General Motors and "Quite Ugly" – part one

No, not the Pontiac Aztek.
 
The new car sales picture.
 
When asked last week about the economy by TopSpeed.com, GM’s CEO, Rick Wagoner – referring to various political proposals for economic stimulus – said he thought things would get somewhat better, but then added “or it could get quite ugly.”
 
It’s looking more and more like “quite ugly” is what’s happening.
 
Everywhere you turn, people are predicting a recession. In the opinion of may, it’s already started. The psychology of the buyer is, of course, part of this – and that’s not good news. Increasingly, it appears that the expectation of buyers is that times are going to get worse before they get better. It’s an expectation based on the current fallout from the “subprime” mortgage crisis and fueled by a profound distrust of America’s politicians.
 
Indeed, the politicos are only pouring fuel on the flames. The vocal insistence of every politician that the economy needs a “shot in the arm” to get it going again merely confirms what the public believes: that things are going to get worse. That “shot” appears likely to be in the form of a tax rebate. History tells us that such rebates are saved, not spent, so they’re futile except as a gesture by the politicians.
 
When you know the economy’s headed South, what’s the one thing you don’t do?
 
You don’t buy a new car.
 
Maybe you don’t buy a new car because you’re worried about your ability to pay for it. Or, maybe you know you can afford it, but figure you’ll get a better deal if you wait a couple of months.
 
Either way, though, you don’t buy a new car.
 
Which means that things are more and more likely to get “quite ugly.”
 
But what, exactly, is “quite ugly?”
 
“Quite ugly” is a shake out in the consumer credit markets that makes the “sub prime” mortgage crisis look like a walk in the park. 
 
It’s what the car makers all know, but don’t even want to think about, it’s so scary.
 
It is what the politicians should be focusing on, right now. They’re not, though. They don’t even see it coming. They’re dithering over whether or not to rescue Joe and Jane Doe from their upside down mortage. But, that’s old news. The real problem is that Joe and Jane are upside down on their 2.3 cars, too. Very upside down. 
 
So, too, is the entire auto industry, foreign and domestic.
 
That includes Toyota and BMW.
 
Indeed, BMW is one of the companies most at risk. Of all the car companies in the world, BMW more than any other has built its sales on a Ponzi scheme of residual value which is very vulnerable to an economic downturn.
 
So, if you’re thinking of a new or used BMW – best you should wait. There are bargains galore to come.
 
Now, I know that some folks get offended any time I mention “Ponzi scheme” and BMW in the same sentence. It’s as though I were suggesting that BMWs are a fraud. That’s not the point. Quality cars, though often unattractive. 
 
It’s their pricing that’s the fraud. It’s been artificially inflated, so that the company could sell more cars. Cleverly done, but ultimately impossible to sustain.
 
Here’s why:
 
I had the opportunity at the Detroit auto show to sit down with the general manager of a General Motors division and speak with him about the credit picture of his customers. I asked what percentage of his division’s new cars were leased, and what was the typical length of installment contract on those which were sold. I pointed out to him the numbers reported in the Los Angeles Times: that the average new car buyer was obligated for $4,000 more than the value of the car being purchased, before depreciation, and that the typical new car loan was for a term of more than six years. 
 
I suggested that the auto industry had been using cheap money to subsidize new car sales by propping up used car prices.
 
He didn’t want to acknowledge that this was a problem for his division.
 
But then he made a remark, one made with a very quiet tone of voice that almost concealed the relish with which it was spoken: “Of course, ____ at BMW invented that.”
 
The implication was clear. To compete, other car makers have been obliged to meet BMW’s terms. 

But, some car makers haven’t been able to compete, no matter what the price, because their products weren’t inhere
ntly as attractive. Now that the competing brand has a product which is as attractive, maybe more so, a tanking economy is going to hurt BMW much more than its American competitor.
 
Why that will happen is Part Two.