown’s executive director. “That’s one new company in Detroit every 2.7 days, from now until 2012, so this is the start of a revolution.”

But a revolution has to be fought on many fronts. The creation of tech jobs is but one battle in a series of wars this city must fight to achieve true revitalization. For a century, Michigan has been the automotive capital of the world, boasting seven times more jobs in this sector than any other state in the nation. The industry has also given birth to some of the largest black-owned businesses–many ranked among the be 100s. But since 2000 the city has lost three-quarters of its automotive jobs, and its unemployment rate has surpassed 15%. Amid this backdrop, black enterprise takes a diagnostic look at this troubled city to see what tools and parts are needed for a successful Motor City overhaul.

Troubleshooting

It’s easy to spot Detroit’s myriad problems. Roughly one-third of its residents live below the poverty level. It has a crumbling  infrastructure, a bankrupt school system, and a housing climate so abysmal that the median price for a home stood at around $6,500 in June. Charlton sums up Detroit’s status in stark terms: “You’re in the economic equivalent of Stalingrad in the last war. We are on the front line of the recession.”

On the political front, Detroit has suffered severe blows in recent years, with corruption scandals leading to the ouster of Kilpatrick as well as City Councilwoman Monica Conyers pleading guilty to bribery and conspiracy charges for her vote on a sludge fund contract. Trust must be restored in city government–one of the many challenges for Bing, the former basketball superstar and founder of The Bing Group (No. 33 on the be industrial/service companies list with $130 million in revenues). Bing’s plan to address the budget shortfall through furloughs for city employees and proposed service cuts to bus lines  has drawn the ire of city residents and the loss of support from the American Federation of State, County and Municipal Employees (AFSCME), the city’s largest labor union.

AFSCME leaders contend that a disproportionate number of union workers are being affected by the cuts. “We’re saying that everybody needs to share in this equation, that nobody should go unscathed,” says Albert Garrett, president of Michigan Council 25 of AFSCME. All told, the city is attempting to remedy an $80 million cash shortfall this year. Meanwhile, if Bing wishes to keep his job (his term expires this month), he must fend off challenger Tom Barrow, who gained the support of AFSCME.

One might think Detroit’s challenges began with the recent crisis. But residents and other observers say otherwise. The fact is Detroit wasn’t always a one-industry town. At the beginning of the 20th century it was a major producer of ships, stoves, and tobacco. But the wildly successful Ford Model T led to an automobile frenzy that at its peak had some 300 auto manufacturers competing in Motor City. By the 1920s its economy boomed, manufacturing more than 60% of the nation’s cars. After World War II when the population began to shift to suburbia, Henry Ford and other entrepreneurs decided to build factories outside of Detroit. By the 1950s, despite being the country’s fifth largest municipality with about 1.8 million people, there were virtually no new factories built within city limits. “The idea of the modern American city was the suburban lifestyle. It was not living in the inner cities because they were considered dirty and dusty and old,” says Janese Chapman, a city planner and historic preservationist for Detroit’s Historic Designation Advisory Board.

Thus, Detroit went from one of the wealthiest cities in the country to becoming victim of a gradual exodus that lasted decades. Between 1947 and 1963, it lost 134,000 manufacturing jobs; as a result, more than half of the residents left over the next few decades. The greatest shift took place during the 1967 civil disturbance, which escalated “white flight,” further eroding the  city’s tax base and industrial activity.

By 1973, the city elected its first black mayor, Coleman Young, who inherited an economic mess–a staggering fiscal crisis, municipal employee layoffs, and the threat of plant closings. He brought the city back from the brink of bankruptcy by revitalizing the city’s waterfront and, in the process, bolstered the black entrepreneurial class through his administration’s minority set-aside program.

As the city was being redeveloped, however, the gas crunch of the 1970s helped open the door to competitive pressures from foreign automakers. Models that were smaller, more fuel efficient, and cheaper to make than American muscle cars enabled companies such as Honda and Toyota to grab a foothold in the American marketplace and take market share from the then-reigning Big Three: General Motors, Ford Motor Co., and Chrysler Corp.

By the 1990s, Detroit was enjoying a boom due to the growing economy and a vibrant manufacturing sector. Then-Mayor Dennis Archer presided over a city that was ranked No. 1 by Industry Week magazine on its listing of world-class communities. Black businesses, particularly auto suppliers and car dealers, grew at an exponential rate. By 1998, Michigan had more be 100s companies than any other state in the nation.

