A Crisis of Confidence in the American Auto Industry
Matt Stoller makes a good point over at OpenLeft. What's going on in the auto industry right now is similar to a bank run. It's not just that demand for American-made cars has dropped, it's that people have no confidence that the Big Three are going to be around for much longer and so they don't want to buy from them.
As defenders of various bailout proposals have pointed out over the last few weeks, marketing studies have shown the consumers won't buy from an automaker in bankruptcy. It's not like the airline industry, where people only care about getting where they need to go. A car purchase is a long term investment--it requires servicing and maintenance over time--and many people won't want to buy from a company that may not be around for much longer.
The problem, of course, is that if that's true--and it makes sense that it would be--people also aren't going to want to buy a car from a company that is teetering on the edge of bankruptcy and only staying afloat through government loans. As Stoller puts it: "People won't buy from a company that looks like it'll go bankrupt, but a company without customers will go bankrupt."
Which means that no half-assed bailout attempt is likely to work. Again, as Stoller puts it:
I have no idea if such an plan would work, but we really do need to start brainstorming on this front. The goal needs to be to establish some mechanism whereby the fear of manufacturer bankruptcy does not influence the car buying decision. If that's not done, I don't see how the Big Three can recover.
As defenders of various bailout proposals have pointed out over the last few weeks, marketing studies have shown the consumers won't buy from an automaker in bankruptcy. It's not like the airline industry, where people only care about getting where they need to go. A car purchase is a long term investment--it requires servicing and maintenance over time--and many people won't want to buy from a company that may not be around for much longer.
The problem, of course, is that if that's true--and it makes sense that it would be--people also aren't going to want to buy a car from a company that is teetering on the edge of bankruptcy and only staying afloat through government loans. As Stoller puts it: "People won't buy from a company that looks like it'll go bankrupt, but a company without customers will go bankrupt."
Which means that no half-assed bailout attempt is likely to work. Again, as Stoller puts it:
The temptation here from policy-makers is to cut the baby in half, which is the wrong strategy. Either the government should decide to defend the auto industry at all costs, and tell consumers their car purchases are safe, or the government should let the auto industry die. A bridge loan must be accompanied by a government guarantee, because without it the industry is just in limbo and the underlying confidence problem remains.That seems right to me, though I'm not sure how the government would go about providing such a "guarantee." But the problem really does need to be approached from the prospective of stopping the bank run phenomenon. Like the FDIC structure, we need to think creatively about setting up some kind of mechanism that instills confidence in buyers. Perhaps some kind of maintenance insurance program where you would be able to write off the cost of maintenance if a company goes out of business within X number of years after you purchase an American-made vehicle.
I have no idea if such an plan would work, but we really do need to start brainstorming on this front. The goal needs to be to establish some mechanism whereby the fear of manufacturer bankruptcy does not influence the car buying decision. If that's not done, I don't see how the Big Three can recover.
posted by A.L. at 10:50 AM
10 Comments:
I have heard this argument a lot over the last couple of weeks, and it doesn’t make any sense to me. First, if the auto companies do declare bankruptcy, it seems dubious that anyone’s warranty would be in jeopardy. Second, if there were any reason to worry, it would be the people who bought cars before the bankruptcy, not those who bought after bankruptcy, who should be concerned. Third, if the auto companies really believe this is a marketing issue, they could contract with a third party to provide payment guarantees on the warranties. Fourth, even if customers had one-hundred percent confidence in the warranties, it wouldn’t change the fact that they don’t want to buy the cars that Detroit is selling, which is how the companies got to the brink of bankruptcy in the first place.
Finally, as the financial crisis should amply demonstrate, the fact that a company needs to be rescued by the federal government tends to undermine confidence in the company’s financial condition, not enhance it. This is why Paulson required all the major financial institutions to take TARP money—otherwise customers would refuse to deal with those who needed a bailout.
MLS,
There are a couple key points that I think you're missing. First, the current crisis the Big Three are facing isn't solely due to the quality of their products. Car sales across the board are down dramatically and every automaker (including the Japanese, Korean, and Germans) are reeling right now. The Big Three were just a little more precarious to begin with, so they are facing insolvency. They can't absorb the shock the way, say, Toyota can.
Second, it doesn't matter whether people's warranties would actually be put in jeopardy. It's all about perception. People want to buy cars from companies they believe will continue to exist for the long term. And because they have a choice of manufacturers, they'll go with the "safer" bet.
Your first point, it seems to me, is irrelevant. It doesn’t matter whether Detroit is in trouble solely because of the quality of their products. The point is that they are not in trouble because of the safety of their warranties, so “solving” that problem won’t get them out of trouble.
Your second point might have some merit, but think about how one would have to evaluate it. First, one would have to conclude that people are reluctant to buy cars from bankrupt companies because of concerns about warranties (as opposed, to say, because they assume that bankrupt companies probably make crappy cars). Second, one would have to conclude that there are no alternative means of convincing people that the warranties are safe (such as contracting for third party warranties and/or better education). Third, one would have to conclude that these same unreasonably suspicious consumers would be reassured by the idea that the federal government is standing behind these warranties. It seems to me that the reverse is more likely, that federal intervention would reduce confidence in the auto makers just as it has for financial institutions.
Your first point, it seems to me, is irrelevant. It doesn’t matter whether Detroit is in trouble solely because of the quality of their products. The point is that they are not in trouble because of the safety of their warranties, so “solving” that problem won’t get them out of trouble.
That's not my point. My point is that however bad the Big Three's current situation is, there's risk of a self-reinforcing feedback loop here that makes it much worse. This is what happens in a bank run. News that a bank is struggling leads people to pull deposits which then compounds the problem and cause the bank to fail.
Similarly, the Big Three are not in the situation they're in because of fear of warranties, but people's reluctance to buy cars from a company facing bankrupty may compound their existing problem and prevent recovery.
And I agree that merely accepting a federal bailout will not solve this crisis of confidence. That was the point of my post.
Chicken meet egg.
GM execs like Tom Lutz and others who say
Global Warming is a hoax do not inspire confidence as industry leaders.
Should anyone in the auto induistry recive a BONUS
lets let them keep their JOBS
that is enough .
The government can instill consumer confidence simply by saying they won't let Detroit fail. If the message comes from Obama, it will be all the more reliable. However, I doubt the wisdom of the government guaranteeing Detroit's solvency so overtly. For one, I don't think that all three companies can make it. Ford and GM were on the road to recovery when the Perfect Storm (credit crunch, high gas prices, recession) hit and wiped them out. Chrysler seems to be in much worse shape, but we don't really know since they are a private company. I genuinely think that if we save GM and Ford, we would have two very strong companies in twenty years--I can't say the same about Chrysler.
Also, it is worth mentioning that Chrysler was bailed out about 30 years ago. The conventional wisdom is that this bail out worked, since they returned to profitability. Yet here we are again. Does Chrysler get another bailout thirty years from now? This hurts as Chrysler is an icon, but I think we could be wasting money propping them up when GM and Ford are much more viable companies.
The strategy must be to defer the collapse until a more propitious time, when the economy is rebounding and can absorb the blow better. Deferment might also allow time to permit the dismemberment and sale of parts of the companies to people who actually know how to run auto companies-the Japanese and Germans.
Is it ever a wonder that people have lost their confidence in the big three?? They have made poor cars for a while now. Admittedly they have gotten much better recently. Getting better recently though doesn't erase the memory of all the cars that broke down right after the warranty expired. This credit crunch is only magnifying insecurities we have all had in our big three.
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