Volume 2, No. 11
January 2007

Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businessperson in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Continued Dark Clouds For
State Economic Forecast

Walter McManus
Walter McManus, Director of Automotive Analysis of UMTRI, predicts further restructuring of U.S. auto companies.

By Kate Kellogg

The University of Michigan's Economic Outlook for 2007-2008 shows merely overcast skies for the nation. However, the state appears stuck beneath a "stationary front" of stormy weather through 2008, say U-M economists.

The Michigan Outlook projects unemployment in the state to average 7.5 in 2007, peaking at 7.7 percent in 2008. In 2006, Michigan had lost an estimated 38,000 jobs, on top of the 298,000 lost from mid-2000 to the end of 2005. That's the state's biggest job loss streak since the Great Depression, note Joan P. Crary, George A. Fulton, and Saul H. Hymans, authors of the annual U-M report released in November. Most of those jobs were in manufacturing; the state will lose another 30,000 manufacturing jobs in 2007, according to the forecast. The auto industry accounts for about 70 percent of those manufacturing losses.

It doesn't take a Ph.D. in economics to pinpoint the chief reason for the state's economic challenges. The Big Three U.S. auto companies' market share of North American sales plummeted another three percentage points last year, after dropping seven points from 2001 to 2005. And as the forecast points out, "Michigan's economy is almost 700 percent more concentrated in automotive industry employment than the national economy."

The pressures of competition from overseas automakers, combined with high gas prices and an unsustainable cost structure, have resulted in overcapacity and falling sales for Michigan's main industry

Ford Motor Co. just survived a particularly hard year, having (for the first time) sold fewer vehicles in the U.S. than Toyota did. Late last year, Ford announced that about 38,000 of its hourly workers&emdash;almost half of the company's U.S. factory workforce&emdash;accepted buyouts or offers of early retirement. The auto company hopes to reduce its white collar workers by about 10,000 nationally. Ford also announced a 21 percent reduction in North American vehicle production for the last quarter of 2006 compared to the same quarter of 2005. At about the same time, Toyota touted plans to increase production in North American plants by 20 percent by 2008.

Meanwhile, General Motors Corp. is completing its own restructuring program. Nearly 34,400 hourly workers have accepted buyout offers (including about 14,000 in Michigan) and some 30,000 have already left the company according to a G.M. spokesman. The number one U.S. automaker has announced plans to close 12 plants by 2008. The Chrysler Group, of DaimlerChrysler Corp., also cut production the second half of 2006 and sharply cut delivery of vehicles, due to excess inventory of pickups and sport-utility vehicles. "It's going to get worse before it gets better," says Walter McManus, director of the Automotive Analysis Division of The U-M's Transportation Research Institute (UMTRI). "Given their high fixed costs for health care and retirees' benefits, it's a particularly bad time for U.S. auto companies to be shrinking rather than growing or remaining stable. They need to shed a lot of capacity and its going to be painful."

What will that mean for Michigan's near future? The picture is not totally bleak. While the U-M forecasters project a continuing decline in Big Three light vehicle sales, they expect the slide to moderate through 2008. The local labor market is projected to hit bottom the summer of 2008, assuming stabilization in Big Three vehicle sales. Put in perspective, this is not the most severe period of job loss the state has experienced. During the 1979-1982 recession, Michigan lost 14.6 percent of its workforce in just three-and-one-half years "double the loss of the past six years," note the U-M researchers. The private, non-manufacturing sector is expected to grow modestly through 2008. Financial activities and most service industries will grow over the next two years, with the largest gains in private education and health services. In all, from mid-2006 to the end of 2008, the service industries are forecast to contribute 34,000 jobs.

While Washtenaw County is not immune to the effects of the manufacturing decline, the area is far less dependent on the auto industry than other parts of the state. And those business sectors enjoying growth are particularly strong in the Ann Arbor area, notes James Bennett, accountant and treasurer with Ann Arbor's Weidmayer, Schneider, Raham and Bennett PC.

"Besides our strength in education, we're gaining dominance in the biotech and information technology industries," says Bennett. "And from what I've seen, the nonprofits are holding their own here. That's not to say the slow-down in construction and manufacturing are not having an effect. My business clients are being very cautious."

