Auto bailout–what viability means?

In order for a manufacturer to be viable, there must be customers ready, willing and able to buy what the manufacturer produces.

Mass producers (like automotive manufacturers) manufacturer products in anticipation of demand. Retailers buy products in anticipation of demand. When supply exceeds demand, the only alternatives are to (1) deeply discount goods in the hope of finding a buyer, or (2) scrap them. Just look at what’s happening this very day in malls all across America.

The financial “bailout” of Chrysler and GM may yield little benefit in the short term as the focus is only on the supply side, not the demand side, of the problem.  Since supply is so out of balance with respect to current demand, until there is greater demand/supply equilibrium, these firms can’t possibly be financially viable.

The auto manufacturers can do little to influence greater marketplace equilibrium as the normal “tricks of the trade” (low/no interest rates, discounting) aren’t effective now. These tactics have become too commonplace to stimulate consumer demand. Consumer access to credit is also a huge negative at this point.

While continuing to produce products creates jobs and stimulates the supply chain, it is only forestalling a larger problem for these manufacturers as they can’t convert what they’ve already built into sales. Does it make sense to continue manufacturing products that can’t be converted into sales? Of course not.

While we can all argue that the business model and cost structure for the U.S. auto manufacturers needs to be rationalized into something far more viable, demand weakness will limit what these manufacturing companies can do to become viable in the short-term/near-term.

Breaking News: In the past 24 hours, there’s been an announcement that GMAC, a financial services company owned by GM that finances autos, is getting $5 billion in bailout money that will enable them to make money available to  broader spectrum of consumers.  For the past 2 months, GMAC has limited auto lending to consumers with credit scores of 700 and higher.  Now, they’ll be able to make loans to folks with credit scores as low as 621. This has the potential to stimulate demand which is good news.

What do you think?

Dave Gardner, Gardner & Associates Consulting http://www.gardnerandassoc.com

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