It seems that more people are beginning to get wise to the point I’ve been making for some time, that world automobile manufacturing capacity far exceeds demand:
Speaking to the Automotive News World Congress in Detroit, Marchionne [head of Chrysler] said the global auto industry must reduce factory capacity in order to survive, especially in Europe.
World automakers can build 94 million cars and trucks a year, but that’s 30 million more than it can sell, he said.
Bankruptcies and economic struggles have forced cuts in North America, but European manufacturers have not closed plants, often because they are paid by governments not to, he said.
He predicted further consolidation in the global auto business, with five or six people running the industry.
Marchionne’s speech was interrupted twice by protesters. One man yelled “Shame!” in Italian, and Marchionne later said the man was protesting Fiat’s plan to close a factory in Sicily.
Of course, we’ve been subsidizing our own domestic automobile manufacturers to beat the band. Not only is there the “Cash for Clunkers” program but there’s also the whopping subsidies granted to GM and Chrysler, subsidies of so great a magnitude relative to the companies’ profits in recent years that there’s no realistic way that they can be paid back.
And they’re not alone. India’s Tata Motors is being propelled by subsidies:
West Bengal government’s subsidy package to Tata Motors includes subsidies on land, power, tax paybacks and a soft loan of Rs 200 crore. The state government will make efforts to maximize sale of products from the “Small Car Plantâ€. The package, notes the agreement, is given to Tata Motors to match benefits it would have enjoyed in Uttarakhand and Himachal Pradesh, both designated backward areas with following central tax concessions:
- 100 per cent exemption from excise duty for 10 years.
- 100 per cent exemption from corporate income tax for first five years and 30 per cent exemption from corporate income tax for next 5 years.
among others. China has its own “Cash for Clunkers” program as well as subsidies for rural purchases of cars and trucks. Its longterm subsidization of its steel industry has also been an effective subsidy to its automobile industry. Japan’s export subsidies are part of the explanation for the growth of its automobile industry to the position it enjoys now.
And so on. Practically every country that has a domestic automobile manufacturing industry subsidizes it.
Consequently, we have more automobile manufacturing capacity than people will conceivably buy. It’s called “deadweight loss”.
I’d prefer “over-capacity”, since “deadweight loss” has its own specific definition relating to taxation. Helped by the fact that these subsidies and benefits more or less act as a kind of informal, imperfect “price floor” for automobile production, resulting in more cars than customers.
It’s a pity that automobile manufacturing is generally seen as some type of “nationalist pride” industry that can not be allowed to die. If all the manufacturers removed subsidies, we’d get a brief, paradisical period for car-buyers in which the over-production would cause a major crash in car prices, after which they’d stabilize.
Deadweight loss refers to any loss of economic efficiency. That can be as a result of monopoly price, externalities, taxes, or subsidies. The deadweight loss of taxation is what you’re referring to. I’m talking about the deadweight loss of subsidy.
“Over-capacity” is too neutral in my view and doesn’t address the consequences of the inefficiency the way “deadweight loss” does.