“The automotive industry was very good to black entrepreneurs here, but it also made us collectively not as aggressive on our game because it was such a lucrative industry,” says Louis Green, president of the Michigan Minority Business Development Council. “There was no urgency to diversify or explore other options.” And when all-time highs for crude oil combined with the subprime-fueled erosion of the U.S. economy, this perfect storm sent the auto industry into its worst slump ever–and took Detroit with it.

Diagnostic Measures

So the prognosis is simple: Detroit must attract industries outside of the struggling automotive space, wooing both large corporations as well as fostering entrepreneurial growth. Since no single industry can produce the job and wealth creation the auto sector did in its heyday, the city must transform itself into a magnet for as many industries as possible. This renaissance will also be fueled by the development of small businesses and minority-owned enterprises (blacks comprise 81.6% of the city’s population). For instance, automotive suppliers must rethink their business plans. “We’ve got to recognize that new entrepreneurial efforts, startup companies, new companies from overseas, or part of the wind wave–solar, advanced energy storage, battery systems, biomass systems, geothermal systems–are going to be key,” says Keith W. Cooley, president and CEO of NextEnergy, Michigan’s renewable energy industry accelerator.

It’s not like the Motor City doesn’t have its plusses though. After all, the area was a strategic trading post in the 1700s and 1800s because its vast waterways made it accessible. It also has extensive highway and rail systems. In fact, 60% of the U.S. population can be reached overnight from Detroit by land or sea. Then there’s the access to the Canadian market by way of nearby Windsor, Ontario. And it has two college campuses: University of Detroit and Wayne State University. Combined with a willing workforce, low-cost housing,  cheap factory space, and a major international airport, you have a city with the ingredients needed to participate in a 21st century economy.

But first there must be a change of culture. “I think Detroit really suffers from a lack of entrepreneurial spirit. It’s mostly a function of the fact that the auto companies have been so successful for so long and they built such a big corporate culture that permeated thinking at all levels of society there,” says Donald Grimes, senior research specialist for the University of Michigan. “You’re on your own more now than you’ve ever been. People have to recognize that. I don’t think they’re going to be able to find big institutions figuring out solutions to their problems.”

Michigan Gov. Jennifer Granholm wants to shift the state’s massive manufacturing capabilities to serve the emerging green economy. “We know that technology associated with the auto industry can be transferred to produce better materials for wind turbines and solar panels. We want to identify the natural strengths we have based upon our traditional base and move them into areas we know are up and coming, like the green economy.”

Today’s Motown Enterprises

Jimmy and Natalie King are among area residents who understand this. They also view renewable energy as being an important element in Detroit’s economic revitalization. As owners of J King Solar Technologies L.L.C., which engineers, designs, and installs solar paneling, primarily for commercial facilities, the husband-and-wife team is hoping to get a piece of the retrofitting pie as city- and state-owned buildings are brought into the 21st century with renewable energy or energy-efficient additions. Based in nearby Southfield, Michigan, the startup company, funded with roughly $180,000 from a combination of the couple’s funds and outside investments, has just one project: installation of a 145 kilowatt solar photovoltaic system in Bordertown, New Jersey. In the fall, J King Solar Technologies will be one of several vendors participating in DTE Energy Co.’s solar pilot program offering rebates to residential and small business clients.

The firm only netted about $10,000, but the Kings remain optimistic about future prospects. Jimmy, 36, a member of the University of Michigan’s famed “Fab Five” basketball team would like to see Detroit capitalize on what many consider a growth industry. “You look at the infrastructure of the city and the state itself; we have a lot of manufacturing capability,” he says. “We’d love to see green-collar jobs come to the city. That was a major factor in our determination to start this business.”

The Kings have tapped into an area where there’s plenty of money to be made. According to the LOHAS Journal, a publication that tracks economic trends, green products and services generate roughly $209 billion a year–a number that’s only expected to grow as more Americans adopt more eco-friendly practices. With its vast manufacturing capability, Detroit can capture a significant portion of these dollars through the development of wind turbines, solar panels, and energy-efficient batteries. That’s where legislation can help. “The state must have strong incentive programs that will make investment in a renewable energy system make sense–that’s when you create jobs,” says Natalie, 35. “Then developers will begin to write solar into their specs since it’ll make economic sense.”

