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Summary:

The U.S. auto industry is facing the worst downturn in several generations, one so dramatic that it threatens to take out many of the domestic manufacturers and their network of suppliers. While much of the blame rests with Detroit for building mediocre products, most agree that […]

The U.S. auto industry is facing the worst downturn in several generations, one so dramatic that it threatens to take out many of the domestic manufacturers and their network of suppliers. While much of the blame rests with Detroit for building mediocre products, most agree that allowing car companies to fail would wreak severe damage upon parts of the country that are already shouldering an unfair share of the economic malaise. The challenge, then, is how to stimulate car sales without rewarding bad decisions.

A few years ago I retrofitted my home to run mostly on solar power, and was rewarded for doing so with a generous subsidy that amounted to about half the cost of the system. Such subsidies did much to stimulate demand for solar technology, and are being phased out as the industry approaches parity with other power sources.

A similar program could enable us to get a “two-for-one” deal by stimulating demand for electric and serial hybrid vehicles, while also rewarding car companies for ramping up their production capacity. While electric vehicles are more economically viable than they were in the 1990s, they are still substantially more expensive than conventional cars. In a severe recession, demand for new vehicles overall will soften, and for expensive vehicles, even more so.

Of course, there are already subsidy programs of various types for green vehicles, and the recently proposed stimulus package includes $200 million for grant program for electric vehicles. But this idea is meant to encourage people to book orders now, so manufacturers can book revenue in 2009 and invest in production in 2010 and beyond, essentially a way of breaking the bottleneck that’s caused car sales to drop like a rock this past year.

One way to get around this chicken-or-the-egg dilemma is to create a rebate program where customers can book orders for electric and serial hybrids for future delivery, with the government providing a substantial subsidy to encourage consumers to book orders. The program could work something like this:

  • The customer books an order, making a small downpayment that may be spread over the time from order to delivery, zero down if they have good credit.
  • The government pays 25 percent of its rebate to the car manufacturer on signing, the remaining 75 percent on delivery.
  • The customer starts paying the remainder of the balance on delivery, of course, and has the option to transfer the order to someone else if they are unable to afford the vehicle at delivery.
  • The car maker’s risk of producing too many vehicles is offset by the initial 25 percent payment (although this risk is probably minimal since these vehicles will still be in scarce supply relative to other classes).

The logic here is to encourage people to book orders for vehicles that will not be delivered in quantity before 2010 or later, but also not defer the decision because they are unable to buy a vehicle now or are concerned that they may be out of work in the future. A program like this would be a simple way to jump-start orders, finance investments in electric and plug-in hybrid vehicle production, and immediately put people to work in the auto industry. It would also give auto companies the ability to forecast actual demand for these vehicles, and encourage them to accelerate their migration to electric/hybrid platforms. What it would not do is reward them for simply doing more of the same — the biggest risk of any blank-check approach.

The auto industry can and should become more like that of technology. Rewarding technological innovation like this could do a lot to push the industry in the right direction while encouraging the car companies to invest in facilities and people in the near-term to ramp up for mass production when the economy recovers in 2010 and beyond.

  1. —The challenge, then, is how to stimulate car sales without rewarding bad decisions.—

    I believe the key is to let the assets of U.S. car companies to be taken over by the more efficient auto manufacturers. These companies have proven themselves in efficiently satisfying consumer demand.

    If this is not done, then the U.S. car companies are being artificially rewarded.

    Government is surely not in the business of forecasting supply and demand…Sadly, they’re in the business of redistribution…

    Forecasting consumer demand should be left to the car companies who have not made poor decisions and have a proven record or successful anticipation.

    Government merely transfers funds to politically favored companies. Under the Bush Administration it was companies like Haliburton, etc.

    Under Obama, it will be a different group of politically connected “green” companies. This is hardly worthy of being called “change.”

    The results will be the same as always.

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  2. [...] Malik | Monday, January 19, 2009 | 9:35 AM PT | 0 comments How to give Auto industry a stimulus and not a handout. [Earth2Tech] How do you know that you are doing too many things? [WebWorkerDaily] Sezmi wants to [...]

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  3. This plan only works for people who purchase a vehicle out of comfort not out of necessity. If someone lost a car due to vehicle failure, collision, etc. that person needs a replacement vehicle immediately in order to continue with his/her daily life. Placing an order and waiting 1 year–or even 1 month–won’t work.

    So, considering that this plan only works for people who buy a vehicle out of comfort, I ask the following: Why should the government provide an incentive program only for people who are in a better position than those who are forced to make on-demand purchases due to financial necessity?

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  4. “While much of the blame rests with Detroit for building mediocre products”

    Faulty premise. Every auto manufacture in the world bar Rolls Royce and Lambo have suffered catastrophic drops in sales volume. It’s called OVERCAPACITY!

    Think about it, why the hell do we need to replace cars so often? A large % of that is to ‘keep up with the jones’ rather than the vehicle becoming unusable. The bad news is that auto over capacity has lowered prices so much at the low end of the market that it has all but killed resale values in the second hard car market making it more expensive to trade ‘up’. Combine that with the evaporation of “buy-now-with-no-proof-of-income” finance which helped the new car market extending itself further down the social economic ladder and you have a stalled market.

    Most car purchases are not from necessity, it’s exactly like the PC market where everyone already has a PC that works fine and the trend is to buy new form factors (laptops, smartphones). What’s new about current cars? Absolutely nothing.

    There has been so much news about EVs that IMHO everyone is waiting for them before making any decision to replace their current car. With the ridiculous nature of the fuel market who can blame them. EVs will help automakers to have sales volumes like the iphone.

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