Did Detroit Oversell?
Apparently the Big Three U.S. automakers (Ford, GM and Chrysler) are finding out their business plan over the last few years wasn’t much of a plan at all. By pushing cars, trucks and vans to millions of Americans who couldn’t actually afford them, they created their own “auto bubble”.
CNN published an article today title “Pop goes the market: Detroit’s auto bubble woes” that chronicles the numerous mistakes Detroit made in offering 0% financing (among other creative financing options) plus huge rebates and cash back offers. Not only did the strong sales make the automakers think they were on the right track, it also caused them to make some risky deals with the UAW that they can no longer live up to thanks to the down economy:
The strong sales also allowed General Motors, Ford Motor and Chrysler LLC to generate healthy profits, which led them to agree to contracts with the United Auto Workers union that they ultimately couldn’t afford over the long-haul.
Plus, they all added factory capacity, thinking that the demand would last forever. But all good things must come to an end, and that’s what automakers (even Toyota) are realizing now. One shocking statistic is the number of cars compared to the number of consumers:
In 1998, there were about 12 million more vehicles than drivers in 1998. By 2006, the difference grew to 34 million.
Wow! No one thought that supply might outrun demand someday? But the auto companies thought they could continue the 16 million+ sales year-over-year. Now 12 million sales in a year might mean a good year for a single car company.
Why bring all this up? Well, because the automakers need to justify why they deserve the $25 billion bailout up for grabs from Congress. If they can’t prove relevancy even if they get the money (thanks to no demand), then why give it to a company about to go bankrupt anyway?
Even with the discussions of Ford shedding Volvo and GM potentially dropping Buick, Pontiac and Saturn (and of course Hummer), it may not be enough to save the companies. It’s no easy task to drop a product line. Oldsmobile cost GM millions to discontinue thanks to payoffs to dealers and employees. And who wants to buy a product line so tied into GM’s other products like Buick and Pontiac? These brands don’t have much of their own unique products (except the G8), so you would be buying the factory capacity, brand awareness and, uh, debt.
The auto industry is in for some serious growing (more like shrinking) pains, and it won’t see the light of day for at least another 4-5 years. By then, maybe we’ll see a Chinese Corvette on our shores 😉
Watching our economy is like watching the old Lawrence Welk show: bubbles being created at the beginning of the song then popping into oblivion as the music ended. When will the music start again? And is our standard of living the next bubble to burst?
I mentioned this similarity to a friend the other day, and it’s funny that someone actually wrote about it. All those people got their cars years ago, and well, the most modern cars aren’t much of an improvement, thus no incentive to get a newer one. That, and most people can’t afford it now with the economy in a slump.