 

 The New Growth Industries

Beyond the green space, four other industries could provide significant jobs and tax revenues. They are:

Motion Pictures: Even in a brutal economy, the motion picture industry managed to grow 1.7% in 2008 with the domestic box office generating $9.79 billion. Detroit is positioning itself as a major player by making tax incentives available to filmmakers. According to city officials, 68 films were produced in Detroit last year including 12 major motion pictures. Transformers, Dreamgirls, and Gran Torino are among big-name films shot there in recent years. “This was an entertainment city for a long time and you’ve still got a generation or two removed from the great Motown years where we still have a lot of talented young folks here and they don’t want to leave,” says Bing.

Healthcare: The healthcare industry is one of the largest in the U.S. with estimated expenditures (which include prescription drugs) of $2.2 trillion–that’s trillion, not billion. The city is home to Henry Ford Health Care System, Detroit Medical Center, St. John Health System, and Beaumont Hospitals. According to Bing, these facilities have been growing on average more than 10% a year for the past five years and are projected to expand at the same rate over the next five years.

Construction: The Bing administration is working with the federal government to make Detroit a priority in its economic recovery initiative. In June, the federal government approved nearly $125 million in funding for the city to attract jobs and investment through its recovery bond program–funds that can be used to rebuild roads and infrastructure. A proposal to revamp the city’s woeful mass transportation system is under consideration.

Automotive: Auto may be a four-letter word in southeast Michigan, but people are still going to buy cars and Detroit will likely remain the center of the U.S. automotive industry. If American automakers such as General Motors and Ford can turn around their fortunes as smaller, leaner players (and analysts are fairly optimistic they can) then the city should position itself as the place where next generation fuel-efficient technologies are developed. “One of the big bets that we are making is that electric vehicles will be an integral part of the automotive platform and strategy for years to come,” says Rod Gillum, GM’s vice president of corporate responsibility and diversity.

For these industries to take root and thrive, however, it’s imperative that Detroit ensure its business incubators and training and educational programs remain open to produce the next generation of entrepreneurs. This means financing. And believe it or not, Michigan has it. “You go 50 miles down the road to Ann Arbor that God knows is wealthy enough. They’ve got something like 17 venture capital companies of one sort or another in that small town, feeding off the university expertise,” says TechTown’s Charlton, pointing out that there’s just one such firm in  Detroit–Oracle Partners. “Job No. 1: You’ve just got to raise investment funds to invest in these small businesses.”

Surprisingly, Big Tobacco could well lend a hand to Motown’s efforts. In the mid-1990s, Michigan joined 45 other states to sue the tobacco industry seeking compensation for healthcare expenditures for ailments arising from tobacco use. Michigan’s initial payment from the tobacco industry was $104.5 million, to be followed by $279 million to $365 million annually for 24 years. The state securitized those settlement dollars to create a $2 billion fund to invest in alternative energy, advanced manufacturing, homeland security/defense, and life sciences over a 10-year period.

Repairing the School System

As one would imagine, a full economic turnaround is not only decades in the making but also rife with challenges. Perhaps the biggest in the case of Detroit is the poor educational attainment of its residents. Metropolitan areas that succeed tend to have a thriving central city with a highly educated population. In Detroit, roughly 11% of residents 25 years and older have a bachelor’s degree. Grimes says: “If you look at Seattle it’s over 50%; Boston is over 40%. It’s really important to have an educated population in your central city and Detroit does not have that.”

Illustrating this point, an April 2009 study by the EPE Research Center, a division of the nonprofit Editorial Projects in Education Inc., ranks Detroit’s graduation rate 48th out of the 50 largest cities–ahead of only Cleveland and Indianapolis. Some 27% of its students dropped out in 2008, and only a fraction of its high school graduates go on to college or technical school. This is a serious issue for a city whose workforce may not be ready for industries policymakers are hoping to attract. Granholm is trying to address it statewide by offering scholarships to every student in Michigan who graduates from high school. “We’ll give them a $4,000 scholarship to college, which is essentially two years of community college tuition here,” she says. “No matter where you are, no matter where you live, we want to double the number of college graduates, which is part of the strategy to diversify our economy.”

