Detroit's Next Big Crash

By Editorial Board

Two amazing comebacks in Michigan dominated last week's news: that of Bernie Sanders, and that of the auto industry. Whether Sanders's lasts will be known soon enough. But there are already real questions about the industry's recovery, and the answers have profound implications not only for U.S. automakers but also for federal policy.
It's true, as Hillary Clinton boasted, 2015 was "the best year that the auto industry has had in a long time." Americans bought 17.5 million cars last year, breaking a 15-year record. But these rosy sales figures hide an alarming truth: The boom is being fueled by many temporary factors that could put automakers in the same vulnerable position they found themselves seven years ago.
The most obvious of these is the price of oil, which dropped below $30 a barrel by the end of last year, lowering the price at the pump by nearly a dollar since 2014. While low gas prices don't necessarily lead to increased auto sales, they do influence the type of vehicles Americans buy: pickups and SUVs rather than fuel-efficient sedans. The sales boom has been driven almost entirely by such light trucks:

The three top-selling vehicles last year were Detroit's flagship pickups, while the top five non-trucks were all made by Japanese companies. When oil prices inevitably rise again, the same SUV addiction that laid U.S. carmakers low in the 2000s could threaten them again.
Car loans are another red flag, for two reasons: Consumers have been able to afford them largely because interest rates are low, but these rates, like oil prices, can be expected to eventually rise. And nearly one out of five new auto loans are being made to borrowers with low credit ratings. The automakers' own finance operations have become increasingly dependent on the subprime market:

Loaning money at high rates to people who may not be able to repay is a recipe for disaster, as the housing bubble demonstrated. Delinquencies on subprime car loans that have been bundled into bonds have already risen to 4.7 percent, the highest rate since 2010.
What's more, automakers have been goosing sales by offering ever-longer loans with lower monthly payments, pushing leases that count as "sales," and dumping their sedans onto rental car companies and other bulk buyers. Last year, these low-margin fleet sales rose more than 6 percent -- helping companies meet the federal goal for overall fuel economy in spite of growing light-truck sales.
Despite these danger signs, the auto industry can well avoid another meltdown -- if it positions itself for the economic headwinds, and for the technological change that stands to radically reshape the car business.
Mostly this is a matter for the automakers themselves, of course. They should, for instance, invest in more flexible production systems, as their German and Japanese competitors have. Detroit also needs to better prepare to compete on both electrification and autonomous vehicles. With the exception of GM's all-electric Bolt EV, the Big Three have been largely sitting on the sidelines.
Whether U.S. automakers join the competition for new technology, they should plan better for rougher economic weather ahead -- and here's where the government can play a role. It should stand firm against industry efforts to exploit loopholes and water down fuel-economy standards when they are reviewed next year. And the government, which still gives carmakers tax credits and other advantages, should use its leverage to pressure them to prepare plans for bankruptcy or restructuring, in the event either one is needed. Neither GM nor Chrysler had such living wills before taxpayers bailed them out in 2009.
The Big Three are again making many of the same mistakes that drove them to ruin a decade ago, and this time they should be ready to bear the consequences on their own.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.