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A Rustbelt Revival: From Doom to Boom

by: Andrew Mickey September 07, 2008 | about stocks: ENER / FSLR    

Andrew Mickey

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The locals call it “The Pointes.”

Grosse Pointe was one of the highest rent neighborhoods in the country. It sits between Detroit and Lake St. Clair. Its wooded scenery, mild summer weather, and proximity to industrial areas have made it a popular residential neighborhood for industrial titans for a century.

The Pointes was one of the hottest real estate markets in the 1920’s. You had to have a mansion in Grosse Pointe if you were an executive in Detroit’s booming auto industry.

Flash forward 90 years and we’ve got a completely different picture. There are “for sale” signs hanging off a lot of houses. As Big Auto downsizes, slashes salaries, and hangs on for survival, the rich have left town. In the process, they’re creating a great opportunity to get in at the bottom.

Thanks in part to the big problems at General Motors (GM), Ford (F), it’s getting rough in Grosse Pointe, but it’s probably worse in Detroit. More than one million residents have fled Detroit since 1950. When the jobs left, the people did too.

First it was factory automation eliminating jobs. Now it’s a sharp decline in demand for the Big Auto’s SUV’s and an inability to compete against cheaper (and sometimes more efficient) foreign labor. The population of Detroit is now less than 900,000.

Recently, Home Properties Inc. (HME), a residential real estate investment trust [REIT], unloaded 5,000 Detroit apartments on Lightstone Group. Home Properties said the sale was “consistent with our strategy of focusing our operations in…higher-growth markets.”

It has left Detroit for dead like a lot of others. The mass exodus has caused real estate prices to fall. Vacancies have climbed. With the aggressive selling, there are a lot of huge sales. Mansions that originally sold for $2 million just a few years ago are going for $1 million.

It’s not just in Detroit though. The entire U.S. Midwest, also known as the “Rust Belt,” is facing the same challenges. Towns that sprouted up around manufacturing centers have been abandoned in the same way as Detroit. Slowly but surely, that’s all starting to change.

A revival in the Rust Belt is appears to be starting and investors could be in for a pretty solid payoff.

You see, when industry rolled out of town, Rust Belt factories were shut down, boarded up and left for dead. That is…until the next U.S. industrial revolution really ramps up and brings the Midwest back into prosperity.

It may surprise you, but one of the fastest growing and manufacturing industries are staying right in the United States. They’re not headed to the dank low-cost, labor-intensive factories of Vietnam, Mexico, or China, they’re staying right here.
In fact, the migration has already started. Big Auto’s moving out of its factories across the Ohio River Valley and Big Solar is moving in. The way things are going; the United States is set to become the manufacturing hub of the $18 billion solar industry.

Fortune says, “Nearly all the United States’ current solar manufacturing capacity is in the Midwest.”

And it's absolutely right. With the exception of Nanosolar’s thin film facility under construction in California and Ausra’s facility in Las Vegas, all solar panels made in the U.S. are built in the rust belt.

First Solar (FSLR) has been one of the first to start tapping into the rust belt. The $22 billion solar panel manufacturer recently announced the expansion plans for its Ohio factory.

Germany’s Flaberg is slated to build a new solar panel-making facility in Pittsburgh, Pennsylvania.

The original U.S. of solar panel developer, Energy Conversion Devices (ENER), operates three manufacturing facilities in Michigan. On top of that, Energy Conversion Devices has also laid out a plan to almost double production double capacity in one of them.

These solar powerhouses have spotted the value in the rust belt and are taking full advantage. The Energy Conversion Devices CEO says, “Our processes really require high productivity, so what makes it competitive here in the Midwest is that we have a great labor force that is eager to work and well-trained already.”

Frankly, there aren’t too many other places in the world offering a willing, ready, and able manufacturing labor force. Considering Big Auto’s financial troubles and scheduled shutdowns, there will be plenty more space and trained labor coming available to the solar industry. And if any industry needs more capacity, Big Solar does.

There were 2,800 Megawatts [MW] of solar energy capacity installed last year. There were only 1,700 MW of new solar power brought on line the year before. That’s way up from a mere 21 MW in 1985.

The solar industry is growing…fast. It needs more capacity. The rust belt will help fill that void.

The rust belt will return to prominence with the help of the solar industry. Let’s face the facts. Oil isn’t going back to $20 a barrel anytime soon. Midwestern labor is getting cheaper in order to stay competitive. The U.S. dollar is not going to be regaining its strength for a long time (if ever), making U.S. goods cheaper in the global marketplace.

Over the long run, the rust belt’s problems will get sorted out. The U.S. may not have been an early mover in developing a solar power industry, but it's cutting the big checks to get caught up. There are billions of investment dollars flowing into the solar industry and the rust belt will be getting a big chunk of that investment.

The rust belt is not doomed to economic oblivion. It just has to change with the times like all of us have to do.

The rust belt will be coming back to life soon. Investors willing to buy shares in companies that are taking advantage of the situation or willing to buy up real estate assets at dirt cheap prices will be well rewarded within the next five to ten years.

Companies like the Lightstone Group, which bought all of those Detroit apartments, see the potential here. They have an advantage though. As a private firm, Lightstone has the luxury of a genuine long-term outlook. A publicly traded company like Home Properties does not. It has to report to a short-sighted Wall Street every three months.

Investing in the rust belt is a long-term proposition, but all the fundamentals are there. At the moment, I haven’t found any easy, highly liquid pure plays on this opportunity yet. But the situation does remind us of how to be good investors.

