9/15/2009

You made your SUV now lie in it

I came across an article on the "Big 3" automakers and their trip to the bailout buffet at the end of last year. The pathetic arguments on the collective part of the Ford, GM and Chrysler is because they cannot guarantee that they will be able to attract consumers who will purchase their products, they need help.

Well duh. Automakers have been on notice since the 70's energy crisis that the day would come when fuel efficient vehicles and durable goods, like cars, would dominate the industry. Just as our financial industry role-models were lured by easy credit and the opacity of accounting systems, automakers greedily sold high margin SUVs instead of developing needed technologies to compete in the next age of business.

Having given up their once magnificent market power, and influence toward better vehicles, this industry is now cowering instead of thriving. Imagine if Big 3 had developed sustainable, efficient vehicles in the 80's and 90's. Wouldn't present day income shrinkage spur demand for its products currently? As economic recovery begins and incomes rise I think we may see the demand for american automobiles drop as evidence that our auto industry produces an inferior product. Foreign made vehicles will be substituted at a much higher rate because they match up better with complimentary things like fuel prices.

Now I understand the well publicized argument that certain industries are too large to fail. Certainly the auto industry is in there with insurance and finance and the demise of automakers would send shockwaves through our labor markets and affect our domestic and world economic outlook.

However, at what point do we stop inflating our national debt in favor of a few bloated industries that have brought problems upon themselves? The ever-widening deficit will have economic consequences that no one wants and the truth is the economic consequences of more debt are unknown. What we do know is that the future is gonna suck when we, as a nation, are unresponsive to future crisis because we are overdrawn.


Just as the Federal Reserve regulates monetary policy, a regulating body that would require a scalable amount of capital, insurance and/or surety bonding in gigantic industries would decrease federal government/taxpayer exposure in the future.


http://www.economist.com/businessfinance/displayStory.cfm?story_id=12754289

5 comments:

skylar said...

As a happy SUV owner I object!! As I was reading this post I thought about the different demand shifts that are going on in the SUV industy over the next few years I actually have been anticipating them. I am interested to see if prices would go down way down on Trucks and SUVs but, it has not happened yet and in fact some trucks have increased in price. Go figure. If automakers stop making them you could see supply decrease and price go up, or it might go the other way if everybody want to go green. There are tons of SUV on the roads and new one keep coming on the lots I am not seeing the cut back that people are talking about. It will be interesting to see if engery efficency will eventually overcome the comforts of the SUV.

Rebecca said...

Skylar, thanks for the comment. Do you think automakers and other business organizations should face the consequences of their (poor) manufacturing decisions or should they be allowed to continue to seek money from the government based on recent precedent of bailouts?

What would be the appropriate business management response in light of changes in demand for SUV's.

That was the managerial economics discussion I was trying to pose with this post i.e., own-price elasticity and how it relates to substitute goods, etc.

Brooklyn said...

This topic of SUV and the failing auto industry in america makes me think of the "Cash for clunkers" deal that recently occurred and what were the reasons behind it? I can tell you one thing, it put a hurting on the SUV market since they were out of the running for replacing a less fuel efficient car with a more fuel efficient car. Like you stated in your post about foreign automobiles as compliments to the American automobile, foreign auto makers made out like bandits only widening the gap between foreign auto makers and US auto makers.

Lucas said...

In regards to your post after the post Rebecca, I agree with you in that the automakers, or anybody that did not prepare wisely (banks and other industries that have received bailouts) should receive some support from the government. The support maybe should not have been what it was and they should have come in with more stipulations on how the money was spent. They also should have given some guidelines on how the money was spent.
I feel that they also could have negotiated their way to a better deal with their creditors and they should have admitted that they messed up. They should pay some price but not the extreme price of failing.
The automakers should have been quicker at coming up with a recovery for themselves. In Ford's case, they were proactive in almost everything that they were doing and they are in great fiscal shape, as compared with the other two.
There will always be a demand for SUV's and trucks just because there always will be. I work in an industry where I would be dead in the water without a pickup truck that could haul a trailer. The demand will always be there but it will start to be less and less over the years as people go green. If you have that option, great. But as for most people I know, it is not an option when it comes to vehicles.
Great insight and post.

Amelia said...

I completely agree. The automakers should have been developing new technologies after the 70s energy crisis. Their lack of efficiency in this area allowed foreign auto makers to get ahead. Now they are surprised that they are slowly being phased out?

American cars are too expensive and inefficient for the current market. The "Big 3" just keep producing vehicles that they assumed consumers would want. Basically it was a "Yeah, that's a good lookin' car, it'll sell" mentality. They were also induced by the profits they could make on the car. instead of concentrating on growth in the long run, they were satisfied with immediate profits. What happens when theses profits diminish?

Asian firms have been doing market studies for years, collecting data on what trends are progressing in consumer taste. American firms are just barely getting on the "hybrid" bandwagon. How do they think they'll get a good market share when they are the last to offer the product? Oh, right, because it's "American-made."

American firms are basically stuck in the middle. Asian manufacturers are providing the low-cost, high efficiency car. European cars are providing the efficient, luxury vehicle. What do American firms expect to offer in regards to consumer demand?