Tuesday, March 31, 2009


Last October I posted on this blog an open letter to the auto manufacturers. I hope you will go back and re-read that posting because we now need to visit that problem once again. This time the letter must be addressed to both the manufacturers and to Members of Congress.

Today as I write this piece, the stock market is tanking once again. This time the reported reason is the auto business. It would seem that the government has now concluded that the American auto maker is no longer viable and must knuckle under to government regulation or face extinction. In their wisdom government officials have determined that all the American automobile manufacturers have to do is build a more fuel efficient car to have a future. Never mind that the technology doesn’t exist to accomplish what the government wants, just do it. In their view car buyers are just waiting with baited breath for the opportunity to buy an American car if only it got better fuel economy. It is my opinion that this once again proves beyond a shadow of a doubt that government officials don’t have a clue. The vast majority of people in government either elected or just employed have never had to meet a payroll or make a profit. Their continued interference will serve only to hasten the demise of any possibility auto manufacturers have of surviving or succeeding.

The reality of the auto business is really much simpler. As I described in my October 2008 blog, people have financed their cars for longer and longer periods. What we have now is a huge number of people driving worn out cars with very high mileage on them, but who still owe large balances on those cars and are upside down in their value. In other words, they owe more on the cars than they are worth. Many would love to buy a new car but they can’t. This situation has been building for a long time.

What I have just described was created by the auto makers with the co-operation of the banks and the dealers. Unfortunately the chickens have now come home to roost. Unions have continued to make demands on the manufacturers to share their huge profits without considering this reality. Contrary to what the government would have you believe, it is just that simple.

Now the question is what to do. I fully recognize that there are no initials after my name but I did spend my entire working life in the auto and auto financing business. I have seen this coming for some time. We have basically borrowed future buyers for today’s business. The reason banks have financed cars for extended periods is the price has increased at such a rate that average buyers shied away from them without the extended financing. Used car markets have continued to punish car values with high mileage. When you think about it, would you want to buy a car with 200,000 miles on the odometer?

We have to return to a saner way of selling and financing cars. Lenders must not over finance. People must realize that they cannot buy a $30,000.00 car for $250.00 per month. Manufacturers must advertise the price of their product, not some phony lease payment. Unions must realize that the profits they shared in are no longer there and they must pull back.

In other words, we need a correction. Well guess what? We are in one now and we will soon get to the other side of it. Soon many buyers will find themselves in a position to once again enter the car market. They will have paid off their old junker and will buy another car. No government action will have anything to do with this correction. It will happen anyway. Any effort on the part of the government will only serve to delay what has to happen.

Yes, times will be difficult for a while, but we will get to the other side.

Car buyers, face it. You must change your expectations if you wish to buy a new car. Unless you put half down, the payment is not going to be $250.00 per month. Consider a nice used car. They are better than ever today.

Government officials, get out of the retail business. Concern yourself with matters of State instead. Quit spending taxpayer dollars trying to create your image of how a business is supposed to be. Businesses succeed and fail all the time. Let the correction happen. It will anyway with or without your interference. We will all soon see this problem as a thing of the past.

Ron Scarbro March 30, 2009

1 comment:

Anonymous said...

It appears a "Fiat" was issued within the past couple of days.
It is interesting that the one doing the best, Ford, is being led by a non car manager. Assembling and selling planes is a little more complex than cars.