That the crisis would dramatically reshape the financial intermediaries’ landscape seems pretty obvious. Indeed, it is where the crisis started. That the car industry would face similar challenges was rather surprising, but only at a first glance.
Founded in 1923 as an equity-trading house, it survived the 1929 stock market crash without laying-off a single employee. It grew steadily and managed to become the most admired securities firm by 2005, according to Fortune magazine; a title it would hold until 2007. In March 2008, it disappeared, becoming the first major US casualty of the unfolding financial crisis. Everyone will have recognized Bears Stearns, once a proud Wall Street name.
Founded in 1926, when it came to cars it was considered by many buyers to represent a smart mixture of luxury, safety and economy. It rose to international fame in the early 1980s, when one of its models, the Trans Am, played the main character in a very famous TV series called Knight Rider. In November 2009, it became the most prominent victim of a refocusing and downsizing of General Motors’ operations. Many will have recognized Pontiac, once an icon of US car making.
One can find many reasons why automobiles would be hit as hard as banks globally and especially in the US. First and foremost, the sector was and continues to be characterized by huge overcapacities in the mature and saturated automobile marketplace. Second, the tremendous increase in gasoline prices just before the financial crisis unfolded found US carmakers on the wrong foot. Having focused for years on cars, which were not at all fuel efficient, they could not respond to a rapid shift in demand. Lastly, several car manufacturers needed to be rescued big time by governments over the past few years. So here, like in the banking industry, a moral hazard issue has arisen.
With the current crisis, the problems of the car industry remain unsolved. Again governments felt the need to intervene, this time on a rather large scale. According to the New York Times, which has tracked the US Trouble Asset Relief Program (TARP) of USD 700 billion, almost one-seventh of it was spent on US automakers in the form of direct injections of cash. Much more money was put on the table, not only in the US but also elsewhere in the OECD, in the guise of “cash-for-clunkers” subsidies. Although this was a temporarily relief for the industry in 2009, the payback (i.e., fewer cars sold this year because too many were sold last year) is now the biggest threat to the mass car market and likely one of the most discussed topics at the 80th international motor show in Geneva.
If one takes a very long perspective, one can ultimately see the car industry in a similar position as the agriculture sector. Many governments around the world consider it worthwhile to preserve national champions despite them no longer being very competitive. If this interpretation bears some truth, then the latest crisis in the automobile industry is by far not the last one.
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