Of course, the national outlook will have an impact on Michigan's. Overall, the national economy's growth will expand for the next two years, but at a slower pace than it has for the past two. The nation's real Gross Domestic Product is expected to grow by 2.4 percent in 2007 and 2.5 percent in 2008, compared to 3.2 percent of the previous two years. Nationwide, unemployment is expected to remain fairly steady for the next two years, averaging 4.6 and 4.7 percent. Like the state, much of economic growth for the country depends on vehicles sales, as well as the health of the residential housing market.

"The housing market retreat remains orderly over the next two years, with prices flat in 2007 and housing activity bottoming out in early 2008," said Saul Hymans, U-M professor emeritus of economics.

The U-M economists acknowledge that the same risks associated with the national outlook apply to the state forecast. Those include unforeseen developments in global geopolitics, higher oil prices, and worsening of the housing market. In addition, Michigan could take a bigger hit than the nation from rising interest rates because of the state's reliance on favorable markets for the sale of consumer goods.

Read the Signals

Leaders of the Big Three have repeatedly maintained that restructuring is necessary to turn their companies around. While few would argue that changes need to be made, some auto industry analysts question whether the emphasis on workforce reductions will cure the industry's&emdash;and Michigan's&emdash;economic malaise.

UMTRI's McManus believes that management may be focusing too much on downsizing and not enough on important vehicle issues. Inventories are growing because the auto companies are offering the wrong product mix for today's market, he says. "That, combined with the need to shrink dramatically, is what's nailing American automakers," he says. "Just when they should be revamping their product portfolios across the board for the 21st Century, they're preoccupied with restructuring."

The companies' own market research shows that customers are increasingly drawn to vehicles with good fuel economy, McManus says. His views on the importance of fuel economy have changed since he left General Motors. He cites studies of "escape shoppers" done by another of his former employers, J.D. Power and Associates. The number one reason American auto companies lost customers to Japanese competitors was quality, closely followed by fuel economy.

"The bad news is that G.M., Ford, and Chrysler still have many large, gas-guzzling SUVs in the pipeline just when they need more fuel efficient models and hybrids like their foreign competitors are offering," he says. "They didn't read the signals."

Besides the market research, those signals are visible in the used vehicle market. The price of used SUVs, which don't come with dealer incentives, closely tracks the price of gas, says McManus. Auto companies have only to look at declining prices of used SUVs to see that these vehicles are no longer considered the trade assets they once were.

In September, UMTRI released a study that looked at the benefits Detroit automakers could realize by proactively increasing the fuel economy of their fleets. The results were eye-opening. If domestic automakers increased their vehicles' fuel economy beyond current government regulation, the study found, they could increase their annual profits by $2 billion collectively for the 2010 model year. That's if gas prices rise to $3.10 per gallon. Even at $2 per gallon, they could increase profits by $1.3 billion. In both cases, improved fuel economy in American-made cars would cause their Japanese competitors to lose millions.

Conversely, if all automakers follow a business-as-usual approach, U.S. automakers could lose as much as $3.6 billion in profits with gas at $3.10 per gallon&emdash;compared with a smaller loss of $800 million for Japanese automakers. In addition, the study looked at the estimated impact of strategic choices by automakers on U.S. employment. At $3.10 per gallon, a market-wide, proactive fuel-economy strategy could save nearly 35,000 jobs for the American Big Three. The UMTRI researchers were not looking at changing vehicle types; they only projected what could be done with modest changes using current technologies.

In fact, gas prices did rise to over $3 per gallon during the course of the study&emdash;and American automakers have lost more than $20 billion collectively since the fourth quarter of 2005, McManus points out. "They were even more vulnerable to rising gas prices than we had predicted."

Gas prices continue to be relevant. Despite the perception that they've dropped, the data shows that the price of regular, unleaded gas has been climbing since 2002. Overall, gas prices were 14 percent higher last year than in 2005, according to the U.S. Energy Information Administration.

Ignoring all these signals, American auto companies persist in using available technologies for horsepower rather than fuel economy. Consequently they heavily rely on price incentives to sell trucks and large SUVs, McManus says. "I'm on a mission to wake them up to the value people put on fuel economy. The only real opportunities out there are for low-cost, high- quality fuel-efficient products that can be made at low cost. That's why the Japanese continue to increase capacity here&emdash;because they do this better than Americans."

While foreign-owned plants continue to boost economies in states like South Carolina and Alabama, Michigan is losing its status as the center of the U.S. auto industry. Washtenaw is one of the few counties expecting to add auto-industry-related jobs, due to Toyota's Ann Arbor Township tech center and new research facility planned for York Township. If Michigan has any hope of leading the new generation of auto workers, it will probably not happen through the traditional assembly plant model. McManus envisions this area becoming the hub of a technology cluster that focuses on engineering and design. Education and retraining will be the key to the new manufacturing paradigm.