In response to the school system’s projected $259 million budget deficit following years of mismanagement, Granholm appointed Robert C. Bobb as emergency financial manager for the Detroit Public School System earlier this year. He assumes full financial authority for a school district with a sharp decline in student enrollment and poor academic performance. To solve its fiscal problems, Bobb may be forced to file Chapter 9 bankruptcy (the chapter of the Bankruptcy Code providing for reorganization of municipalities). He believes that to resolve long-term financial issues, the school system must “put in place, aggressively and urgently, methods for 21st century teaching and learning.”

 

 

 

 

Taking Matters In His Own Hands

Recognizing the shortfalls in the city’s public school system, particularly in the sciences, Keith Young decided to do something about it on his own. As founder and executive adviser for Ecotek, a nonprofit scientific research organization, Young helps develop future global scientists and young inventors. “The goal is to put them in a position, through hands-on work, to be able to compete with other folks around the world,” he says.

There are currently 15 children, ages 10 through 17, in the 5-year-old program, funded through Young’s business consulting service combined with not-for-profit grants. He cites that virtually all Ecotek projects, including the development of biofuels from ingredients such as soybeans, corn, and grape seed oil, originate with United Nations member countries. He asserts: “The expectation is that through my experience and background and access to resources, it will create opportunities for our kids to work and develop as global leaders.” His goal: open up as many research laboratories as possible in the United States and abroad while ensuring student scientists are able to develop inventions and gain recognition–not only in the form of scholarships–but also notoriety in their fields.

Young believes the sciences are critical to Detroit’s future. “If we do not bite into this apple called scientific research and get on the cutting edge of biotech, biomaterials, geospacial technology, and all the different technologies that drive location-based knowledge, we’re finished, it’s over,” he says. “We won’t be able to sell enough cars to recover what we have lost.”

Pittsburgh Primer

Overhauling a city is a dauntingly complex task–one fraught with thousands of potential missteps that could derail any potential progress. Once the nation’s eighth largest city and producer of nearly half of America’s steel, Pittsburgh hit rock bottom in the 1980s when competitive pressures from Germany and Japan led to a decline in the U.S. steel industry. Eerily reminiscent of Detroit’s situation, Steel City was battered by widespread layoffs (unemployment reached a staggering 18.2% in January 1983), mill closures, and mass departure of nearly half of its population, from approximately 600,000 residents to some 360,000 by 1990.

However, the city administrators shifted its economic base by attracting new industries and offering incentives to a range of corporations. “We’ve reinvented ourselves since the downsizing of the steel industry and some of our other industries in the 1980s,” says Andy Masich, president and CEO of the Senator John Heinz History Center. “That has allowed us to diversify into things like high-tech industries, robotics, healthcare, nuclear engineering, financial services, and education.” In addition, foundations and corporations endowed many of the city’s arts institutions, contributing to a higher quality of life.

While struggling with many issues urban centers are facing in today’s brutal economy, Pittsburgh’s unemployment rate (as of July) was 7.8 % vs. 9.7% for the entire U.S. And while the city’s poverty levels are high at 20.1% (the most recent figures available), it remains substantially below Detroit’s 33.8%. “I think Pittsburgh is actually doing better than the rest of the country,” says Masich. Underscoring this, Pittsburgh was named most livable city in the U.S. by The Economist earlier this year.

TechTown’s executive director is positive the same miracle can happen in his city–partially due to its prime location next to the country’s most heavily populated areas, which is desirable for international businesses looking to move products throughout the U.S. “I think we are going to be the gateway to America,” says Charlton. “We are going to be the place where the rest of the world comes into because it’s low cost and because the rest of the world wants to get into the biggest market of the world.”

Detroit has a rich history as the birthplace for scores of successful black entrepreneurs–from Berry Gordy of Motown, which was the nation’s largest black-owned business for more than 20 years, to Don Barden, CEO of Barden Cos. Inc. (No. 10 on the be industrial/service companies list with $455 million in revenues). A revitalized Motor City would not only provide jobs and business opportunities for this predominantly black city, but also serve as the primer for future urban revitalization projects to follow.

Can Detroit be saved? Given time and through great effort, absolutely. But only if policymakers, powerbrokers, and residents make the necessary changes, sacrifices, and successfully navigate the scores of obstacles that stand in the way.

This article appeared in the November 2009 issue of Black Enterprise magazine.