Slim Chants

The cause of the crisis in the automotive sector has been blamed on the credit-crunch that resulted from the mortgage meltdown. While the auto crisis and the mortgage meltdown are related, the link is less direct. Here is the root cause of the crisis and why any bailout is destined to fail.

The industry analysts and economists, both union and corporate would have us believe that this unprecedented drop in sales of automobiles is the result of a cyclical downturn, perhaps compounded by the inability for dealers to seek credit to fill their lots with product and customers to purchase new vehicles. They maintain that the big three have a viable restructuring already underway and that they just need some cash in the form of a short term loan in order to get by until the market rebounds. This kind of assessment demonstrates the vision of an ostrich under threat.

I don’t know about you but I’ve not seen big three dealerships with empty lots. Nor do I believe that people are not buying vehicles because they can’t get the loan. The fact is, sales of cars and light trucks has been fueled by a side-effect of the overheated housing market. Property purchased for a low 5 figure sum in the 70′s was worth a mid to high six figures in the height of the bubble and those who chose not to up size their accommodation found themselves with a lot of equity on paper. With cheap, easy credit available many elected to improve their standard of life with the purchase of an expensive vehicle or two, leveraged against the value of their home.

Reuters reported the sharpest year over year drop for any month on record, dating back to 1942, the first sign of an impending automotive decline on May 23 of 2008. Gasoline in the US had just reached $3.79 a gallon.

WASHINGTON (Reuters) – In a sign that Americans are curbing their driving in the face of record-high gasoline prices, data released on Friday showed highway miles driven in March fell 4.3 percent from a year earlier, the first March decline since the last major oil shock in the late 1970s.

In August, 2008, Climate Progress reported:

June 2008 saw another sharp drop in vehicle miles traveled (aka VMT) according to the Federal Highway Administration’s monthly report on “Traffic Volume Trends.”

Americans drove 4.7 percent less, or 12.2 billion miles fewer, in June 2008 than June 2007 — beating the record-setting drop of March (see here).

In October of 2008, the Wall Street Journal reported the decline extended the monthly fall in driving to 10 months. Again, this is the largest year over year decline ever recorded.

Drivers in the U.S. traveled 15 billion miles less in August, or 5.6%, compared to the same month last year, the Department of Transportation said Friday.

“The decline is putting new pressure on the way road, bridge and transit projects are funded at a time of record growth in transit ridership, showing the need for a new approach for funding transportation construction,” Transport Secretary Mary Peters said.

On December 12, 2008, CNN Money’s Aaron Smith reported:

Driving in America has undergone its most dramatic continuous decline in history, the Department of Transportation said Friday.

Americans drove 100 billion fewer miles during the 12-month period between November 2007 and October 2008 compared with the prior year, according to the DOT’s most recent data.

U.S. Transportation Secretary Mary Peters noted that driving continued to decline even as gas prices came off their summertime peaks.

“The fact that the trend persists even as gas prices are dropping confirms that America’s travel habits are fundamentally changing,” she said in a statement.

So what can we make of this? Is the automotive downturn cyclical? Are people actually taking the bus because they can’t get a loan to buy a pickup truck? Or because the dealership does not have any in stock? Without a doubt the current credit crunch has exacerbated the situation of the big three at a time when they are not selling cars and are still stuck in an old and tired business model. But the math is telling. There is currently capacity in North America for the manufacture of some 25 million vehicles, annually. And the current market seems to be about 10 million and declining. If we bailout the big three, what are they going to do? Keep building cars?

GM has already answered that question. They are closing 20 plants for at least 6 weeks, as reported by Huffington Post. Even mighty Toyota is in slowdown mode with an extended Christmas break and short weeks in January. It’s plain to see that a good chunk, possibly as much as a half to two-thirds of North American car plants must close for good.

So if the car plants close and more than half the auto-workers, both blue and white collared are left without a job the question that begs is what do we actually get for the bailout money? Who benefits if we still end up with massive unemployment? Shareholders? Company brass? That reeks of socialism for the elite, in my humble opinion.

Politicians must carefully weigh the cost-benefit analysis of propping up this dying breed before wasting tax dollars that could be directed at infrastructure projects (perhaps it might be wise to invest in rail seeing as it is growing in popularity) and  start-ups and entrepreneurs who will create modern, new jobs with a potential to jump-start renewed growth of our economy.