Detroit’s dan­ger­ous road • A U.s.-canada cli­mate pact doesn’t do enough

The in­dus­try must end its de­pen­dence on sales of gas-guz­zling light trucks and sub­prime loans

Bloomberg Businessweek (North America) - - News -

It’s true, as Hil­lary Clin­ton boasted, that 2015 was “the best year that the auto in­dus­try has had in a long time.” Amer­i­cans bought 17.5 mil­lion cars last year, break­ing a 15-year record. But th­ese rosy sales fig­ures hide an alarm­ing truth: The boom is be­ing fu­eled by many tem­po­rary fac­tors that could put au­tomak­ers in the same vul­ner­a­ble po­si­tion they found them­selves in seven years ago.

The most ob­vi­ous of th­ese is the price of oil, which dropped below $30 a bar­rel by the end of last year, low­er­ing the pump price by nearly a dol­lar since 2014. While low gas prices don’t nec­es­sar­ily lead to in­creased auto sales, they do in­flu­ence the type of ve­hi­cles Amer­i­cans buy: pick­ups and SUVS rather than fuel-ef­fi­cient sedans. The cur­rent sales boom has been driven al­most en­tirely by such light trucks. When oil prices inevitably rise again, the same SUV ad­dic­tion that laid U.S. car­mak­ers low in the 2000s could threaten them again.

Car loans are an­other red flag. Con­sumers have been able to af­ford them largely be­cause in­ter­est rates are low, but th­ese rates, like oil prices, can be ex­pected to rise. The au­tomak­ers’ fi­nance op­er­a­tions have also be­come in­creas­ingly de­pen­dent on the sub­prime mar­ket; al­most one out of five new auto loans are be­ing made to bor­row­ers with low credit rat­ings. Lend­ing money at high rates to peo­ple who may not be able to re­pay is a recipe for disas­ter, as the hous­ing bub­ble demon­strated. Delin­quen­cies on sub­prime car loans that have been bun­dled into bonds have al­ready risen to 4.7 per­cent, the high­est rate since 2010.

What’s more, au­tomak­ers have been goos­ing sales by of­fer­ing ever-longer loans with lower pay­ments, push­ing leases that count as “sales,” and dump­ing sedans onto rental car com­pa­nies and other bulk buy­ers. Last year th­ese low-mar­gin fleet sales rose more than 6 per­cent—help­ing com­pa­nies meet fed­eral goals for fuel econ­omy in spite of grow­ing light-truck sales.

De­spite th­ese dan­ger signs, the auto in­dus­try can avoid an­other cri­sis—if it po­si­tions it­self for eco­nomic head­winds and for the tech­no­log­i­cal change that stands to rad­i­cally re­shape the car busi­ness.

Mostly this is a mat­ter for the au­tomak­ers them­selves, of course. They should, for in­stance, in­vest in more flex­i­ble pro­duc­tion sys­tems, as their Ger­man and Ja­panese com­peti­tors have. Detroit also needs to bet­ter pre­pare to com­pete on both elec­tri­fi­ca­tion and au­ton­o­mous ve­hi­cles.

The govern­ment’s role should be to stand firm against in­dus­try ef­forts to ex­ploit loop­holes and wa­ter down fuel-econ­omy stan­dards when they’re re­viewed next year. It should pres­sure au­tomak­ers to plan for bank­ruptcy or re­struc­tur­ing in the event ei­ther one is needed. Nei­ther Gen­eral Mo­tors nor Chrysler had such liv­ing wills be­fore tax­pay­ers bailed them out in 2009.

To read Narayana Kocher­lakota on the real rea­son to worry about China, and Justin Fox on free trade, go to


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