Auto Market Recovery Seems Peculiar

This presentation was first placed on the Internet in late 2010.

There are many aspects of the amazing recovery of the American car manufacturers that seem to defy logic.

In early 2014, many news reports seem to be confirming my 2010 concerns expressed in this web-page. On April 19, 2014, a news broadcast said that 88% of all General Motors automobile buyers in recent years have been given by GM to people who have horrible bank Credit Ratings, below 640. In other words, people who are in worse financial shape than the millions of people who defaulted on tricky home loans around 2008. Millions of people who seem virtually certain to default on their GM car loans, where enormous numbers of nearly new cars figure to be Reposessed soon by GM. In addition, General Motors has been found to have ignored safety recall concerns for as many as ten years, where GM has only recently announced safety recalls for many millions of their vehicles on the roads. Unbelievable! How can ANY company afford to confront these many problems, especially a corporation which seems to have fictitious finances?

For several decades, all three American car manufacturers had struggled with commitments of many billions of dollars regarding the Pensions of millions of prior employees. Both GM and Chrysler declared Bankruptcy in early 2009, which released them from having to honor those millions of Pension payments to retired employees. Given the clearly hopeless status of both of their corporate finances, having consistently lost billions of dollars every Quarter for years, the logical result would have been that they both were liquidated and disappeared. But that did not happen. Only a few months later, both GM and Chrysler were allowed to come out of Bankruptcy. The news did not mention it, but it seems extremely likely that all those millions of prior employees must have suddenly lost all their Pensions, as that was one capability during the Bankruptcy process.

For many years, all three American car manufacturers have been offering amazing incentives to customers to buy their (American) cars, such as eliminating down payment costs, eliminating monthly interest charges, increasing the 36 month long payment schedule to 60 months and 72 months, announcing giving many thousands of dollars in rebates for the slightest possible reason, and more. These things have cost the car manufacturers astounding amounts of money! For many years, GMAC generated far greater profits and cash flow than the General Motors manufacturing did, by carrying millions of car payment contracts which collected 10% or 12% or more in monthly payment interest. In a 36-month contract, that interest was commonly $15,000 quick profit for GMAC, and when 10 million vehicles were being carried, that means $150 billion in extra profit, which GMAC no longer receives!

But there are other strange things happening! Both GM and Chrysler say all the time on the news that they are selling enormous numbers of vehicles and making enormous amounts of profits. The Third Quarter and Fourth Quarter of 2010 were described as being the most profitable Quarters in many years.

That would be wonderful if it were true. But I have made a point to eat many lunches and dinners near enough to various car dealerships so I could see the huge numbers of customers that must be in the showrooms. But I virtually have never seen more than a single person or family actively looking at the vehicles, and most of them struck me as being more window shopping rather than actually buying.

A related issue also seems important. For millions of people to be placing orders for new vehicles, doesn't it seem necessary that those customers have reliable jobs, such that they could make the payments? But it is well publicized that Americans have saved extremely little, and it is also well publicized that something like 15 million homes are now worth less than the Mortgage on them, that they are described as being under water. So if 15 million Americans do not currently have jobs and are actively looking for work (to qualify for unemployment checks), and around another 15 million are now working part time at minimum wage jobs, and millions more are not even counted because they gave up hoping to get a job so they are no longer counted as trying, then WHO are the millions of people who are supposedly buying all the new cars?

(It IS recognized that millions of recently rich Chinese people have been buying American cars, which accounts for a good amount of profit.)

Yet another related issue is that nearly all TV commercials now aggressively promote: no money at purchase, many thousands of dollars of rebates or whatever, AND 60 months or 72 months WITH NO INTEREST. For even ONE $35,000 vehicle, over 60 months, that represents around $15,000 of interest income that the car manufacturers are conceding, just to get some sales.

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One gets the impression that if they can just get a customer to sign a contract, their Accountants consider that as a new asset on their books of the entire value of the vehicle. Isn't that EXACTLY what bankers had been doing during the sub-prime catastrophe in the housing market? Where few of the customers who signed the Mortgage Contracts had any realistic chance of actually paying it off? Yet, the Banks immediately treat each such signed contract as a full value asset, which made their apparent profits spectacular? And we are seeing both GM and Chrysler bragging about spectacular (alleged) profits now? What is wrong with this picture!

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Does no one give any thought to the financial survival of those companies beyond the current Quarter? In order to be able to OFFICIALLY make any sales at all, they are having to tell all customers that they will get many thousands of dollars back, along with not having to ever pay any interest charges for the many years! These are actions of companies that are committing financial suicide!.

It gets even worse!

For the past sixty years, those American car manufacturers have always counted on selling MILLIONS of new vehicles to the tens of thousands of Municipal governments, as well as to the tens of thousands of local Police Departments, as well as to each of the governments and police of the 3,000 Counties and 50 States. All at straight RETAIL PRICES, without all those Rebates or reduced interest payments!

But virtually ALL those governments are now struggling with trying to avoid Bankruptcy. Are ANY of them likely to be buying dozens of brand new Police cars or dozens of brand new SUVs for all their city employees to drive around in? How could they? More than that, THOSE vehicles have always been sold at STRAIGHT RETAIL, where the manufacturers made the greatest possible profit (where all regular customers now EXPECT to be offered $5000 rebate and all the rest.)

So by far the most profitable sector of their market must certainly VANISH for several years, as all those governments and police departments will instead repair the vehicles they already have.

