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December 14, 2008

Saving the American Car Industry – Plan C

Build to order should be the distinguishing specialty of the North American car industry which is located in the heart of the world's greatest car market. You should be able to get the exact car you design on the Web within a week of placing your order. There's no way in the world that overseas manufacturers could compete with that.

Modern technology can translate a Web order to factory instructions easily. Computer assemblers like Dell have done that for a long time and even given spot incentives to people to order over-stocked rather than under-stocked components.

Dealer inventories will shrink down to one of each kind that you can test drive on your way to placing an order. Dealers would be able to deleverage their own balance sheets without the requirement to finance huge lots of new cars or the lots themselves (not sure what we do with all the real estate along our state highways once it isn't full of new cars). Manufacturers won't have to carry finished product inventory either.

Since manufacturer and dealer costs go down, so will the price of cars. That means a triple decline in the amount of borrowed capital needed to keep the industry going – no factory finished product inventory, no floor plan financing, and less consumer financing for cheaper cars.

The manufacturers can protect the dealers who attract people for a test drive by compensating them for sales that happen a reasonable time after a test drive of the same car from their lot. Dealers, of course, would retain the aftermarket businesses of maintenance and repair and selling used cars.

Dealers for importers will be disadvantaged by still having to maintain huge inventories, stock a shipping channel, and not being able to deliver exactly the car the customer wants in any reasonable amount of time. Some people will still opt for imported cars, of course, and the foreign nameplates made here will be able to follow the domestic build to order strategy themselves

There is a danger that we will be called on to further bailout banks and GMAC if they lose their dealer financing business. Personally, I think we need cars more than banks. The economy gains in the long term when it manages to do business with less need for financing. The banking industry needs right-sizing even more than the car industry, not that an space alien would be able to deduce that from the relative amount of bailout allocated to each… but I'm wandering.

Plan A suggests a workout rather than a bailout, the US government should pre-order a green fleet and partially prepay to help with retooling.

Plan B is to let bankruptcy either eliminate or strengthen the weak players as it has in may other industries.

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