Why the Auto-Industry is Failing

So Ford, GM, and to a lesser degree, Chrysler, have spent the last week making waves in Washington trying to get more money to save them from bankruptcy. Everyone’s arguments come from surface issues: saving jobs, forced restructuring, cost to the tax payer, and compensation. What everyone seems to be missing, even those who are calling for “restructuring,” is that the problem is neither with the structure of these companies nor with the health of the industry. The problem quite simply is supply and demand.

What we have here is three companies which refuse to acknowledge that the market for cars at the prices they are selling them for is oversupplied. Significantly. This has been a growing problem for the last decade. These manufactures have been producing more cars than the market demanded at the price they were paying to produce them. Quite simply this was not and is not a viable business model. So they decided to cut prices and sell these cars at loss, offer trade ins, anything to avoid cutting production. They gave huge incentives to encourage people to buy cars earlier than they normally would and have thus lowered future demand.

Well today the future is here. The economy is down and people are cutting consumption. And everyone already has a new car! So who is going to buy one? In a sense there was an auto-bubble and it too has popped. At this point I suspect the only way out is for one of the big three to die. I don’t like it but I don’t think they are going to be able to survive this competition without cost cutting that they are either unable or unwilling to commit to. I mean they are going to have to sell or shut down entire factories. Or they are going to have to figure out how to chop several thousand dollars off the price they pay to build each vehicle.

This was of course avoidable. This happened precisely because the government was willing to give these companies sub-prime loans to keep deficit spending. These companies spent so much money trying to compete for market share with a better company: Toyota. The idea is sound, you lower your own prices below the price that the other company can afford to sell cars at and force them out of the business because they can’t afford to operate at a loss. Of course, when everyone is doing it, and everyone is getting annual assistance from Congress to keep doing it, everyone is operating at a loss, and everyone gets cut off at the same time. So now everyone is in trouble. Of course they ask for assistance and we’ve been giving them more assistance every year. I suppose we were the ones who bought cars for less then they cost to manufacture, so in way it balances out. But more assistance is not going to solve this problem, just prolong it. Every time the government interferes with markets it makes things worse.

It is going to take years for American demand for cars to return and for those years the big three have no plan, no way of staying afloat.

I for one believe that people are responsible for their own actions. Which means the blame here falls chiefly on the auto industry itself. It doesn’t help their case that there is now a car in India that will sell for about a tenth of what a Ford costs. Of course it may not sell well in the United States. But the auto industry seems to have fallen into a pattern of missing the boat on new markets and technology. Toyota didn’t win this race by selling at a loss. Toyota won by building a better more reliable, more fuel-efficient car.

The lesson here: Capitalism, it works. Government help, it doesn’t.