Make the Automotive Bailout Demand Driven

With apologies to AMR Research -- the firm that came up with the concept of the demand-driven supply chain -- I believe that the automotive bailout should be demand driven. What do I mean by this? Simple -- encourage businesses and consumers with specific tax incentives and credits to purchase cars and trucks, driving demand rather than encouraging continued supply build-out. And why not even tie it to environmental policy by offering extra incentives for the purchase of vehicles that meet certain mileage standards or rely on alternative energy sources? This approach could offer three key benefits:

1) Letting the market drive who thrives and who goes out of business, giving its dollars to the automakers it wants to support. If Honda and Toyota trump Ford and GM (I've written off Chrysler already) in this case, then that's the invisible hand at work. And rather than prolong the inevitable (i.e., the ultimate failure of the Big 3), it would accelerate new business formations and ventures in the US automotive market.

2) Costing the government less than loans that will offer no guarantee of payback. How does this work? The government allows businesses to depreciate capital purchases over a period of years. By accelerating the depreciation period or allowing 100% capitalization of purchases in the first year, the only cost to the government is the cost of capital lost over the accelerated period vs. the standard one. It's a simple NPV calculation, but it would probably amount to the high three to low four figures per vehicle at most.

3) Quick implementation by letting the people vote with their wallets rather than the government. All of the time spent on deciding who gets how much and why -- not to mention making sure the investments are not wasted -- would go away. It's like the inefficiency in a construction loan in the residential sector (a loan type that requires significant handholding from the bank and can cost up to 10-20% of the loan amount in administrative costs).

So is a demand driven approach the right model? I certainly hope so for the very reason that it aligns consumer and business benefits with the need to prop up an industry -- without favoring one manufacturer over another.

Jason Busch

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