You could almost hear it in the Senate hearing room today as the heads of the nation’s big automakers pleaded their case again for a government bailout: the air hissing out of the leaking auto bubble.
The Big Three are in big trouble for many reasons, but one of the most important ones is that automakers have been producing too many cars for too long. The U.S. economy can support at most 16 million new cars sold every year. But total sales averaged sales of closer to 17 million units from 1999 to 2006. The Big Three account for more than half those sales.
How did this happen? Rather than make fewer cars, the Big Three offered bigger and bigger discounts and cheap money for consumers to borrow. Remember those days of “zero percent financing?” or “employee pricing?” In 2007, the average incentive was worth over $6,000, about 25 percent of the average vehicle price.
Why not just make fewer cars? Under deals they signed with their unions more than 20 years ago, the car companies are required to pay laid off autoworkers up to 95 percent of their wages and benefits. The so-called “jobs bank” and related programs made it very expensive for the automakers to trim production.
As a result, American automakers produced more cars and trucks than Americans want, creating an “auto bubble” of excess supply that’s exploding like a Firestone tire:
It’s not just GM, Ford and Chrysler that can’t sell cars. No one can sell cars right now. This is hurting all carmakers, but the Big Three are especially vulnerable because they are burning through cash to meet all their fixed cost obligations, like pensions, health care and, yes, the jobs bank.
Yesterday, the UAW agreed to suspend the jobs bank program, calling it a distraction. But there’s still a whole lot of extra cars in the system. One economist estimated that the entire auto industry would have to shut down production for nearly a year, just to get rid of an estimated at 10 million extra units.
That’s not exactly what the Big Three have in mind.