Article in December 29, 2006 Detorit News

2007 Industry Outlook

More tough times ahead

Experts say Michigan's jobless rate will grow in '07

Detroit News Business Staff

This year was a somber one in Michigan, with only a few bright spots for businesses. And 2007 will bring more of the same, experts say.

The domestic auto industry will continue to downsize as it strives to hold its own against global competition. The housing market will remain soft as the state works to replace thousands of auto jobs.

On the plus side, commercial building activity and retail spending should remain healthy, analysts say.

Here's an industry-by-industry breakdown of what's ahead in 2007:

Automakers

It was a hard year for Detroit's Big 3 automakers as slumping sales led to bloated inventories and major production cuts, pushing Chrysler into red ink along with Ford and GM.

Jump-starting sales and cutting costs will continue to be challenges in 2007. Detroit automakers also face what are expected to be difficult contract negotiations with the United Auto Workers. While General Motors Corp. is showing signs of a comeback, and DaimlerChrysler AG's Chrysler Group is expected to be in better shape next year with a host of new products in showrooms, Ford Motor Co. is fighting for survival, said David Healy, an analyst with Burnham Investment Research.

"Ford is the basket case," he said.

GM and Ford will shed thousands of jobs by the end of next year, as they downsize in line with their shrinking market shares. Chrysler wants to cut costs by $1,000 per vehicle, and plans to announce a restructuring plan in February likely to include job cuts and plant closings in a bid to restore black ink.

IRN Inc., an automotive research firm, projects vehicles sales will drop to 16.1 million units compared with a forecasted 16.3 million units this year.

"We actually came skidding toward the finish line in 2006 with auto sales softening and that will continue into '07," said Erich Merkle, an analyst with IRN in Grand Rapids. "The second half of 2006 has not been kind and it's going to get a little worse before things start to improve."

Auto Suppliers

Any softening in vehicle sales next year likely will mean more production cuts by automakers and that will mean another tough year for parts makers. As the Big 3 cut costs and output in 2006, suppliers faced steep production cuts of their own.

"Suppliers are going to have a very difficult time at least in the first half of next year," said Fred Hubacker, executive director at turnaround firm Conway, MacKenzie & Dunleavy, which has a Detroit office.

"Anybody that's connected to some of the light truck programs at Ford or the Jeeps, maybe, at Chrysler, I think those programs have a very real risk of some significant downtime at least in the first half of the year."

Several companies are already in bankruptcy, including Troy-based Delphi Corp., whose two biggest investors are battling over control of the company. Tower Automotive recently secured $250 million from investors to help finance its exit from bankruptcy. Experts expect more of these types of deals in 2007.

Reduced vehicle production and manufacturers' continuous demands for cheaper parts from suppliers will intensify pressures in the parts-making segment, said George Magliano of Lexinton, Mass.-based Global Insight Inc.

"Sales are going to be off a couple hundred thousand units and basically production will be flat," he said.

Jobs, economy

Can Michigan adapt in the era of the vanishing auto job?

An estimated 100,000 auto workers, blue collar and white collar, at GM, Ford and Delphi Corp. have taken buyout or early retirement offers -- including tens of thousands in Michigan. Soon workers at DaimlerChrysler AG's Chrysler Group may get similar offers.

"You can just go down the line in terms of the ramifications -- tax base, real estate market, consumer spending," said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor.

But a glimmer of good news is that the workers are not leaving empty-handed; in some cases the payout is more than $100,000.

"We are talking a lot of talent becoming free. Not all of them can uproot and leave," said Lou Glazer, president of Michigan Future Inc., an Ann Arbor think tank. That means lots of highly skilled people looking for new ways to make a living.

Still, the state's unemployment rate is expected to keep climbing in 2007, averaging about 7.5 percent, according to several economists. It's currently at 6.9 percent.

Beyond autos, job gains are expected in health care, professional and business service sector and possibly tourism. The building sector should remain stable.

A big moment comes in September when the UAW starts contract negotiations with Detroit's Big Three. "I see the 2007 negotiations as probably the most decisive in the industry," said Gary Chaison, professor of labor relations at Clark University in Worcester, Mass.

Few rule out the possibility of strikes.

"It will determine what kind of a union the UAW is going to be."

