As the new year dawns, U.S. automakers have a surplus of inventory sitting in lots, to the tune of one million units. While this number would sell out in two months in more prosperous times, it would take four to eight months to clear in the current state of economic chaos. The three major automakers are facing the possibility of producing more vehicles than they can sell if the scarcity of credit and public timidity continues to inhibit prospective car buyers. Congress and automakers are rushing to rectify this mismatch of supply and demand by getting credit flowing again and introducing more products better aligned with current consumer sentiments.
The Treasury Tosses the Big Three A Lifeline.
The Bush administration approved 17.4 billion dollars in emergency loans to fund the development of new products the public will hopefully buy. Some of the key selling points many shoppers now have an affinity for are: improved fuel economy, hybrid vehicles, electrics, alternative fuel, and more conservative vehicles with lower curb weight.
Retooling for Consumer Demand
On January 11, 2009, the North American International Auto Show in Detroit will introduce a few new vehicles, concept cars, and improved hybrid technology that could begin to address consumer's increasing demand for economical transportation. Hopeful to make an impact at the most important car show on earth, Ford's next-gen hybrid propulsion system has a few new tricks up its sleeve to power the most fuel-efficient midsize sedan in production, the 2010 Ford Fusion.
Honda is introducing a new 4-door hybrid, called the Insight (name taken from Honda's first hybrid runner), which at $20,000, will cost about $4,000 less than the Civic Hybrid. The 2010 Toyota Prius will be even more fuel efficient than yast year's model. Not surprisingly, a few big names and several lesser luminaries, Nissan, Infiniti, Porsche, and Mitsubishi for example, will not be on display in Detroit due to difficult times.
The Credit Freeze
The other impediment to recovery is the credit lock-out, which deters millions of potential buyers. When GMAC, the finance arm for GM, hiked loan-qualifying credit scores from 620 to 700, only the top 10 percent of those who applied were approved. Since GMAC finances over three-quarters of the vehicles sold by GM, the results were disastrous.
GMAC and the Holding Company
On December 30, 2008, GMAC obtained bank holding company status, thereby qualifying for a $5 billion piece of the Treasury Department's $700 billion Troubled Asset Relief Program (TARP). GMAC announced that it will now offer 5-year, zero percent interest loans while dropping the credit score requirement to the 620 or better level. Loosening the noose on credit offers a breath of hope for GM vehicle sales, especially in the second half of 2009.
12 Million Sales a Year Instead of 16 - the New Norm?
Some auto industry experts however, are suspecting that the current drop in car sales is more than just a passing phenomenon, but rather the establishing of a new norm. More people are realizing that trading in their vehicles every three years is a luxury they can't afford. These suspicions are further supported by the fact that sales at Japan's big three, Honda, Toyota, and Nissan have declined by an average of thirty percent.
Darwinian Economics
Other analysts concur that by the third quarter, some stabilizing of the auto market may occur. Unfortunately, this may be too late for Chrysler, who saw a 50 percent decline in sales in December, 2008. A drop that large may represent a complete loss of confidence by consumers in the Chrysler badge and is not a good prognostic indicator. It is time for automakers to step back and address the true needs of consumers and society, before new car buyers become an endangered species.
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