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High-MPG car inventory dwindles

By Claes Bell, CFA · Bankrate.com
Wednesday, May 11, 2011
Posted: 1 pm ET

Just in case you were wondering, the laws of supply and demand are still in effect. As I predicted last month, a combination of factors, including the earthquake in Japan and rising gas prices, is causing a fairly serious shortage of small cars, leading to higher prices and diminished selection for small-car buyers, according to an article by Brent Snavely and Greg Gardner of the Detroit Free Press:

A healthy level of car inventory is considered 60 days' worth, but many automakers have half that amount, especially of the most popular models.

Ford has just 31 days of the Fiesta, the most-popular subcompact on the market last month. "If we run another month this way, then it gets really serious," said Bob Page, owner of a Toyota store in Southfield.

The shortage led car incentives to decline 15 percent last month. Toyota, Ford and General Motors have already said they are raising prices. That, of course, will improve the profitability of small cars, which now account for one-fourth of all vehicle sales.

And if you have your heart set on one of the most effective gas-price fighters, the Toyota Prius, prepare to hunt around a little to find one:

Stocks of the Prius hybrid are at 10 days' supply, near the lows reached during the summer 2008 gas-price spike.

A shortage of new Priuses couldn't come at a worse time for car buyers. According to the latest numbers from CNW Research, the percentage of new-car shoppers considering a hybrid rose from 19.5 percent in January of this year to 31 percent last month, and the average premium they were willing to pay to own a hybrid rose from $405 to $601.

But if the current auto shortage seems bad, I want you to take a second to consider a counterfactual scenario. Whatever your views on the proper role of government in the economy are, take a second to imagine what would be happening now if GM and, to a lesser extent, Chrysler had been allowed to fail.

I had a conversation with a close friend who's well acquainted with manufacturing and economics around the time the auto bailout was taking place, and he raised a key issue: the massive vacuum a collapse of two of the Big Three would create in the auto industry. Even though GM and Chrysler sales had been lagging for years, they still accounted for millions of autos sold every year. Sure, foreign automakers and Ford would have eventually ramped up production to fill the void. But just as downsizing in the auto industry is expensive and time-consuming, increasing auto production takes massive amounts of capital and labor, both of which take time to mobilize.

So imagine how much more painful the Japanese auto shortage would be for American car buyers if there were no Chevy Cruzes or Chrysler 200s to fill the void created by a lack of Corollas and Camrys. Instead of relatively minor inconveniences such as losing out on auto incentives or having to buy a car that's not the exact color they wanted, American car buyers would be looking at massive delays, severe shortage pricing and all kinds of other hardships. And instead of those hardships going away by late June or July, as we're looking at now, it might have taken far longer for new-car inventories to get back to normal.

What do you think? Car buyers, have you seen higher prices on small cars at the dealership? Would the current auto shortage be more painful in a world without GM and Chrysler?

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1 Comment
Dr. Evil
May 11, 2011 at 4:30 pm

Dear Claes,
As you probably know, Hummer was bought by the Chinese and I do not think that they would thought twice before buying if the BIG 3 went for sale. The reason why the auto industry was salvaged by the government is that this branch is seen by the consumers as a "genuinely American", if not the last American manufacturing business. To make my point, I think it would have been increasingly awkward to market, let's say, the Ford F-150, which for some reasons, that escape me entirely, is the pride and glory of the American auto industry, made by a Chinese owned company.
In the end, you have to remember that the Big 3 went down because of their own crass greed like their brothers from banking industry.
Regards,

Dr. Evil.