Kudos to The Economist for recognizing that overcapacity continues to plague the automobile industry and just won’t go away (see Trouble Down the Road). Although cash-for-clunkers and other government subsidy programs meant to prop up the ailing automakers have helped the industry avert imminent disaster, the reality is that by enacting such programs governments have simply kicked today’s problems down the road until tomorrow. Not one of the major automakers has been allowed to fail in any meaningful sense, whereby massive productive capacity has eliminated from the industry.

According to The Economist:

LAST December the boss of Fiat, Sergio Marchionne, predicted that the economic crisis would finally force the world’s car industry to confront profit-destroying overcapacity and change its broken business model…But his predictions look increasingly like wishful thinking.

Across the world governments have lavished their ailing car firms with subsidies. Although General Motors (supported with over $50 billion of taxpayers’ money) has shed some brands and factories in America, so far not a single carmaker of any size has disappeared. One of the weakest was Chrysler, but thanks to a $7 billion federal bail-out and a deal with none other than Fiat, it motors on. So too does GM’s perennially lossmaking former European arm, Opel/Vauxhall, propelled with a €4.5 billion ($6.5 billion) dowry from the German government last week into the arms of Magna, a Canadian auto-parts company, and Russia’s Sberbank.

…the remarkable thing is that not a single car factory in Europe has closed in the past 12 months. According to industry estimates, overcapacity in Europe next year will be around 7m units, or 30%. In America, a market of similar size, overcapacity will fall from about 6m vehicles this year to 3.5m next year, but a great deal of the overcapacity elsewhere will be aimed at America when sales begin to recover…

All this means that the industry’s return to health is by no means assured…predictions that the car business will have to close factories to reduce overcapacity on the one hand, and consolidate into a smaller number of big firms to cut costs on the other, may not come true next year. But one way or another, they will come true eventually.

I agree with the sentiment expressed by The Economist. Even with rapid growth in developing markets, the auto industry is (and will continue to be) dogged by overcapacity. Capacity has got to be purged.

I have expressed concerns about overcapacity on several occasions. For example, in August I wrote (see A Patriotic Cerberus?):

The automobile industry has been plagued by mass overcapacity and has been in decline for decades.

In June I wrote (see Appearance on Cavuto):

…we discussed some of the ills confronting the global auto industry – i.e., the severe overcapacity problem (in the order of 20-30 million units per year). We also talked about the prospects of Chrysler ending up right back in bankruptcy within 5 years. That is a distinct possibility.

In April (see Now Introducing Fiat/Chrysler):

The global auto industry continues to be plagued by massive overcapacity. Keeping a weak competitor like Chrysler around will certainly not resolve systemic overcapacity in any meaningful way.

Overcapacity is a real problem, and expecting sales to bounce back quickly enough to eliminate that overcapacity is wishful thinking. A full recovery of the auto industry’s fortunes will not happen until the overcapacity problem gets resolved, and that likely translates into fewer plants and fewer firms.

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