Now that the Federal (Feds) government had already provided GM and Chrysler with $13.4 billion to support their operations though the first quarter of 2009, the questions confronting the new Administration is how many more billions would be needed to help both companies flow again. All eyes are now aiming at monitoring the outcome of such a huge bailout program. Although it may be too early to predict the effectiveness of such a rescue program, primarily information from the even bigger bailout funds loaned to the financial institutions seem indicate that much more rescue money would be needed to help the Detroit big-three to survive the worst recession since the World War II.
In 2009, the Feds kicked in $2 billion initially in "cash for clunkers" program. The program, which initially ended on August, offers the consumer to buy a new car, priced at $45,000 or less and rated at least 4 mpg better than the old one (gets a $3,500 voucher). If the new one gets at least 10 mpg better, you get the full $4,500. The popularity of the program caused the Feds to extend the program to November with additional $2 billion added to the pot.
Despite the overwhelming responses to this program, most observers concluded the program had very little impact on the domestic auto markets, and had little help to GM and Chrysler. Ford is probably the only one seeing some benefits from this program. The main reason is current bailout programs can be characterized as the supply pushing programs. Money is injected into the suppliers in hoping for them to come up better products to generate needed cash flow quickly. Unfortunately, for GM and Chrysler, it may be too late and too little to have any significant impact on the bottom lines of these companies. Unless the Big Three can come up with the cars that the consumers wanted quickly, and the consumers are willing to spend tens of thousands dollar to purchase them, it is unlikely the billions loan to the industry would yield the desired results.
CONSUMPTION INDUCED BAILOUT
To be more effective, the bailout programs may have to focus on the demand side of the market instead of the suppliers. In our opinion, money should be spent to induce the consumption of the targeted products - i.e. the cars already assembled by the Big Three and are sitting in the Dealer's lots as well as the cars to be made in the near future. The catch is to convince the consumers to open their now tightly guarded wallet to purchase the cars that may jeopardize their financial security during this severe recession period.
We believe the consumption induced bailout programs can help solve several issues confronting the Feds. These include the job creation, energy independence, and obviously the future of the Detroit's Big Three. We'll explain how these critical issues could be alleviated, if not fully resolved with the consumption-induced bailout programs in details.
OBJECTIVES TO BE ACCOMPLISHED
1. Job creation
The Feds could offer the stimulus programs to subsidize the car buyers to purchase the car that is assembled in the US with certain percentage of domestic components. For example, if the consumer would like to purchase a new car which is 100% made in the USA (i.e. all parts are made in the USA, and the car is assembled in a domestic factory). Then the government may offer a purchase credit of, say $10,000. With such a hefty subsidy, bank would have less risk when a loan is issued to the buyer, and more consumers would be able to afford buying a new car. The amount of subsidy would reduce for the cars which were made with less than 100% of the domestic components. The subsidy would be eliminated for the car which is made with less than 50% of domestic components.
To benefit from such stimulus program, the car makers would have to increase their domestic manufacturing activities, and motivate their parts suppliers to have their products produced domestically. …