From:
February 1, 2007
Article from Bloomberg:
http://www.bloomberg.com/apps/news?pid=20601103&sid=axcJdEYNcsY8&refer=us
In January GM and Ford sales plummeted, Ford falling 19% and GM 17% in a single month alone. The outrageous decrease in sales has led both companies to once again cut North American production once, for a combined total of 28 plant closings between GM and Ford. One strategy of both companies is cutting back sales to rental companies, such as Hertz and Avis to try and diminish the number of used cars being sold after the cars have been used for several years. Automotive analysist John Casesa claimed "...these are low margin sales. Those cars go to Hertz and Avis, then come back and wind up as used cars, undermining the selling of new cars." Which leads to the question, what are GM and Ford to do? First off, GM is cutting rental company sales 40% from 90,000 cars/year to 56,000 cars/year, and Ford is folllowing suit by cutting the sale 175,000 cars.
With a continually shrinking consumer demand, it is not enough for GM and Ford to benefit from limiting their sales to rental companies. To me, this is a dire situation that can only lead to both companies limiting their output and closing plants and laying off workers. When they do, it will only increase the demand for foreign vehicles (such as in the past ten years) until U.S. car companies are deemed unprofitable. This article reminded me a lot of one of the sample problems when we were studying comparitive advantage between countries. Which leads to the question, if no one wants to buy U.S. cars, why are we producing them still? and why is our country so bent on preserving the historical integrity of these companies when there's no profit to be made in producing them?
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The US does not have comparative advantage in producing cars, and the demand for foreign cars is much higher than US manufactured cars. It is hard for some people to face changes, especially those who are losing their jobs. You also talked about making decisions at margin.
That leads me to ask the question, why do people want foreign cars so much? Obviously, Ford and GM aren’t doing something their competitors are. Maybe they should take a look at how they produce their cars, prices, and sales. Honestly, I don’t understand why foreign cars are seen as spectacular these days. My little bug is a foreign car, and when it breaks not only do I have to drive to Janesville to get it fixed, but it also costs me a large amount of money to get it fixed when parts have to be shipped from overseas. The opportunity cost of a foreign car is high, at least for me (hence why my next car will be simple-like a Ford Taurus).
in response to the question "why do people want foreign cars so much?" i would have to say that to begin with, excluding opportunity cost, foreign cars tend to be cheaper. also, in a time of escalating gas prices, foreign cars often out-perform US cars in gas mileage, due to the much higher gas prices everywhere else in the world. and, lastly, US auto companies spend lots of time and money producing huge trucks and SUVs, which are fine when gas prices are low, but much more expensive currently. think about it, the vast majority of car commercials are for huge vehicles, and hardly anyone wants to buy Ford's gas-guzzler when KIA's economy car is so much cheaper and more fuel efficient.
Is there really NO profit in producing cars domestically?
Now, I know next-to-nothing about cars, but I do know that a great deal of Americans drive domestically made cars. Okay, and logically, I'm thinking a company (any company) would only stay in business if it were profitable to do so... thus leading me to the conclusion that domestic car companies ARE making a profit.
You're right, Rageena - there is a profit. It's dropped a lot lately, which is causing panic among the top domestic auto producers.
I think Domino has a really good point - fuel efficiency is really hot right now. And the top rated car in the US for the last...10?...years has been a Toyota. Weird, hey?
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