Things to Know About Cars
Steven Rattner, the financier, onetime journalist and recent “car czar,” has just published a book called Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry. This weekend, the Wall Street Journal published an excerpt, and if this snippet is a good indication, there is a lot of sensible, factual material to be read:
As I studied the industry, I learned that the car business had gone through a mini-version of the housing bubble. Auto financing had been abundant in the years leading up to the financial crash of 2008-for a brief period in 2006, buyers could borrow more than 100% of the cost of a new car! And because as many as 90% of consumers finance their new-car purchases, easy loans kept U.S. sales hovering around 17 million vehicles a year until gas prices spiked.
At the same time, substantial gains in quality and reliability were leading consumers to keep cars longer; all told, the number of cars in America rose by nearly 25% in the decade ending in 2007 while the driving-age population grew by less than 15%. The ratio of cars to licensed drivers, long greater than 1-to-1, continued to increase.
In 2008, of course, the wheels had come off. The collapse of the financial markets choked credit; rising unemployment and sinking house prices sapped household budgets; and summer brought $4-a-gallon gasoline, a particular disaster for the Detroit Three, with their anemic offerings in small cars.
And I came to appreciate why auto makers obsess about the total number of new vehicles sold each year (they call this the SAAR, the seasonally adjusted annual rate of sales). In effect, the SAAR is every auto maker’s speedometer. For any company with a competitive line of products in a business where fixed costs are high and market share tends to shift only gradually, total volume is the most important determinant of profitability. We’d started this project in the midst of the steepest fall-off in sales that the auto industry had experienced since at least 1950. By January 2009, the SAAR had collapsed to 9.6 million. Extrapolating from this trend, many pundits issued dire forecasts for at best a slow and meager recovery.
But looking at the big picture, I’d begun to feel more optimistic about the prospects for overall sales than I had at the start. The driving-age population was continuing to increase by more than 1% a year. “Scrappage,” or the rate at which cars were junked, had dropped decade by decade, from the 1970s rate of more than 7% a year to about 5.5%, which meant that the average age of cars on the road was increasing. Car buyers could put off replacement purchases, but not forever.
Our inquiries had led to another pleasant surprise: U.S. auto makers were no longer as pathetically inefficient as people thought. In 2007, the Harbour Report, an authoritative statistical source on auto-making, had found that the Detroit Three needed just over 32 hours of labor to build a car, versus 30 hours for Toyota. That represented a huge advance over 1995, when GM had been at 46 hours, Chrysler at 43, Ford at 38-and Toyota at 29. And given that the Big Three tended to make larger, more expensive cars, the narrowing of the gap was all the more significant.
Maybe we should bring Rattner in for a Q&A. What think, readers?
Also, in case you missed it last summer, here’s one account of the internal White House clash (Larry Summers vs. Austan Goolsbee) over whether Chrysler should have been rescued:
Mr. Goolsbee and Mr. Summers also clashed in March over whether to bail out Chrysler and ease its merger with Fiat, or to let the automaker fail.
Mr. Summers, along with Mr. Geithner and the political advisers, favored giving Chrysler a second chance. “My judgment, and Tim’s judgment, was that given all the equities involved, and given the potentially traumatic effects on confidence, that it was much better to try to save Chrysler if a reasonable merger agreement could be reached,” he said.
Mr. Goolsbee argued that rescuing the financial system was one thing, since credit is the economy’s lifeblood, but the government should not run an auto company. Saving Chrysler, he added, could further harm General Motors, which stood to gain market share.
The arguments became so heated that Mr. Summers stormed from one meeting, a witness said. While he later included Mr. Goolsbee’s objections in a memorandum for Mr. Obama, he excluded Mr. Goolsbee from the decisive meeting with the president.
There, Mrs. Romer expressed the objections from the Council of Economic Advisers, but made a point of naming the absent Mr. Goolsbee. That prompted Mr. Obama to ask, “Where is Austan?” He had the aide summoned to state his case, in what some aides took as a rebuke to Mr. Summers. The discussion continued that evening, and Mr. Obama decided on the course Mr. Summers supported.
Mrs. Romer, the only woman among the top advisers, said that Mr. Summers, as a fellow economist, had been “incredibly inclusive” and “listens to the economic arguments.” Their clashes have come when he takes a more political view.