Real estate, construction

The uncertainty in the domestic auto industry will continue to mean trouble for Michigan's housing market in 2007. In contrast, the commercial real estate sector will remain stable.

"The big problem is all the concerns about the auto industry haven't been answered yet," said Dana Johnson, chief economist for Comerica Inc. "The question of how many are taking the auto sector buyouts and possibly leaving the state is causing many people to simply hunker down and not make new investments."

That's bad news for many Michigan homeowners, particularly those in Metro Detroit, which has a soaring foreclosure rate and declining housing values. Many homeowners will continue to have trouble selling their houses, and potential buyers may hold off due to the overall uncertainty of Michigan's economy, Johnson said.

On the bright side in the real estate sector, commercial building projects should generate about $15 billion in revenue thanks to 17 large new projects, including a variety of hospital construction jobs and the building of three permanent casinos in downtown Detroit, according to Ron Hausmann, president of heavy and special construction group at Detroit's Walbridge Aldinger Co.

"Once you get past the auto industry, there is plenty of building still going on in Michigan," Hausmann said. "That will not change in the next year."

Airlines

2007 it should be a pivotal year for the airline industry, including Northwest Airlines, Detroit's largest carrier. Northwest, which filed for bankruptcy in 2005, is planning to exit bankruptcy in the second quarter of 2007, with a new streamlined operation after $1.4 billion in labor cost savings.

Northwest and other airlines should return to profitability with record numbers of passengers exceeding pre-Sept. 11 levels.

Overall, ticket prices in 2007 will remain the same or slightly higher, though there will be frequent sales and discounts as major carriers battle for market share and compete with low-cost airlines in the markets they serve.

There also may be one or two attempts at mergers between major carriers, something that will be scrutinized closely by the U.S. Justice Department.

"We have hit bottom on cost-cutting as it affects passenger service," said Dr. Jack D. Kasarda, a professor of management at the University of North Carolina in Chapel Hill who specializes in airline infrastructure. "We will begin to see the quality of service go back up in 2007 with more amenities such as better food and maybe an extra flight attendant in the cabin for better service.

"I see quite a sunny future for airlines in 2007. This year was the dawn where we saw the sun rise, but now it's going to shine much brighter."

Retail

The local retail sector will have a decent 2007, experts predict.

"It'll be a good year for the retail market," said Ed Nakfoor, a Birmingham retail consultant. "It won't be a cake walk, but it'll do well. Businesses -- especially small businesses -- can't just turn on the lights, unlock the door and say 'I'm here.' "

High-end retailers and discount stores will have to work harder and smarter to win over customers. Intense competition will keep retailers on their toes, with good bargains.

Malls and local and national retailers will be expanding in Michigan, despite the state's dubious distinction as having one of the worst economies in the nation.

Nordstrom's, which has a store at the Somerset Collection in Troy, plans to put another store at Twelve Oaks Mall in Novi and a third store at The Mall at Partridge Creek, a new shopping center in Clinton Township due to open in October.

Health care

Rising health care costs will continue to plague auto companies in 2007, mostly because of aging retirees using more medical services.

But many other companies will get a break from the steep cost increases they have experienced over the past few years, by passing on more of the health-care load to employees through higher co-pays, higher deductibles and savings accounts. Some employers are going even further, and charging workers who smoke extra for their health insurance coverage.

Consumer-driven health plans make up about 7 percent of the privately insured market, representing some 13 million customers, according to a Booz Allen Hamilton health care trends analysis. And they will rapidly grow.

Hospitals and health systems in Metro Detroit will continue expanding and renovating in an effort to keep up with new technology and attract customers with hotel-like amenities.

Smaller insurers will likely continue merging with larger counterparts, following the example of the proposed sale of the University of Michigan's insurer, M-CARE, to Blue Cross Blue Shield of Michigan and Trinity Health's insurer, Care Choices, to Grand Rapids-based Priority Health.

Technology

The winds of change are blowing through Microsoft's Windows.

The software giant plans to launch a consumer version of its new operating system, Windows Vista, in January and that's likely to impact office desktops and spark new home computer sales.

It's Microsoft's first operating system overhaul since 2001 and experts say the most significant change since Windows '95. Also along for the ride are new versions of Office, SharePoint, Outlook and Exchange -- all common workplace tools.

