The Car Collapse

graph-3078540_1920

Op-Ed by Paul Wimsett

For this blog we are going back in time ten years. So picture it in your mind — Lost and ER are on the on TV. Barack Obama had just become president and Sarah Palin began her comeback. The Internet of Things, Alexa and Siri’s parents was born. And on your car radio Bleeding Love by Leona Lewis or I Gotta Feeling by The Black Eyed Peas are playing. And the car business took a strange turn that no-one could have predicted.

The economic events of the period between 2008 and 2010 are best known for the mortgages and stock market crashes but they were also detrimental to a number of car businesses.

In a bad economy people look to save dollars and while it was harder than ever to get a loan if you did need to buy a new car, you were looking for a deal. America made large, expensive, vehicles with bad fuel economy. A crash then combined with an energy crisis to drive sales of vehicles like as SUVs and pick-up trucks to rock bottom. It got so bad in the United States that Chrysler and General Motors needed to be rescued by the government.

For the US government to step in and help a business goes against the grain of what America stands for in the eyes of many of her citizens. Survival of the fittest is the core of any free market and it guarantees the best price for goods. However, the thinking at the time is that if a giant part of the economy, such as the automotive industry, failed too many jobs lost would send the economy into a death spiral. There was no other way to keep the economy stable and allow people to keep buying.

Pre-crash, in 2005, GM’s factories were performing at 85% of capacity. This may not seem much but it was a pattern to be found in other businesses too. So the term too big to fail started getting tossed around. Of course what “too big to fail” means is “too big to let fail.” The idea goes all the way back to 1984 and Stewart McKinney, though its true source probably predates that. Even in 1984 the term was controversial.

A CNN/Opinion Research poll said only 36% of the public supported the bailout. What people may not realise is that there was in fact two bailouts to the car industry, the second mainly going to General Motors and Chrysler. Part of GM’s bail out included an odd sort of bankruptcy that allowed them to default on certain loans. They were allowed to zero out stock that didn’t belong to the government or union members. It was not a good deal for most Americans.

automotive-74070_1920The lasting memory in the minds of “Big Auto” was how only really excelling at selling gas guzzlers had left them vulnerable. After all, this was the second time that a large scale economic crash had knocked out the auto industry. The first time was in the 1980s. When the economy got going again this time it found the American automaker throwing everything it had behind convincing its fans to buy hybrids and electric cars.

While the move to EVs and hybrids made fuel economic cars, suddenly needing to retool factories and develop new designs raised the price of all American vehicles. Then there’s the uncertainty of whether electric and hybrid cars will even stay popular.

Given that the economy is not stable long term we’ll most likely see another test of the American auto industries ability to remain viable. Given that they haven’t made cars more affordable they’ve only dealt with half the challenge of selling cars during a down turn. In fact, it’s not an original solution its just copying Asian car makers into an obvious decision.

So has the American auto industry learned anything from needing a bail-out? You decide.

 

Advertisements

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.