March 31 is supposed to be the deadline on decisions regarding loans to the auto industry. Unfortunately, the industry is setting itself up for failure by using a forecast for sales this year of 11.2mm. That number is problematic given that the current sales rate is closer to 9mm. While that is below the normal scrappage rate, cars are being repaired not scrapped. This ripples through the food chain resulting in good results for the Autozones of the world, but lousy results for the major auto companies. No one, not even Toyota, can make money at 9mm cars per year. The federal government needs to be prepared to lend sufficient funds to keep the industry alive until sales approach 12 or 13mm cars annually. GM, for example, assuming they sell 25% of the new cars, would fall 500,000 cars short of its forecast if sales stay at 9 vs. 11mm. 500,000 times a wholesale selling price of, say, $25,000, would be a revenue shortfall of $12.5 Billion and missed contribution to overhead of maybe a third of that. At some point, sales will return to a normal scrappage level at least, but probably not until mileage improves substantially on new cars and the consumer’s balance sheet looks better.
Don’t blame the auto industry for today’s sales rate. If you need to have someone to blame focus on the financial services industry. However, do realize that at this critical juncture it is particularly important that the US auto industry continue to operate without having to fight through the intended and unintended consequences of bankruptcy and the ripple effects of that on an already struggling US economy. A disruption of the improvements wrought by the design and engineering efforts surrounding the Camaro, the eVolt, and Ford’s work on hybrids would set the whole global auto industry back in its contribution to reduced CO2 emissions. I know that sounds like a stretch, but the Camaro at 29mpg, winning kudos for design and engineering and the eVolt following next year as a real game changer in power trains, can start making a difference. The Camaro is not the best car for today’s environment. Lutz did a great job shaking up the design and engineering efforts at GM but his vision of where the world was going with fuel consumption fell short. Nobody’s perfect, but the direction is right. We don’t need the risk to the momentum of the US position in the industry and to the overall economy of a bankruptcy right now. And don’t believe that Ford will be unaffected just because it doesn’t file immediately.
Don’t let the anger with AIG and the financial services industry affect the political will to preserve an important manufacturing and consumer industry in this country. The unintended consequences on CO2 emissions will be severe.