"The auto industry once took high school graduates and brought them into the middle class. Those days are over," he says. "Now there's a demand for a more highly educated labor force. The factory job of the future needs technicians who understand statistical process control and robotics. Shame on us for not seeing that this was coming."

In the meantime, Michigan faces plant closings, disruptions, and displacement. The ripple effect is being felt all the way from dealerships and distributors, to car washes, to the bars and lunch spots auto workers used to frequent. The future is, at best, uncertain, notes local accountant James Bennett.

"The layoffs haven't taken effect yet. People are still getting paychecks but it will be different next year. 'Keep costs low and limit spending' seems to be the watchword these days."

His advice to business clients is not to lose focus on opportunities for client services and to "concentrate on increasing value while cutting costs." With Google and Toyota's expansions, at least the Ann Arbor area's economy may pick up next year, he hopes.

The U-M forecast for Michigan concludes on a more somber note. The future of Michigan's economy depends on the auto companies' ability to "get their houses in order," says co-author and U-M economist George Fulton. Like McManus, he emphasizes the need for investing in a more highly skilled work force and growing the knowledge-based economy. Says Fulton: "Such a strategy would be in step with the evolving new economy, recognizing that, regardless of the fate of the domestic auto industry, we are not going back to the good old days."

Local Businesspeople See Silver Lining For Area Economy

Norm McArthur of University Office Equipment
Norm McArthur of University Office Equipment

By Duane Ramsey

Despite a statewide economy that is expected to continue struggling, many local businesses are cautiously optimistic for improved results and potential growth in 2007.

The outlook for the retail business in 2007 depends on the sources, ranging from local retailers to Briarwood Mall, Borders Group and Ideation. The consensus of local sources is that retailers could see some modest growth this year compared to 2006 results.

Although final figures for 2006 were not yet available, retail sales through October were flat overall. Most retailers saw fewer customers but the average sale was higher in 2006, according to Tom Ungrodt, president and CEO of Ideation, Inc. in Ann Arbor, and a member of the board of directors for the Michigan Retailers Association.

Retailers in Michigan experienced an increase of 8 percent in sales in November, expected growth of 5 percent in December and 2 to 3 percent for the year. Nationally, retailers had 8 to 12 percent growth in November and early December, projecting 5 to 7 percent growth for the year.

The Retailers Association projected a 4.5 percent sales increase over last year's "lackluster performance." It estimated that holiday shoppers would spend about $15 billion in Michigan during November and December.

Ungrodt expects gift retailers to purchase good core merchandise in 2007. He will attend a national gift show in Atlanta this month to plan for their spring catalog that comes out in April.

The spring catalog emphasizes gift products for Mother's Day, the largest gift-buying period after Christmas. Ideation also publishes some special publications during the year and a fall catalog in early November.

Ideation provides a buying service for gift merchandise to 450 retail stores nationwide. The company also operates three gift shops including Crown House of Gifts in Ann Arbor with stores in Chelsea and Jackson.

"It seems like people are starting to feel better but we expect consumer spending to remain conservative in 2007 not knowing what the issues will be this year," said Ida Hendrix, general manager of Briarwood Mall.

"We expected a good holiday season with the year (2006) ending on a positive note." Hendrix added that people will be using gift cards they received but still expected sales to be slow in the first quarter of 2007 after the holiday spending season ends. Two stores opened at Briarwood in early December, Papyrus greeting cards and Samsonite luggage. The mall also had its usual holiday kiosks with seasonal products such as calendars, Hickory Farms gift packs, and holiday decorations.

Occupancy at Briarwood is near capacity with only five vacant stores out of approximately 100 storefronts. Hendrix said they are working on leases for two new retailers that expect to open in early 2007, but she could not reveal the tenants until the leases are signed. Briarwood responded to customer requests for Pottery Barn and Coldwater Creek stores which opened at the mall in 2006.

Ann Arbor-based Borders Group Inc. will not announce its forecast for 2007 until the close of its fiscal year 2006 at the end of this month, according to a company official. Borders is a publicly traded Fortune 500 company with annual sales of $4 billion at more than 1,200 Borders and Waldenbooks stores worldwide.

Borders Rewards, a free customer loyalty program introduced nationwide in 2006, attracted more than 10 million members, who could earn holiday savings and the opportunity for personal shopping days throughout the year.

