Saturday, March 12, 2005

Good News

Gas guzzlers are losing market share to fuel efficient cars (Yahoo). That's great news for the US economy. Bad news for auto makers. There is indication that the shift to fuel efficient cars might be a structural trend...which is even better news.

Sadly, the auto makers will respond in the self destructive manor of dramatically reducing prices on SUVs to sell the current stock rather than the more sane option of simply holding back inventory and production. Meanwhile the demand for smaller cars seems to be on the rise. I suspect Detroit will hold back production on fuel efficient cars to jack up the price.

There are two ways to respond to a structural drop in demand. You can lower prices or cut production to try and spur demand. Too often companies try to respond to the market only by lowering their prices which can destroy their profit margin. I suspect we will see Detroit flood the market with SUVs until they undermine their market and the market forces a cut back in production.

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