The Auto Biz: Finally Facing Reality

Pontiac Aztek

Carmakers sold nearly 17 million cars and light trucks in the U.S. in 2005. As of September 2009, reported figures are 9.2 million.

If you think sales are ever going to come back to that earlier level, I’ve got a used Pontiac Aztek I’d like to sell you. Americans are buying fewer cars for a number of potent reasons, and the NY Times recently traced some of these: Younger buyers have less cash, older buyers are moving back to the city; all groups seem to be downsizing (in both vehicle size and number of cars per family); environmental concerns are growing; and, not insignificantly, the emotional charge of buying/owning/driving a car seems definitely on the wane. These trends, I think, are only going to continue.

For manufacturers, it’s the most difficult of times. How are they going to anticipate demand in such a fluid environment? Figure out what kind of vehicles to build? Determine whether, as the Times said, they are in the car business or the transportation business—and not end up like the cigarette companies?

Comes the government into the picture, and many are still trying to figure out whether it is savior to the auto industry or inoculator of a new form of social disease. For many Americans, the man of the hour is Kenneth R. Feinberg, the Treasury’s pay czar. He told reporters Wednesday that there would be big, big cuts in cash and stock compensation for execs at the seven companies—including AIG, Citigroup, Bank of America, GM and Chrysler—that have together received a total of $300 billion in taxpayer (TARP) funds. Details, particularly concerning the auto firms, are here, and a lot of people are cheering, even though it is still generally business as usual on Wall Street.

Detroit's Renaissance Center, GM headquarters

To get some handle on where things are headed, it’s necessary to know how we as a nation got here. Steven Rattner, who headed the Obama auto task force, has written for Fortune a short history of how his team came to terms with the crisis that unfolded last winter in the industry. It is fascinating reading and offers a few unforgettable insights into the key players, like Rick Wagoner and the President himself, as they reacted to the course of events.

Both GM and Chrysler, says Rattner, were in a state of denial.

At GM’s Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).

This isn’t Michael Moore-type commentary, since most of it has to do with the financial rescue and the decisions that led to it. For car gurus, this should be required reading.

If GM, Chrysler and Ford (not to mention the transplants) are facing much-lowered expectations, how will they execute in the coming years? Do you see major successes or failures ahead?

—jgoods

2 Comments

  1. As always, Panayoti makes really worthwhile points. But of course I want to take issue with a couple of his assumptions.

    First, to put the condition of the world economy on the backs of the American consumer is surely setting up the conditions for failure, the conditions of his second paragraph. If all his conditions were fulfilled “for a number of years,” well, yes, the auto industry and everyone else would prosper.

    But the likelihood of any of these conditions being maintained is totally problematic, most especially that “unemployment has to go away, not just be reduced.” We have created structural unemployment in this country by our investment policies and by outsourcing jobs and whole industries, and that will take years to turn around. The banks: Yes, they will start lending money again–if and when the administration provides real incentives to do so (which will cost taxpayers lots more money) and/or develops policies to reform the banking industry (don’t hold your breath) and in particular stop them from selling securities. Right now, the big banks still hold the trump cards, most of the money, and there is no will in Congress or the administration to take their power away.

    So, I gotta say the chances for an auto turnaround in five years seem to me pretty slim. The outlook is one of muddling through, minimal profits on reasonably good cars, and no production breakthroughs as the green sector tries to carve out a viable niche.

  2. First good question asked here in over 2 months. I believe that the current economic conditions will last at least a year more and until the economy recovers, no car maker will have great success in selling their products. Companies all over the world have finally recognized that the key to success of their businesses hinges solely on the shoulders of the American consumer. Without that consumer, businesses all over the world will have difficulty with their economies. All that horse crap we’ve heard about “decoupling” has proven false. “If America catches cold, the whole world aches”, is more true today than ever before.

    For the domestic automakers to do well a series of conditions must prevail and remain stable for a number of years. First, the price of gasoline has to remain under $3. Second, automakers must continue engineering truly “world class” cars, lest the foreigners eat them alive. Thirdly,they must regain the trust of the American consumer. Fourthly, and probably most important is that unemployment just has to go away, not just be reduced. Fifthly, the banks just have to get off their high horse and start making loans again. If these conditions can be met over the next 5 years, I believe that all automakers will do well and maybe even prosper to the point that they can pay back the billions they have borrowed.

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