AUTO DEALERS FEEL PAIN OF CREDIT CRUNCH (Oct. 2008) Car showrooms across the cou

Question

AUTO DEALERS FEEL PAIN OF CREDIT CRUNCH (Oct. 2008)

Car showrooms across the country are noticeably vacant. Customer traffic is down about 50 percent over last year, and sales of almost every major brand are down 20 percent. Even the popular brands such as Toyota and Honda are getting hit hard. Sales for 2008 are on tap to be the worst year in a decade.

The National Automobile Dealers Association blames credit underwriters for becoming more reluctant to lend. Some people are unable to get credit at all for the first time in years. Even those receiving loans are paying higher interest rates and have to put more money down. One consulting firm estimates that 20 percent of the nation

Explanation / Answer

1) The tightening of credit sales led to people not getting credit to buy the car. As car is an expensive commodity lot of people take out loans to purchase it. Due to tightening of credit policy people who were earlier getting loans are not able to get loans to buy car.

In this scenario there are three type of customers who are being lost.

The first is the kind who would have paid back the loans, but are not able to get the loans.

The second kind of customers is the people who have not purchasing the cars due to the increased paper work involved with the tightened credit policy.

The third typre of customers are those, who used to earlier buy cars on loan and default on their payments. With a tightened credit policy these customers are avoided.

2.) In this particular case due to reduction in sales of auto industry other industries dependent on auto industry will also be impacted.

One such is the auto spare parts industry. Due to lesser number of cars being sold, the demand for their spare parts is also reduced.

Petroleum industry will also be affected as people buy less cars, hence the petroleum products consumption will also get lower.

Also other industries which depend on credit will also suffer. These industries are those which offer expensive consumer durable goods. These include electronics industries. Also other industries like real estate and luxury goods are also impacted as they are too dependent on credit.

3.) As it can be seen the price of vehicles haven't lowered.

But the sales have increased due to lower unemployment rate. With people now being assured of their jobs and people getting back the jobs, they are looking to purchase consumer durable goods like cars which are expensive.

Also people are feeling more positive about the economy. They are feeling the that they good future growth prospects.

The bailout helped the situation by giving a boost to the auto sector. It saved the jobs of the people employed in auto sector. This in reduced employment and in turn increased the consumption of other industries and thus giving them an indirect boost. This in a "domino" fashion improves the whole economy

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