FICRY

“The party is over,” says Peter Schiff, president of Euro Pacific Capita, who warned publicly in 2006 of the sub-prime housing crisis. “We bought too many cars, and now we’re broke.” Writing for Reuters journalist Nick Carey argues that the consequences of the automakers failures are likely to last for years. Already, the crisis has pushed U.S. auto sales to their lowest in decades forcing automakers Chrysler LLC and General Motors Corp into bankruptcy. The auto market in the United States is about to get much, much smaller.

Carey maintains that, “easy credit is a thing of the past.” The sense of extravagance during the boom was made possible by access to cheap credit and skyrocketing housing prices. This allowed the Americans to leverage their homes and go into debt to buy new cars. A culture of fast-money, where consumers lived on credit, and well above their means, was really good for automakers.

Changing trends in consumerism, increasing gas prices, a decrease in the availability of personal financing, these factors are not the force behind Detroit’s fall, but the nails in the coffin for the Big Three. Those responsible for the death of the auto industry are the car makers themselves who saw evidence of declining profits, consumer dissatisfaction and a decrease in general consumption but continued to increase production year-after-year.

While Carey would blame American consumers for their boom-era folly, the real culprits are the auto execs who knowingly produced their products at an ever-increasing rate that hugely exceeded demand. Ultimately, the auto industry failed because they injected a surplus of cars, and carbon, into the global market and devalued their own brands.

Economist Andy Xie, reporting for the Chinese Journal, Caijin claims that auto makers will need to cut production by one-fourth in order to keep pace with a “normalization” of demand. He writes that “current global auto sales are below the 2004 level, but since that year, the industry has increased annual production capacity by nearly 20 million units.” Currently, their are more cars on the road than registered drivers: the global overcapacity is equal to U.S. sales times two. He writes, “….supply and demand are roughly balanced if two of the three U.S. automakers shut down for good, neither restructured nor revitalized.” Hey, if we got rid of two or thee U.S. automakers, would there be any left Mr. Xie?

Auto executives ignored declining profits and upheld notions of profound distortion in the market. “The credit bubble distorted the market and sales were much higher than they should have been,” said independent auto analyst Erich Merkle. Xie concurs that sales at the rate experienced during the boom were based on a distortion of demand. He argues that, exaggerated demand led to wide-spread overproduction as a kind of business model. This caused a narrowing of income distribution by forcing down the price of manufacturing and labor.

Xie reports that the bubble’s bursting has exposed that some of “the pieces of the global economy don’t fit.”  The the rate of industrial production, was wrongly tied to the supply of raw materials and cheap labor, and not on the consumptive viability of a product. Value was wrongly, and to detrimental effect, hinged on the notion that a heap of raw material will yield profits even before they are processed.  The auto industry managed to stay afloat for so long, or in fact, that they thrived by coveting a monopoly on industrial, raw materials with borrowed funds.

When the well ran-dry and exposed gapping, structural weaknesses in our economic house-of-cards, the auto giants were unable to conduct business. The failures of the automakers’ brands and companies underpinned a greater and more complete failure to respond to the market or to scale-back when no one bought. They had been wallowing, for so long, in a cesspool of credit, to rich to correct their staggering overcapcity until finally the financial rug was pulled out-from-under them.

So, just how much smaller will the American market for automobiles be in the future? Undoubtably, the rate of shrinkage could be swayed by changing consumer trends, interest in smaller fuel-efficient vehicles, disenchantment with American brands, a general ageing of the boomers, etc. But the fact remains: despite demand the auto industry is going to have to cut production by a  significant, portion.

By Cora Weiss, Editor-in-Chief, FICRY.com