Nearly everyone will be affected as Window's operates more than 90 percent of all the world's PCs.

Technology firms could see an uptick in business as corporate clients consider upgrades. A business version of Vista was launched in late November.

Improved security is the most significant feature of Vista, said Mark Becker, partner at C/D/H, a technology consulting firm in Royal Oak and Grand Rapids. The operating system should be less susceptible to viruses, spy ware and other tech parasites.

"Vista alone is going to save me a lot of weekends that I won't have to clean up friends' computers," he said.

In Michigan, the tech sector will be looked at to replace some of the jobs lost in the auto industry. Google and ePrize are among the firms expected to make good on 2006 announcements to hire several hundred workers in the state.

Energy

Drivers should find some relief at the gas pump in 2007, with prices expected to drop a few cents a gallon, from a nationwide average of $2.57 per gallon to $2.51 per gallon, according to the Energy Information Administration's most recent Short-Term Energy Outlook.

The price of oil will remain near historically high levels. The administration predicts that oil will average $65 per barrel in 2007. That's just below the average price of $66 per barrel projected for 2006.

The average MichCon natural gas customer should pay about $50 per month less this winter than last, because the cost of natural gas is cheaper. Consumers Energy customers should also see lower heating bills this winter, of at least $10 a month.

The savings should continue through the end of the heating season in March, unless cold weather drives up demand.

Detroit Edison customers will see their electric bill increase by $1.50 per month in January. The modest increase is due to the rising cost of the fuel that powers generating plants.

"Things are going to be pretty stable in 2007," DTE spokesman Len Singer said.

Expect big changes to the state's energy policy to be discussed this year. The Public Service Commission will release in January a report requested by Gov. Jennifer Granholm. It will examine everything from how many power plants should be built to what share of the state's electricity should be provided by renewable energy sources.

Telecommunications

AT&T brings its weight and cable television product -- U-verse -- to Michigan in 2007, in what could be the biggest development in Michigan's telecommunications industry this decade.

Ma Bell plans to spend $620 million and hire 2,000 workers to upgrade it existing phone line to handle video and high-speed Internet. Don't expect chief competitor Comcast to stand pat; it will work to improve and market its cable, phone and Internet services.

Cell phones are likely to provide a wider array of services in 2007.

In addition to answering and receiving calls, expect the common user to access the Internet, check e-mail, play music and watch video feeds on their phones.

Having a separate phone, PDA, iPod and Blackberry may soon become passé.

Carriers and phone makers looking to drum up more sales will strongly push "smart" phones such as the LG enV, Motorola Q and Samsung Blackjack.

Next year might also be the first when municipal wireless Internet becomes a reality. Oakland, Macomb and Washtenaw counties are among those seeking to launch free, wireless Internet services.

Oakland's much delayed project should launch its pilots in the first 90 days of the year, said Scott Oppmann, Wireless Oakland Program Manager.

"We have finished all the engineering and design work," he said. "We think we're beyond the issues that slowed us down this summer and fall and are moving forward nicely."

Casinos

Casino expansion in Detroit in 2007 is the hot topic.

Both the MGM Grand Detroit Casino and the MotorCity Casino will be battling to see who can open it doors first with permanent casino/hotel/convention facilities.

Both are targeting the fourth quarter for completion.

The third Detroit casino -- Greektown Casino -- is lingering far behind with a completion date now set for sometime in September 2008.

Both MGM and MotorCity have now capped their new 17-story, 400-room hotels and are planning to work on the interiors this winter.

"We're moving right along," MotorCity spokeswoman Jacci Woods said. "Our expanded casino will open sometime in the first quarter of 2007 with the hotel completed near the end of the year."

Jacob L. Miklojcik, president of Michigan Consultants in Lansing, a gaming expert, said at this point, it's a 50-50 shot whether they'll get open this year or early next year.

"The land and permits are the killers. Once you have that and the financing, you want to get that sucker open."

Miklojcik said he'd be surprised if there isn't a push in 2007 to expand the number of commercial casinos in Michigan from its current three in Detroit. It would require a change in the state law.

"The move will come in 2007, but whether or not it's successful is another matter," he said.