If this all represents around two million vehicles, that is close to 1/4 of all vehicles that those manufacturers make and sell in each year, at maybe an average of $30,000 (retail) each, isn't that around SIXTY BILLION DOLLARS OF SALES which will not exist for the next several years?

So how could GM and Chrysler be bragging about making many billions in profits? It makes no sense.

It actually does, but in a dark sense. THEY KNOW that they must CONVINCE the American public that they are fine and roaring along, so that the public might decide to buy future vehicles from them. Otherwise, actual valid buyers might get spooked by any apparent financial instability of GM or Chrysler, and they might hold off buying a new car from a manufacturer that might go out of existence! There seems to be a flaw in their logic in that most customers do NOT have a lot of available money piled up, and the banks will not loan them any so that a potentially unemployed person could not be able to buy a $40,000 SUV.

This is causing even MORE problems. The financing arm of each of the auto manufacturers (such as GMAC) have had to approve many billions of dollars in loans to people who have NO CHANCE of ever paying them off! This is essentially the same thing as the Sub-Prime fiasco, where everyone SEEMED fine at the start, until it was realized that millions of people started defaulting on home Mortgage loans. It's just that now, the EXACT SAME THING is being done for millions of people who are now getting brand new vehicles that they have no chance of every paying off! They WILL default by the millions, and probably pretty soon. (The recent 2014 news reports seem to suggest that is coming very soon.)

It seems bizarre that none of the government "experts" seem to have the slightest clue about this! Of course, they had no idea that the Sub-Prime crisis was about to happen a few years ago, either! I suppose they will all be "shocked" when they see this happen in the automotive business as it is still doing in the mortgage market!

All government Economists know how critical it is that the American automotive market be seen as being wildly profitable, regarding recovery from the 2008 sub-prime market catastrophe. They KNOW that it is critically important that millions of people be buying new vehicles, toward trying to create an image of wonderful prosperity. So maybe all those Economists are PRETENDING that the automotive market is bopping along, exactly like they did in 2007 and 2008 regarding the unstable home loans that virtually no one was going to be able to pay off!

And when all those millions of car loans become defaulted, what in the world is GM going to do with millions of (used) vehicles that it will have to repossess? Didn't we see this in the millions of empty homes that banks Foreclosed on (with millions more to come), where those millions of houses are empty and not being maintained, in other words, becoming worth less every day? And exactly how will GM, Chrysler and Ford sell ANY new vehicles when there will be many millions of repossessed vehicles which are essentially still new but only worth half the price?

I am a logical person. I see NO logic in any of these actions! It seems clear that no one gives even a moment's thought to how ANY of the three American car manufacturers could financially survive beyond around two years (in other words, the end of 2012). (In 2014, I now see that I was wrong about this, by a couple years.)

There seems every indication that the manufacturers are TOTALLY focused on cash flow and profits FOR THE CURRENT QUARTER. I guess that none of them feel that their personal job depends on future profits, only on what they can show TODAY!

And since the economy is so bad overall, the ONLY claims of recovery in the US Economy seem to be regarding the car manufacturers, so once all three of them fail, what then? Wow! It will be bad beyond imagination.

I guess everyone hopes to keep a fiction going, apparently thinking that somehow, everything will magically turn out OK. But it has no logical way to turn out OK, does it?

Right now, there are around 140 million cars on American roads. A small fraction of them are older used vehicles which were bought for cash, so no monthly payments were caused, but in general, the vast majority of those many new or near-new vehicles on the roads are ACTUALLY ownedd by banks, where the 'owners' are (allegedly) making monthly payments on them. There are therefore about 100 million vehicles now on the American roads which are being paid off every month. Those vehicles vary from having car loans of $10,000 up to around $50,000, and we might estimate that the AVERAGE car loan might have an outstanding balance of $20,000. The hundred million vehicles with such loans therefore have around $2 trillion of outstanting balances on them! That is an enormous amount!

A common American attitude is that once a family SUV or car gets to be one or two years old, it is important to trade it in. This is part of 'Keeping Up with the Jones'. But this mind set is very dependent on the majority of American families being able to PAY the monthly car payments! But every day we hear about 23 million Americans who are unemployed, along with many millions more who are working at McDonalds or WalMart at minimum wage.

This all seems terrifyingly familiar with what happened a few years ago when millions of people suddenly were not able to make monthly home Mortgage payments, and the entire Sub-Prime Bubble burst.

Why doesn't anyone see that with 47 million families on Food Stamps and many millions more on Unemployment and Welfare, that it seems certain that a day is coming soon when the Vehicle-Bubble must necessarily burst?

There is one side of this in the families that drive vehicles. They consider it desperately important to have a vehicle to drive, or more than one vehicle! Their mindset is to only drive brand new vehicles, but in desperation, most will be willing to drive vehicles that are a few years old. So THEY might come to tolerate this coming situation. But how can the car manufacturers deal with tremendously fewer buyers of new vehicles? A lot of the fiction that GM and Chrysler (and all the others) have been spreading seems absolutely certain to have the wheels fall off. And with so many millions of American jobs being directly and indirectly dependent on purchases of new vehicles, the impact on the American and world economy may be at least as large as the Sub-Prime housing bubble catastrophe has been.

I would LOVE to encounter some simple and logical way that these matters might be resolved, but unless a hundred million new jobs arise in the United States, that seems extremely unlikely.

This presentation was first placed on the Internet in late 2010.

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Hybrid Vehicle - An Improvement. An Entirely Different Approach to a Hybrid Vehicle (1992, May 2008)
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C Johnson, Theoretical Physicist, Physics Degree from Univ of Chicago