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Permalink Reply by Vanessa Towning on April 23, 2009 at 1:40pm

Today's auto industry is a great example of what happens to market's when supply does not equal demand. Take GM's situation for instance: With cars sales down, a government mandate to restructure or file for bankruptcy, the company will be forced to shut down some of its plants this summer as well as cut 1,600 white collar jobs.

While this puts obvious price pressure on the company and its dealers you may also talk about how GM, along with its competitors, is trying to stimulate demand through its new "Payment Guarantee" plans for customers who lose their jobs.

Additionally it may be worth mentioning how the Big 3 are responding to the shift in demand from gas to hybrid electric vehicles. Both GM and Chrysler recently presented newest models such as the P.U.M.A and Peapod.

http://www.google.com/hostednews/afp/article/ALeqM5gaDBatZU-iL6izYj...
http://www.pcmag.com/article2/0,2817,2344562,00.asp
http://network.nationalpost.com/np/blogs/posted/archive/2009/04/22/...

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Permalink Reply by Michael Smitka on April 23, 2009 at 4:06pm

I wait with bated breath for JJ's presentation! -- and he knows not to let me get a word in edgewise.

Ah, to an economist supply always equals demand ... the curves must cross. Price and inventory take the hit, in one way or another. (Let's not ponder which way.)

One set of issues is to think through how the industry (definition?!) depends on finance, directly and indirectly. On the downstream end, floorplan, customer finance, aftermarket inventory, insurance of various sorts. I probably underestimate the number of facets where finance is central, much less those where it is merely important.

And what do we mean by finance? Does any leasing remain? -- not just vehicles but perhaps physical facilities or (far safer?) the repair bays of dealerships? There must be some innovation, finding niches that in normal times wouldn't turn a profit, but where today there may room to do deals.

Then ... on what basis do you make credit decisions in a situation such as today, assuming you are not capital-constrained and so have the leeway to make loans? Your customers, or at least the ones who survive, will face less competition down the road. How far is a bit sticky. And is there untapped collateral anywhere in the US economy? (Cf. leasing repair bays above?)

And if you have room to use equity, there should be some possibility of finding basically sound operations that can be bought at an attractive price ... or of doing so indirectly by financing acquisitions. Fire-sale inventory? Have the auction houses (ADESA, Mannheim) held any in the past? -- they might be in a position to take a "long" position in the market.

Finally -- as per the end of Vanessa Towning's post -- there are novel insurance products (variations on unemployment insurance). There may not be much actuarial research behind them, but surely GM and others have made back-of-the-envelope calculations of how much their spin on unemployment insurance will end up costing relative to (say) putting an additional $1,000 per car in cash incentives, and how many sales it might create relative to cash-back. And whether such incentives would be honored by a judge in that unmentionable downside scenario. Are there other "novel" insurance products out there?

These questions are posed with less knowledge of the industry than I'd like ... one reason I've asked JJ to come! But it's the first week of our Spring Term so I won't have time to prep students. They're quick to ask questions, and JJ can put me in a devil's advocate position to generate a useful discussion.

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Permalink Reply by JJ Hornblass on April 24, 2009 at 4:46am

Mike, and I thought you just wanted me to come down and tell jokes.

I've been working off a theory lately that this whole economic reversal has laid bare to a degree not seen in many years (ever?) the centrality of finance in the viability of several US industries, auto being a major one. With the increasing commoditization of vehicles (you touched on that in your "Downsizing" post on your blog the other day), it is price that has become the purchasing determinant for a good swatch of consumers. Whether that swatch is enough to redirect the auto industry in recession is something I haven't figured out yet, but even the prospect of it is not conventional wisdom. Or at least it wasn't before the credit crisis. Remember that? This whole thing started with a credit crisis, in addition to a SUV-heavy product mix at the US carmakers. The bottomline is as Mike indicated in this forum: that finance plays a remarkably central role in the auto industry's prospects. It should give every auto finance executive pause. That's a lot of responsibility to shoulder.

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