Saturday, December 13, 2008

The Biggest Sale in the History of Automobiles

“How long can GM really hold out?” That’s a question on people’s minds this weekend, especially around Detroit. And I doubt anyone, even inside the accounting department at GM, actually knows the answer. The White House seems less confident by the day when it considers the prospects for a Detroit bailout, and by this afternoon it had been reduced to looking for options. Probably some kind of financial support will come through, but nothing close to the $120 billion General Motors probably needs to finance its turnaround.

At the risk of sounding glib, it seems to me that what GM needs, and perhaps Chrysler and Ford too, is an emergency cash-raising sale. The trouble with that is that the appearance of desperation could drive many potential buyers away. But I think there are two gimmicks in the current situation that automakers could use to convince consumers that this is an especially good time to buy a car.

The first is the possible need for the automakers to qualify for the loans they might be getting from the Treasury. Automakers can use this to suggest to consumers that they are forced to liquidate their excess inventory to qualify for the special loans they are getting. The second is the possibility that the automakers’ financial arms might get some liquidity support from the Wall Street bailout fund. Automakers can use that possibility to suggest that, thanks to the government help they’re getting, new low-interest-rate financing is easier to get than before.

This works best if the automakers actually do get at least a token amount of this kind of financial support from Washington. On the other hand, the automakers may be able to mount the biggest sale in the history of automobiles even if there isn’t any money coming from Washington. The news on the subject is so confusing that no one can say for sure whether the money is or isn’t on the way. And if there is advertising money in it, the television news people can make the bailout seem real whether anything is happening or not.

I don’t really know how well an inventory reduction sale would work right now, but I know all automakers have at least a little extra inventory right now, and the size of GM’s extra inventory is positively frightening. If they can find a way to sell off some of that quickly, it could give them five or ten more weeks to figure out what to do next.