GM (GM) Plans To Get Government Aid, Cut Car Prices, And Lose More Money

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The Administration appears to be ready to give GM (GM) and Chrysler more money. According to The Detroit Free Press,  the car companies are about to get further aid in the form of more government loans. The paper says that “President Barack Obama’s automotive task force doesn’t see bankruptcy as the best solution for the industry’s woes.”

How will GM use the money it will probably get from the government? It will cut prices on its cars so that it can lose more money.

The FT writes that “General Motors is preparing a fresh barrage of discounts and other promotions to coax Americans into buying more cars.” The No.1 American car company can take a loss on each auto it sells and make it up on volume.

The new discount plan shows that, even with more loans, Detroit may be stuck in a twilight zone from which it cannot escape. Lack of consumer demand has driven up inventories. Dealers are going bankrupt because few customers come to their showroom. To cut the supply of unsold cars, GM almost has to give tremendous incentives to turn reluctant consumers into interested buyers.

The one thing that the government cannot do is solve the new car demand problem. Potential car buyers are worried about their jobs and access to credit. They can decide to make modest repairs on the cars that they own and drive them for another year or two. That may keep the number of light vehicles sold in the US under 12 million a year until 2011 or 2012. That level is not likely to support a profitable Detroit even after The Big Three take out a tremendous amount of their expenses.

In an odd way, the government’s support of GM and Chrysler may hurt the overall economy more than it helps. Consumers now have another opportunity to buy cars that they cannot afford with loans from banks that they cannot pay. It is a clever way to drive up the default rate.

Douglas A. McIntyre