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

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

Bloombergview.com

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