Fourth quarter and 2006 year-end sales were dependent on anticipated benefits from the Borders Rewards program. Expectations for the fourth quarter were uncertain because the program was not in place for the holiday period in 2005. Store sales for Borders domestic superstores were expected to range from flat to an increase in the low single digits. Sales for Waldenbooks stores were expected to decline in the low to mid single digits. International sales were projected to range from a decrease to an increase in the low single digits.

"We certainly are not satisfied with these kinds of results in the long run," said CEO George Jones. "I'm excited about where we are headed and look forward to driving a significant turnaround for Borders Group in years to come,"

Big George's expands with new store in May

One local appliance retailer is expanding its Ann Arbor store despite stiff competition from national chains and the effects of the recently completed road construction on Stadium Blvd. "We're holding our own against the big box retailers," said Mark Bishar of Big George's Appliance Mart on West Stadium in Ann Arbor. His philosophy is "do what you do best and do it better than anyone else."

"We offer selection and service. We're close to matching anybody's price but people don't realize that," Bishar added. "Televisions and cameras are still selling but there are so many places to buy them today. The difference is our sales people know the products they are selling."

Construction continues on its new 16,000 square-foot store next to its existing location. The exterior is nearly completed and work has begun on the interior with an anticipated opening in May.

The new store will feature a "green roof" with live greenery and an outdoor deck that will provide "a great view of the new Stadium Blvd.," said Bishar. Big George's has been selling higher end appliances in Ann Arbor since 1959. It also owns and operates a store in West Bloomfield.

Moosejaw finds success downtown

Numerous retailers have found doing business in downtown Ann Arbor challenging if not often difficult or unsuccessful. As the saying goes, there's an exception to every rule. Moosejaw Mountaineering, a Michigan outdoor gear and apparel retailer, opened a store on Main Street in downtown Ann Arbor in November of 2005. The three siblings who founded the company, Robert, Jeffrey and Julie Wolfe, all graduated from the University of Michigan and were looking for the right location in Ann Arbor.

"It's been awesome!" said Robert Wolfe. "We're doing better than our wildest expectations for the Ann Arbor store and expect to continue growing at that location in 2007." Moosejaw is doing so well there that they extended their hours on Friday to stay open until 11 p.m. when their other retail stores in the Detroit area close at nine, according to Wolfe. Based in Madison Heights, the company operates stores in Birmingham, Grosse Pointe, Rochester Hills, East Lansing, and the Chicago suburb of Lincoln Park.

"There's no magic bullet to success downtown," said Newcombe Clarke, a retail real estate specialist for Bluestone Realty Advisors in Ann Arbor, who also lives downtown. "Responding to changes in retail trends is what will determine success. Retail is completely market driven."

Newcombe negotiated the lease for the American Apparel store that opened on Liberty just east of State Street in July 2005. He said the company selected that location due to its proximity to the University of Michigan campus.

The growing California-based retailer sells clothing and accessories primarily targeted to young adults but also for men, women, children and even dogs.

Absorption of space expected in 2007

Absorption of existing office space is expected to continue in 2007 instead of new construction in the Ann Arbor commercial real estate market. That business approaches the new year with "cautious optimism," said Neal Warling, president of Bluestone Realty Advisors in Ann Arbor.

"It's affected by Michigan's poor economy and reaches beyond automotive to national and international business," said Warling. "Cash is king in a recession. We're leasing more space at deep discounts due to the market but we're taking up more space. Building vacancies continue to decline here."

Small class A office space downtown is the most active property in the market where there are not a lot of big class A users. The 10,000 square feet of space at One North Main is the largest space available downtown, Warling said.

There was some positive absorption with Google coming to town. Google leased about 30,000 square feet to expand its operations in Ann Arbor, but it was far less space than expected after the announcement of its original plans.

The largest office space available is located at the Earhart Corporate Center at Plymouth Road and U.S. 23 completed this summer. Warling said they are talking to some large users to occupy 10,000 square feet or more and have several smaller clients interested in space there. "Don't look for a lot of property sales in 2007. There's not much property for purchase after the record-breaking interest rates of past years," Warling said.

In its first two years in business, Bluestone has become one of the top commercial real estate firms in the Ann Arbor market, now representing about 3.2 million square feet of office, industrial and retail space.

Potential growth in business lending

The economy is going to be difficult (in 2007) but there will still be ample opportunities for growth by commercial lenders, according to Todd Clark, senior vice president of business banking for United Bank & Trust Washtenaw.

