Credit squeeze easing, but consumer confidence remains low

Rick Wagoner is unexpectedly laconic for a man in his position. Addressing two sessions of journalists from around the world at the North American International Auto Show (NAIAS) in Detroit last week, he admitted to being surprised by the hostility directed at him and other Big Three CEOs over the corporate jet pilgrimage to Washington.

When asked by one journalist whether he became so frustrated in his job that he went home and kicked the cat, Wagoner laughed, before replying: "It's probably good for them that we don't have any [cats]".

Laconic he may be, but he's facing the biggest challenge any GM CEO has ever had to address. Wagoner admits that the projections for the first half of this year are not looking good, but he does expect a rescue package to be forthcoming for the 'Beleaguered Three'.

Labouring under a set of adverse circumstances -- most of them beyond his control, he explained to the media -- Wagoner has nominated four GM brands that either must be sold or restructured; he has fast-tracked product development for the Chevrolet Volt (a car that carries the hopes of the entire corporation on its shoulders) and he is engaged in on-going talks with the United Auto Workers (UAW).

Yet it's not enough to ensure that GM will survive and regain its position as the pre-eminent car maker in the world. Wagoner paints a picture of an American automotive industry that sounds like it caught the measles while recovering from a cold.

"The down-cycle in the industry, profoundly in the US, but now also in the rest of the world highlights the fact that the inherent profitability in the industry is not very good," he told the assembled journalists.

Plainly, greater profitability would have helped the industry stave off the difficulties arising from the subprime mortgage fiasco and subsequent credit crisis. And Wagoner is quick indeed to lay the blame for the current situation anywhere but at the door of the automotive industry.

"The problem in the global economy is driven by two things: the housing crisis -- which was fuelled by low-cost credit and poor lending practices in that sector -- followed on by the biggest crisis in the financial sector in seven years and again, driven by lax regulation and oversight...

"When you look at what happened to us -- even with oil prices at 147 bucks -- we had a plan that we were going to get through this and restructure and be in pretty good shape, but then the bottom fell out of the market."

Wagoner can more or less prove his point by citing GM's share price, which "soared to 42 bucks a share" about a year ago. This was despite the UAW issue, the rising fuel prices (around US$4 a US gallon) and the perception that GM's model range was top-heavy with pick-ups and traditional (non-crossover) SUVs.

"I think it's somewhat remarkable -- with what we've gone through in the last six months -- we've been able to show you the product... and the technology today, despite all the diversions..."

With all the portents against him, how does Wagoner foresee 2009 shaping up? Not all that well, as it turns out. Certainly, there's enough data to suggest that the first six months will be hard.

"It's going to be pretty tough," Wagoner acknowledges. Worse, he can't really say whether there'll be much improvement in the latter half of the year. For a market of 16 million new vehicles, the overall forecast remains bleak.

"What we said is that the downside scenario in our submission in early December for next year was 10½ million units for the year... And that submission actually had a little less than 10 million units [adjusted] in the first quarter...

"I can't speculate on whether 13.4 [million] is all we're ever going to beat or not... I just don't know at this point."

Wagoner is also unsure what will principally be the underlying factors behind a continuation of the current market slump. A rescue package from the government may give the car companies and their customers some hope that a new-car sale now won't turn to disaster, but Wagoner doesn't care to speculate on whether the crisis in consumer confidence or readily available credit drying up will have the larger effect on buying patterns over the next 12 months.

"Will [A government-funded rescue package] have a significant impact on consumer confidence, which is to date probably the biggest issue; even bigger than credit availability? I'm not clear on that, so hope for some improvement in the second half of the year..." Wagoner muses.

Consumer confidence and credit availability are the 'chicken and egg' argument rewritten for the automotive industry in the US -- except the question is one of priority rather than precedence. Wagoner is probably correct that consumer confidence is a more immediate concern for the automotive industry, but lack of easy credit has been a large contributing factor in consumer confidence being so depressed in the first place.

Certainly, while in the US for the NAIAS, Aussie journalists noticed that easy credit has become a lynchpin of Toyota's current TV advertising campaign -- and Toyota will tell you that credit has been just as much of a hot-button issue for that company's sales in the US as it has been for the Big Three.

With GMAC obtaining 'bank' status and consequently eligible for 'TARP' (Troubled Assets Relief Program) to bolster its on-going operations, credit for GM buyers has become more accessible once more. Indeed, immediately that GMAC learned of its entitlement to assistance through TARP, it announced zero per cent finance for new-car buyers, frustrating many of the free-market warriors in government -- those of the view that it was this sort of lending strategy that placed the corporation at financial risk in the first place.

Nevertheless, it does at least appear that credit is no longer the same hurdle to new-car sales it was just a few months ago. A lack of consumer confidence is the inevitable outcome of more stringent lending criteria, but as we've seen with Mitsubishi here in Australia, talk of a car company 'going under' can also erode customer support for a car company -- and in the US, there's been little else but talk of GM going to the wall.

At least with the government rescue package, there would be hope -- for both the company itself and consumers -- that a new-car warranty would be honoured for the full term and there'd be a dealer to service the car after the purchase.

Whether consumers, some of whom have had their fingers burned the once already, will regain the will to buy a new car in the face of the massive economic downturn is the question now for car companies.