Everything I have warned about in my earlier blogs is beginning to materialize.  Businesses need to shrink and are shrinking (we see it on the news every day – it is becoming routine) to support the level of sales confronting the new economy.  The American automobile industry, like every other industry that expanded dramatically, (GM, Chrysler and Ford) is going to have to change drastically if they are to survive.   Also, no amount of bailout money is going to help the American automobile industry, if they continue along the same path.  I am strongly against as I am certain every American is, putting more of our good money to support the failed and inefficient automobile sector. 

Up until 2006, the automobile industry was swimming in a sea of money.  They were making a ton of money from their sale of gas-guzzling SUVs and trucks.  Now that things have turned the corner and they are instead drowning in red ink, they blame the consumer for buying those SUVs and trucks.  The automobile manufactures now claim "this is what the American people wanted."  In reality, the automobile industry did not give the consumer many choices to select from.  They came at us from every direction with all sorts of special incentives and low financing to attract buyers to their large vehicles because that’s where the bulk of their profits came from and they refused to manufacture small vehicles.

While the American car manufactures were (aggressively marketing their large vehicles) shoving their large vehicles down our throats, the Japanese and Germans were able to sell small cars in the United States, with very little special incentives provided and some provided none.

Let's face it and be realistic about the real problem with the big three.   One the biggest mistake they made was providing special financing, zero interest, and a bunch of other incentives, all designed to drive sales higher, thereby increasing revenues and profit today at the expense of tomorrow.  Now there are just too many vehicles on the road and since vehicles last much longer than they did even ten years ago, the market for new vehicles is basically totally dried up.  Further, to complicate matters for them we are in a total financial mess and it is going to take many years before sales of automobiles and other large ticket items begin to recover.

In the meantime, the big three are burning through money by the billions every month.  This is due to two main factors: 1) Too much capacity and, 2) Too many employees supporting a capacity that's not there and will not be for several years.   The big three are under the misguided illusion that by getting more money in addition to the $25B they will be getting from the government (our tax money) they are going to be able to start selling cars and survive.  So far they have done a very good job at convincing (or scaring the politicians) the government that they should get some $25B more and they just might get it.  The problem I see with the big three getting our money this time; unlike when Chrysler received money in 1980; is that we are not going to get it back.  In 1980, the government didn't lend any money directly to Chrysler; instead it guaranteed loans to the company made by private lenders, mostly banks, in the amount of $1.2 billion.  In return, the government received warrants to buy Chrysler stock at a very low price. When Chrysler staged its spectacular recovery and paid off the bank loans seven years early, the warrants soared in value and the government earned some $400 million.

There is not going to be any spectacular recovery by any of the auto makers this time around.  At least one of the big three if not two will fail even with the additional support from the tax payers.  While there were problems with the economy in the late 70s and early 80s, those problems were not of the magnitude we are experiencing today.

The American automobile industry as we have known them to be in the past will become history, if not already.  The government should allow one or all of them for that matter to go under. They are not competitive and have produced poor quality products since the very start.  The $25B or $50B should instead be spent to provide unemployment benefits and retraining to those that will be left without a job when the automobile companies and associated suppliers go under.  The automobile industry should not be rewarded for their failure to adopt to change.  Please read my other blogs: http://chaosinamerica.blogtownhall.com