The Plague of the Big Three: Oversupply

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Investors began to rethink the automotive industry after news that GM would shut down many of its factories for as much as nine weeks this summer. The automotive industry has continued to pump out cars, even as the recession tore into sales of popular consumer products and stifled demand for one of the United States’ leading exports.

Not Just a Domestic Problem

An oversupply of cars isn’t just happening in the United States. Many foreign auto manufacturers have as much as three month’s worth of cars stacked up waiting to make their way to the lot. At present, the only foreign automaker with a supply of cars less than one month of supply is BMW, which is generally very specialized at producing “made-to-order” type cars. At this time, it is unknown how many US autos are floating around the country still unsold, but that type of data is expected to be released when GM shuts down its plants.

A Billion Dollar Restructure

Throwing billions of dollars to auto companies could only result in one end scenario: auto companies would have to cut down on their production or cease to exist. Both GM and Chrysler are now the products of recent rumors to a quick close. Washington had to calm investors that the rumors were not true; Chrysler would not be shutting down, and instead a new plan with Fiat would help the automaker better perform.

Banks Are Better, but Autos Aren’t

Halfway through earnings season, it is now apparent that banks are drawing profits, or supposedly drawing profits, on their investments. The credit markets have thawed considerably, reaching a point where credit is nearly free at all banking institutions. Many people who wanted a car can now get a loan for it, just as they always could. However, there is still one major problem – most people do not want a new car. They don’t want a $200 monthly payment and they’re thinking twice before making any large purchases. Impulse buys at car lots are thin, and gone are the days where a dealer could sell a car with the right monthly payment. Buyers are smarter now; they’re spending less and borrowing even smaller amounts than previously. The automotive disaster is not a function of frozen credit markets, but a result of lessened demand for personal transportation.

Insurance Rates Play a Part

Insurers of all types are still posting record losses on derivatives and other financial instruments that were supposedly in place to back the insurer’s balance sheet and to help make payments in the future. As insurers find themselves without as much capital to pay claims, rates for insurance on any asset will grow higher and higher. The next wave is likely in autos, as drivers will subsidize the heavy financial losses that most insurance agencies are now showing.

A Newer, Smaller and Better Car Company

Automotive manufacturers of the next generation are likely to be much smaller, produce half as many cars, and only manufacture what the population can support. At present, there is a large oversupply, which drops prices and cuts into profit margins. Were the Big Three to reduce output, it could better supply the market for cars, allowing them to sell the autos at much higher prices. Instead, the automakers have employed demand destruction against them, and they will notice there is no inherent benefit to oversupply other than prices drop for the consumer. Bankruptcy is the only option for GM and Chrysler; Ford may escape to pick up the slack of the two, but with their current obligations, neither GM nor Chrysler can afford much longer to produce lesser numbers of vehicles.

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