There aren’t too many people willing to put much money into the region now, prices are depressed, and this is the time to buy low. And it’s that type of “buy low” opportunity, which creates the low-risk/big-upside upside odds, that gets the Prosperity Dispatch team very interested. As everything plays out, there will probably be an opportunity to sell high. In the end, that’s what investing is all about.

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This article has 13 comments:

  •  
    Sep 07 08:39 AM
    Very promising and encouraging...
    Reply
  •  
    Sep 07 09:09 AM
    With problems as diverse as water shortage, crazily extensive suburbs and massive residential property overpricing, the sun belt has issues that the Midwest may avoid.
    Good call.
    Reply
  •  
    Sep 07 09:47 AM
    Excellent article. Finally a glimmer of good news that isnt just a misleading statistic. This subject deserves more research thanks for your thoughts here :)
    Marty
    Reply
  •  
    Sep 07 10:07 AM
    Now if the "stupid 3" would just start making plug-in Electric cars to USE the solar power, it would be a real revival.

    Instead, they are still stuck on the dead-end of "fuel cells are the future" and the "hydrogen hype". GM is still refusing to allow volunteer engineers from restoring museum-gutted EV1, and GM is still refusing to resume production of plug-in Electric cars.
    Reply
  •  
    Sep 07 10:26 AM
    Just be cautious of workers with the "union mentality" Isn't the big auto mfg. centers full of them? I'd bet some would rather build a brand new facility hundreds of miles away from the a UAW hall.
    Reply
  •  
    Sep 07 10:43 AM
    [Midwestern labor is getting cheaper in order to stay competitive.]

    True. The new hires at Delphi were coming in at $14/hr, which I think we all can agree is a fair wage considering the task.

    There's been more support than ever for a right-to-work amendment to be added to the ballot.

    I'd be curious to know if you have any indication as to whether that would accelerate progress in this industry.
    Reply
  •  
    Sep 07 10:58 AM
    This conclusion is dead wrong. Sure, the rust belt is beaten down and one might therefore think the economics would be right for new industries, but have you ever heard of the UAW??? Despite the near collapse of the once mighty Big 3, the UAW still rattles it's sword and goes out on strike even to this day. The entitlement class warfare mentality of the unions is still supreme in many parts of the rust belt and that won't be changing soon my friend. You got this call wrong just like you did housing in Sept '06. If you think the rust belt is going to bounce back anytime soon then I have a nice house to sell you in Florida just as soon as the next hurricane leaves.
    Reply
  •  
    Sep 07 11:02 AM
    Doug Korthof, if you feel you have a better idea then by all means feel free implement it. Or just stand aside and hurl insults from the sidelines like the other deadwood.
    Reply
  •  
    Sep 07 04:24 PM
    Hey Doug Korthof: GM has operating test vehicles running on fuel cell "engines". So does Ford and Toyota. It is only a matter of time. In fact I recently heard GM could be ready to mass produce in 2013. What is holding them up? The lack of refueling stations and, according to them, they need to know for sure that fuel cell will be accepted because, they say, they will only be able to overhaul and retool their factories once...(which makes sense). So, dont be so negative and maybe go do a little bit more research to update yourself before you go shooting your mouth off about fuel cells.
    Reply
  •  
    Sep 07 08:00 PM
    Thanks Afleet Alex. I couldn't have said it better. Gm is starting up a new website to debunk just such crazy comments that Doug Korthof is spreading. In addition to the fuel cell vehicles, they are building the Volt that will be available in 2 years to bridge the gap to the fuel cell. Any true American patriot would applaud the big three for devoting the resources they have toward the huge changeover since gas prices have reached nosebleed territory in just a short 18 months. Ignorant bloggers with angry, critical comments, would be well advised to check out the facts first.
    Reply
  •  
    Sep 08 01:50 AM
    Good article, generally good comments. However, as an international trade lawyer who has worked for lots of "rust belt" companies trying to help them export, I am forced to agree with the others that the UAW (and Steelworkers, Teamsters and other American unions) are the kiss of death when it comes to reviving dynamic business in the rust belt. That's why Toyota, Nissan and BMW all went to the Sunbelt. Can that change? Perhaps, especially if Obama isnt elected, since his team supports the secret union ballots that the laobor bosses are trying to impose on business. I wouldnt invest a cent in Detroit until/unless we see a clear path to right-to-work laws in MI and OH. Thanks again for the good article.
    Reply
  •  
    Sep 08 10:10 AM
    There will be no lack of refueling stations for hydrogen. Big Oil will fund the transistion as soon as their dominance in liquid fuel is challenged. They will also make sure that the hydrogen that goes into the fuel cells is derived from the fossil fuels they pump. What could GM's motivation possibly be for "still refusing to allow volunteer engineers from restoring museum-gutted EV1, and GM is still refusing to resume production of plug-in Electric cars" except that large sums of money have exchanged hands? Ask yourself why Chevron is sitting on the Cobasys battery that drove the EV1 so successfully. Why is Daimler sueing Chevron for delivery of batteries? As the world waits for lithium and ultracapacitor alternatives, Big Oil works behind the scenes to make batteries an undesirable alternative for manufacturers. If they are powerful enough to keep the US embroiled in an unpopular war for six years, do you really think that supressing nascent technology would be hard for them? Any backyard mechanic can make an electric car, but lead acid batteries are just too heavy. As long as lighter batteries are unavailable to the public, we must continue stopping at the local filling station. Every day this transition is delayed, it's another billion bucks for Big Oil, do you really think they wouldn't invest a little to keep the status quo?
    Reply
  •  
    Sep 08 03:21 PM
    Doug Korthof: Have you ever heard of the Chevy Volt?

    FYI, WW2 has ended as well...you can come out of your cave.
    Reply
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