“FOR 95 (YUAN) DOWN, I’LL PUT YOU IN A CAR…”

11/23/10

On today’s (Tuesday, 11/23’s) Wall Street Journal’s op-ed page (A23), Paul Ingrassia, perhaps the nation’s best automotive business writer, argues that the success of the new GM is no slam dunk. He cites a laundry list of potential pitfalls for GM, but concentrates primarily on the work rules in the UAW contract. While I wouldn’t argue with Mr. Ingrassia on this article, or about much in general, a few points came to mind as I read the article.

First, Mr. Ingrassia writes

“Climbing only halfway back (from trough to peak in unit industry North American vehicle sales), to sales of 14 million or 15 million vehicles, should allow Detroit’s car companies and their suppliers to start making serious money…”

True enough, especially given GM’s and Chrysler’s new capital structures, courtesy of their former bondholders and the U.S. taxpayers. However, the chances of our seeing 14 million to 15 million sales years on anything like a regular basis any time in the foreseeable future are slim. Why? Pricing. To use just a small example, I test drove a Chevy Cruze, Chevy’s new C segment (small, competing with the Corolla, the Civic, and the Focus) entry. Admittedly, it was loaded and it was a very nice car, but the sticker price was approaching $27,000, about $3,000 north of a comparably equipped Civic, which itself is quite pricey for what it is. And that’s for a compact econocar. Most people, including yours truly, would not buy such a car with such an opulent array of features, but a rather modestly equipped Cruze was also on the lot and it stickered for more than $20,000. Such stories, along with tales of $40,000 Ford Tauri, seem to indicate that the car manufacturers, “domestic” and “foreign,” are delusional on pricing.

Why such pie-in-the-sky pricing? Because, in the past, when cars commanded such prices, people, or at least most buyers, weren’t paying for cars with real money. They were taking out home equity loans or taking advantage of juicy lease or other incentive deals. Guess what? There is no home equity left to “tap,” in the anodyne terminology of the finance industry. And any attractive lease deals will have to come out of the car company’s pocket. People simply don’t have the incomes to support 15 million unit sales every year, and they didn’t have the incomes to support the 17 million unit sales we saw before reality set in.

Second, as I said in my now seminal 9/13/10 post, PEOPLE CALL IT AN “ECLECTIC” BLOG FOR A REASON…(PART II), which itself was reacting to an Ingrassia article, one can talk until one is blue in the face about GM’s prospects in North America, but it really doesn’t matter. GM sells more cars in China than in North America, and that’s not about to change. GM’s future is in China; how it will do for its shareholders depends on how it will do in China. As the years pass, North America will become inconsequential to the General. No one can say that publicly; to do would be politically incorrect in an environment in which American taxpayers spent billions to bail out GM, still own 35% of it, and have little chance of recouping their investment any time soon. But count on it: GM is a Chinese company. Fortunately for American taxpayers, the General does very well in China. And, by the way, Rick Wagoner and the “old, failed” management that the press and the Bush/Obama administration take such gusto in castigating, deserve the credit for those Chinese operations that make GM viable and potentially very successful.