Monday, July 6, 2009

Downfall of American Automotive Industry: To Lease or Buy?

I really feel sad for the automotive industry. Once it was the pride of American manufacturing but today it is dealing with an unprecedented upheaval which could decide if America even retain a tiny share of car sales around the world.

Detriot's Big Three is already whittled down to Ford, while Chrysler and General Motors are in the midst of bankruptcy proceedings and have been ordered to sell off their assets.

A lot of Americans (workers, dealers, suppliers and investors) are left on the ropes when these well-paid top management fail to recognize shifting winds in consumer trends.

The era of cheap fuel is over and Americans are facing a double whammy of lower income and credit crunch, yet the Big Three continue to build big gas guzzlers like Hummers. Just imagine the energy inefficiency when such heavy vehicles travel thousands of miles with only one passenger in tow.

As sprawling manufacturing plants spring up everywhere, the demand-supply equation became so skewed that General Motors and Chrysler can no longer sustain their business model and have to depend on taxpayers' money since last year. There were also unsustainable wages and benefits (health insurance and pension contributions) which compounded the crisis.

Not surprisingly, change has to come, and the Obama administration deserves credit for refusing to bail out an uncompetitive industry. Taxpayers cannot fund the operating expenses indefinitely and foreign car makers from Japan, Korea and China (especially the ultra cheap made-in-China "Cherry" automobiles) are chipping aggressively in the domestic market.

During this consolidation period, cars will keep getting cheaper in order to entice consumers to absorb the oversupply. Is it a good time to buy a new car or to lease one? Which approach can actually help us to save more money?

I will discuss this issue in a later post.