Business Week Predicts Higher Auto Prices for 2009. Huh?

Ed Wallace at Business Week offers a counter-intuitive view: 2009 will see record low automobile sales…. and increased prices. My first inclination was to dismiss the man out of hand. But this past April he presciently said “ There is No Gas Shortage” and followed up a few weeks later with a well-argued skewering of the ethanol myth. So, Ed Wallace is no Bob Lutz. But still, his latest proclamation is hard to swallow. “The time of heavy rebates is over as carmakers get ready to raise prices to increase profits. Get ready for sticker shock.” After that opening salvo, Ed goes tells the global tale of automaker woe. He rightfully points out that governments in German, England, France, Canada and China are stepping in to make sure their companies stay in the game, while the US government wrings its hands. But does anyone really think that the new US government is going to sit back and watch the indigenous auto industry implode?

The problem with all of this propping-up biz: it keeps the marketplace oversupplied with both unit volume and nameplates. Wallace justifies his prediction of falling sales and increasing prices by saying “What we witnessed in 1974, 1980-81, and 1992 was a fairly consistent series of price increases to create profits even as sales tanked.” But he neglects to mention that 1974’s Consumer Price Index inflation rate was over 11 percent, 1980 topped 13 percent and 1981 hit just over 10 percent.

Furthermore, the big news of 1981 was “Voluntary Export Restrictions,” under which Japan’s auto exports to the US were capped. 1992 was the only one of Wallace’s noted years with a relatively modest three percent inflation rate.

In short, today’s market is more fragmented and competitive than ever before in history. No company or cabal gets to set the price. Detroit’s managers have never lived inside the reality they must face today.

Today’s Korean and Japanese competitors have made it clear that they aren’t going to cede sales to Detroit on price; they’ll do whatever’s necessary to move the metal. Likewise, Volkswagen is steaming full speed ahead with plans to finally get a seat at the big boys table in the US market.

The China Price effect has already laid waste to much of the business-to-business market for manufactured goods– and just about everything sold in Wal-Mart. Automobiles are the last big frontier for China’s export manufacturing assault. Existing Korean, Japanese, French and German based competition means that no matter how many factories Detroit closes, they are unlikely to have the power to push through price increases during a time of slack demand. Prospective Chinese competition only ups the ante further.

Ed Wallace thinks today’s Cadillac CTS is a screaming bargain at $10k off its inflated sticker price. But what if it were built in Shanghai?