I have been traveling last week and this - which is why there were so few posts. One of my stops has been Turin, home of Fiat. So I have been following the recent developments in the saga of the US auto industry -- including the pending GM bankruptcy and is selling off of the European operations to a newcomer (Magna). (Interestingly, talk at dinner with the Italians contained nothing about Magna having beat out Fiat for Opel and much about the latest Berlusconi scandal.)
While I support the Administration's action with respect to Chrysler and GM, I think some of the supporters of those actions are in for a surprise. They are, I fear, hoping for a return to the good old days. In that respect, they are sadly mistaken. It is not clear to me that any of us fully understand what is occurring in the auto industry. The problem with our approach struck me as I was reading a recent article in the New York Times on the auto industry - Industry Fears U.S. May Quit New Car Habit. The article talks about the concern that auto sales will not return to pre-recession levels. The failure of sales to rebound sufficiently will put an additional financial burden on the US taxpayers -- as the size of the bailout is calculated on the forecast of future costs and revenues.
According to the article, some think the market will rebound to the benefit of the industry:
If sales do pick up, carmakers eventually could be more profitable than they have ever been because of all the costs they have shed, said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.
"After you rebound from this artificial low in demand, wow," Mr. Cole said of the potential for auto sales and profits.
That statement -- especially the description of the current situation as one of "artificial low demand" -- worries me. For reasons of both innovation and macroeconomics, I thing we need to be very careful in assuming demand is artificially low. That is the point of the NY Times article.
However, this is a complicated story - of both innovation and macro economics. It is a story that the article gets only partially right. The article focuses on people doing without cars completely. It cites increases in car sharing usage (such as ZipCar) and people simply doing with out a car. That is the part of the story it got right -- the story of social innovation. The other part of the innovation story is the switch in core automotive technology (see earlier postings).
Coupled to that is the macroeconomic story. That story has to do with people not buying a second car or holding on to their used cars longer. The decision to trade in an used car or to buy that second car is in large part a function of credit. If credit is easy, there is a greater incentive (or at least less of a barrier) to buying that new car. When credit is tight, people think twice about whether they need that second car -- and whether they can get a few more years out of their old one.
All these forces mitigate against a return to the pre-recession levels of auto sales. To believe auto industry optimistic projections you have to believe that social innovations such as car sharing will have little impact on the market. You have to believe that the shift in core technology will leave the incumbent manufactures in their current dominate position. And you have to believe that central banks will re-inflate credit back to the point where it is cheap to buy a new car frequently.
Not likely.
I think this quote from the Washington Post article After Many Tuneups, A Historic Overhaul is more realistic:
"It's certainly an inflection point. This is an historic transformation," said David McCurdy, president of the Alliance of Automobile Manufacturers who helped negotiate the new fuel standards. "We'll look back in a number of years and realize it was a significant point of change."
That point of change includes coping with oversupply, a new level of sustainable demand and technological and social innovation. The sooner the automakers - and their analysis/supporter - realize that, the better.
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