Saturday, December 13, 2008

A Case For The Big 3 Producing Junk

While listening to a couple of colleagues that other day say that they didn't want to buy an American car, because they were unreliable. Like myself they scorn NAFTA and the WTO. But there is an inherent problem with the idea of not buying "American Junk". There are only so many drivers in the country. If the policies are going to allow people from outside the economy to flood the market with product, there is going to be a point when there are more cars then there are drivers.

I read that Toyota reached a 15% market share by selling 2.5 million cars in ’07. That means 16 million cars hit the road in the US in one year. I have had a hard time figuring out exactly how many drivers are on the road. By divers license is wrong headed. Since an ID is so important, lots of people who don’t have cars have drivers licenses. Lot of people who don’t have licenses drive cars. Anyway, let us apply a little logic.

There are 300 million people in the US . I would say that if we remove anybody too old to drive, everybody under 16, the legal driving age, Those too poor to drive, and those who live in densely populated urban areas where driving is more of a hassle you end up with about half of the people. Let us call it 175 million to error on the side of caution. 175 million drivers.

We know that a car now of days last easily 10 years. I am actually looking for a junker right now. Most cars on the list are 15 years or older. It is 2008 right now, but the ‘09’s have been out for 6 months. 10 years ago, was 1999. By today’ standards still isn’t that old. Many of the Korean companies are now offering 10 year warranties!! Just at this pace alone there would be 160 million cars on the road 10 years or newer. Can you see where I am going here? The reason that the auto industry is hurting, is because everybody who wants a car has one. Now does everybody have the car of their dreams? No, of course not. The junkyards would be filled with Escorts, Chevete, and Prisms if they did. But they have the car that they are “willing and able” to buy. So either their cars have catastrophically fail forcing them to be more willing to buy a new one, or the cost of one they want has to drop to the point they are able to buy a new one. We know that pricing profit margins are too tight for the later to happen with the US big three autos.

The problem is that everybody has a car. Most people trade in their cars and it becomes somebody else’s “new to them” car. When the US let foreign auto companies into the economy, they did exactly what free markets do. They drive product ingenuity and efficiency. The problem is that they have become too efficient, too durable. Ford has been in business for 100 years. The others almost as long. What do you do when you look at the market and you realize that you are producing your product at a rate that outpaces market demand? When entities like OPEC see that in petroleum production, they cut production. The problem is that there are no such unions in the auto industry. If one auto make cuts production, they will just loose revenue. Someone else will fill the market hole.

So how do you suggest that you make sure that your factory keeps people gainfully employed for 30 years? How do you pay form these employees to be paid and retired for another 20 years? Well, if the market isn’t flooded with outside competition, you will find that you can control the prices in a way that will allow you to experience slow downs and rejuvenations. Since the market for the product is symbiotic and local to the economy, it will remain self correcting. But if outside competition is allowed into the mix, ones that have a much larger profit margin, they can easily bleed the market dry. That is where we are at now.

If you are Ford, GM, or Chevy your bet is on an outside chance that you can build brand loyalty and inferior products in hopes that they will keep you employed. It is not a very good plan, but it was the best they had. As I mentioned in the earlier posts, there was no way for these companies that had to pay American wages, follow American safety and environmental standards, and pay the taxes that US companies have to pay. The sad part is that most of the parts from all auto companies comes from outside the economy.

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