Bailout futile if people aren’t buying new cars

Would $3,500 encourage you to buy a new car? Probably not. But it seems a more worthwhile incentive than simply pouring money into companies burning through cash at an incredible clip

Last updated on May 04, 23

Posted on Mar 13, 09

3 min read

Would $3,500 encourage you to buy a new car? Probably not. But it seems a more worthwhile incentive than simply pouring money into companies burning through cash at an incredible clip.

Pointing to a similar program running successfully in Germany, the CEO of Ford Canada,  David Mondragon, this week called on the federal government to offer up $3,500 as an incentive for Canadians to scrap cars older than 10 years in favour of new vehicles.

This idea at least recognizes that keeping auto plants open and producing cars only makes sense if people are buying what’s coming off the assembly line.

That realization highlights the problem with the $4 billion bailout for General Motors and Chrysler operations in Canada, and the much larger financial boost in the U.S. GM’s predicament is particularly troublesome. The company continues to function thanks to $13.4 billion in loans from the American government, and administrators say they want as much as $30 billion. Trouble is, GM lost $30.9 billion last year alone.

Do the math, and the U.S. government “loans” may at best keep the company afloat another year unless there’s a turnaround in the offing. History tells me that’s not a safe bet.

As bad as things were last year, the entire auto industry is bracing for much worse in 2009.

Manufacturers expect sales to drop another 13 per cent this year, meaning 250,000 fewer vehicles representing $20 billion in revenues.

Even if successful, Mondragon’s $3,500 incentive program might provide for the sale of 100,000 new vehicles, not even enough to counter the drop from last year’s dismal performance.

Still, if we’re going to bail out the industry – and there are many arguments against that idea – a direct incentive has advantages over simply funding more of what manufacturers are already doing. While the U.S. government funding comes with strings attached – not the case here, however – both GM and Chrysler (Ford has not requested bailout money) have not moved quickly in the direction mandated, renegotiating deals with creditors, suppliers and unions being high on the list.

Layoffs and plant closures have been announced, but the red ink continues to flow. Already in trouble before the recession, the Detroit Three are in no condition to weather the storm. Clearly, the industry needs to sell more cars. But the downturn precipitated by financial industry misdeeds has consumers on edge, in fear of their jobs even as the credit market evaporates. Potential buyers have neither the means nor the inclination to spend on big-ticket items.

Enter the incentive concept, the goal being to dangle a large enough carrot to bring drivers of older vehicles into showrooms, ready to deal. Is $3,500 enough? It’s certainly much better than the Canadian government’s current plan, which offers a whopping $300, but that’s not saying much.

Leaving aside the quality concerns and image problems that plague the North American carmakers – the issues have largely been addressed, although rebuilding their reputations will take the Detroit companies years and years – buyers may not find the reward ($3,500) justifies the risks (new car payments).

If the government does go down this road, the program would have to come with concessions from the automakers. Profits are already forsaken; if the goal is to protect jobs – and that’s why the government is involved, rather than bailing out executives and investors – then reducing prices is a necessary step. Consumers would also feel much better about getting a deal if the add-on costs – freight, PDI and other profit centers – were stripped away.

Right now, it’s a question of moving inventory; desperate times call for appropriate measures.

There are those who would balk at bailing out the industry on environmental grounds, arguing the money would be better spent on transit or other alternatives. There is merit to that concept, but we’re a car-dominated society and will be for the foreseeable future. The debate instead centers on whether we have a domestic industry at play in what will continue to be an essential piece of the economy.

That concern is especially germane to Ontario, where there are worries the Detroit automakers will contract operations south of the border. The Canadian Auto Workers union estimates losing the industry would cost Canada 600,000 jobs and $13 billion in tax revenue.

Support for the industry should come with some strings, however. Much better, fuel-efficient and alternative-fuel cars are needed. The industry has dragged its feet for years, fighting even the most modest demands for improvements.

Now’s the time to build something consumers want, and will buy on merit when the economy eventually corrects itself.

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