Driven to Bankruptcy

Do you know anybody who bought a new car in October? Most of the country was a little bit preoccupied, I think, for that kind of activity. But even so, the news that GM sold just 168,719 cars last month — down from 307,408 in October 2007, and possibly the first time it sold fewer than 200,000 cars in a month since the 1940s — is sobering.

Part of the problem, of course, is that GM isn’t very good at making the kind of cars that people want to buy. But there’s also the fact that if you want a car loan from GMAC, you now need a credit rating of at least 700. Plus, of course, GM no longer owns GMAC, which can’t help.

New cars, like houses, are leveraged assets: you buy them on credit. As demand for all leveraged assets falls, it stands to reason that new-car sales, as well as financed used-car sales, are going to fall commensurately.

Now this doesn’t need to be the end of Detroit. But it does imply that the equity in the big three carmakers is going to zero. As Justin Fox notes, bankruptcy is pretty much exactly what all of them need right now.

As the carmakers come out of bankrupcy, it’ll be interesting to see the degree to which they continue to cling to a business model which involves selling the cars at a loss and trying to make up the profits on the financing. It seems to me that the most successful brands have for decades been the ones with the least reliance on their retail leasing arms. And in any case I don’t see much of an appetite for car-lease receivables over the next few years.

What this says to me is that Americans will be buying cheaper cars, just because they won’t be able to get financing for the more expensive ones. And since cheaper generally means smaller and more fuel-efficient, that’s got to be a good thing for the country.

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