DLai0001 (< 20)

Autobail out?

November 21, 2008 – Comments (1) | RELATED TICKERS: F , GM

I really hope they don't bail out the auto industry.  Seriously, bailing out doesn't solve the true problem, and that's people are not buying american cars in large enough numbers.

I'm seeing these numbers on the internet, I don't know how factual they are, but I don't have big reasons of doubting it.  So first number, there's an approximate $29 pay gap in the assembly line workers of GM vs. some of the more lean Japanese car makers who have factories setup in the US.  Ok, so these GM workers are getting paid ridiculous amounts for what is basic work that doesn't require a PhD.  I also know that because so much is automated, it only takes around 32 man hours to build a car.  So 32 multiply by the $29 pay gap, we have an extra cost of $928. 

I'm not particularly rich, but to me $928 difference isn't really going to change my mind on which car I pick.  If I'm looking at a $14,000 car, I don't think it'll be any more attractive to buy a slightly inferior car (same features, but slightly lower build quality) for $13,000.  $928 is less than 6% of the price of the car at retail.  Seriously, if someone put a 6% off sign at the store, would you even pay attention?

So what am I saying is the true problem?  The cars kinda suck that's one.  Build quality and competitive features are getting there.  But the bigger problem is you have an expensive operation with too many players in the field.  If a 6% difference margin could be the difference between profitable and non-profitable.  That means the market is over saturated.  In most businesses, there's at least a 30%-40% profit margin between cost and retail.  The fact is there's too many car makers, with too many brands under each of their belts.  It's no wonder this business sucks overall.  If you're putting so much up front cost to setup a factory to build something so expensive, you'll need some higher margins to really justify investing in that business. 

In a complete free market environment the only real rational decision is, liquid date the business and redeploy capital in a less oversaturated market.The way I see things, as consumers, we've been spoiled by cheap goods.  Imagine if we paid 40% more than the cost to make like every other good we consume daily?  Shouldn't cars sell for around that much if that business is justifieably worth running?

The best thing they can do is let 2 or 3 of the American car makers go out of business and reduce this oversupply of autos that's causing the supply and demand curve to be out of wack.  I think the only reason why some of these auto companies are still in business is because there's a hope of a bailout and not really because it's a business worth running.