"We expect to have another year like we had in 2006 with $30 million in net loan growth in Washtenaw County," said Clark.

United Bank & Trust has experienced significant growth over the past five years since entering the extremely competitive banking market in the county. Clark said that they will focus on the service sector and small businesses in 2007.

United hired another commercial lender, Patrick Cavanaugh, to increase its staff to seven lending officers in its Ann Arbor office. David Kersch now heads up its mortgage operations. "David and Patrick bring a large network of clients for potential growth," Clark said. "Our people and the personal service they provide make the difference with our business customers."

Home mortgage biz does better locally

The residential mortgage business faced a challenging environment in 2006 with a decline in the housing market due primarily to the poor economy in Michigan. However, the mortgage business in Washtenaw County has experienced much better results than the rest of the state. Huron Valley Financial, Inc. in Ann Arbor experienced high mortgage activity in October and November, recording the best months of the year. Business in December was busier than usual, according to Eric Bradley, president of the company.

The decrease in interest rates and housing prices was a significant factor in residential mortgage business in the local market and nationally. Congress recently passed a law to make home mortgage insurance tax deductible, making home ownership more affordable for people. "We expect to see a fairly strong year (2007) in Washtenaw County. We'll continue to see some of the excess inventory taken off the market mostly by first-time buyers. They are getting great deals," said Bradley.

"We already have prospective clients looking for pre-approvals of home mortgages for purchases they expect to make this spring," he added. Huron Valley Financial is a direct writer originating residential mortgages and home equity loans. With 18 loan officers on staff, the company claims to be the county's largest locally-owned mortgage lender.

Interfirst Wholesale Mortgage Division of ABN AMRO based in Ann Arbor reported that business was good in 2006 with a slowdown in the last three months of the year in Michigan, according to Willie Newman, president of the Interfirst division. "We don't expect much of a bounce back in 2007 but hopefully we'll see some stability in Michigan," said Newman.

Interfirst Wholesale Mortgage writes mortgages through more than 200 mortgage brokers in Michigan. LaSalle Bank, another subsidiary of ABN AMRO, also writes residential mortgages directly with consumers.

Digital color copiers lead office equipment

The transition to digital network color copiers/printers/scanners has bolstered sales for the office equipment business, according to Norm MacArthur, president of University Office Equipment in Ann Arbor.

"We're not breaking any records but business improved the last few months of the year and we expect an even better year in 2007," said MacArthur.

His business is selling the new digital color copiers with high-speed black and white capability along with cross-cut confidential paper shredders for security and stand alone fax machines to colleges, universities and government offices. University sells office equipment for home to heavy-duty commercial usage.

New technology set for digital printing The continued downward pressure on pricing and rising cost of doing business will continue to pose challenges for commercial printing, according to the industry trade journals and Larry Goetz of Goetzcraft Printing in Ann Arbor.

"Until the economy in the state turns around, things will be difficult," said Goetz. "There is no quick fix. It's incumbent on our elected officials to find answers and put them into place."

Businesses need some tax relief and are concerned about what will replace the Single Business Tax in the state. Personal property tax is another burden on businesses that are paying taxes on equipment forever, said Goetz.

Out-of-control health care costs are another critical issue for all businesses and employees. Goetz said he will continue to provide health insurance for his employees as long as he can. "Pay raises are going to pay taxes and health care costs," he added.

The technological changes have businesses going to digital printing which requires capital investment and many companies have trouble getting the capital. Goetzcraft expanded by adding a five-color press for printing a wider variety of materials for clients such as U-M and some health care firms.

Advertising business grows with changes

"We had our best year ever in 2006 and have the potential for continued growth," said Dave Hile of Hile Design. "We have a number of large projects lined up for 2007 and are very optimistic for another excellent year."

Hile added his firm is fortunate that it was never tied to the automotive industry which has worked to their advantage. Hile is very active in marketing the business and has added several new clients on a local, regional and nationwide level.

Hile Design created work for new local clients that include Palmer Productions, a film and video company with web applications, Ufer & Company Insurance, Arbor Strategy Group, and U-M Life Sciences, all of Ann Arbor, and Incat, a technology firm in Novi.

Print advertising and design projects have declined during recent years, but Hile Design has compensated for that loss with increases in web development and package design business. It has developed a niche in the toy market and added office design consulting business which "has taken off for us," Hile said.