Why bailout won't save Detroit
Posted
Nov 17 2008, 04:51 PM
by
Anthony Mirhaydari
Rating:
General Motors, Ford, and Chrysler are at the epicenter of intense maneuvering in Washington D.C. as those taking a tough stand for free-market principles lock horns with pragmatists worried about massive layoffs in the rustbelt.
Political reality will lead to some form of assistance given the popularity of Keynesian fiscal stimuli these days and the amount of pressure being applied by industry. Unfortunately, people like to assume that once Detroit retools its factories and stocks its showrooms with the fuel efficient cars and car-based SUVs of the future, happy days will return. They won't.
As I wrote last summer, we simply have too many vehicles to sustain the Big 3's current production capacity. The United States now has 981 cars for every 1,000 people of driving age compared to 613 in the United Kingdom and just 24 in China. As a result, no amount of government aid will stop the factory closures and layoffs.
Since 1990, new car sales have exceeded the scrap rate by one-third -- pushing the median American car age to 9.3 years and filling the market with a multitude of nice, reliable used vehicles. While trading in a used car for a slightly newer used car is less than glamorous, it's a choice penny-pinched drivers will increasingly embrace.
The Financial Times estimates that if vehicle density stops growing and Detroit can stabilize its market share around 48% (down from 75% in the 1980s), then there is a market for only 6.5 million cars from the Big 3 in the United States. That's down from 9 million just two years ago.
To survive, even in slimmed down form, the automakers will depend heavily on exposure to still-growing international markets. In October, the China Association of Automobile Manufacturers noted a 10% increase in production over the previous year. Showroom traffic is also up slightly. Detroit must be able to competitively penetrate these markets.
This is something the private equity hotshots at Cerberus Capital should have considered before buying Chrysler from the Germans last year: More than 90% of its cars are sold here in the United States. Kimberly Rodriguez of Grant Thornton's automotive consultancy sees the writing on the wall: "Chrysler as we know it will cease to exist very soon." Call it death by market saturation.
Disclosure: I don’t own or control shares in any of the companies mentioned. I can be contacted at anthony.mirhaydari@live.com
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