We’ve spent a great deal of time discussing the plight of auto suppliers and manufacturers, as well as the potential impact of US Treasury actions aimed at this struggling industry. Of course, this has been a very supply side focused look at the challenges and potential solutions. But as any high school economics student can tell you, demand is the other piece of the puzzle. So in addition to supply chain finance as a tool to unclog the credit markets that are grinding the supply chain to a dangerous halt, perhaps spurring demand is something the government and private sector should be pursuing.

Most of the current problems are due to the credit crunch AND the fact that the auto industry’s entire supply chain is built to support 14 million units or so and current projections are less then 10 million, some as low as 9 million! Yes, that’s a drop of less than 30 %, but due to the high fixed cost of auto manufacturing, this is not only all the margin, but the OEM’s cannot cover their cost. This problem then gets propagated down the supply chain.

There is another way however - focusing stimulus money on spurring demand. This would require:

1. Tax incentive/discount for buying a car
2. Supporting the credit markets so they can provide the liquidity needed to finance (or lease!) a car

This is a win/win, since getting demand back above 12 million units helps the entire supply chain as well as consumers who are already hurting in this current environment. And when you look at the alternatives, addressing supply and demand may even be cheaper in the long run than expensive bailouts.

Spurring demand is actually the approach some other countries are taking. And they’ve posted some positive results. Germany, a country with a long, proud history of auto manufacturing, has implemented a program that gives people with cars over 9 years old €2,500 if they buy a new car. Sales of small cars have risen significantly, making this an effective incentive towards “greening” the cars on the road (before the next gas price hike even hits). GM owned Opel, for example, reported an unexpectedly large increase in sales last month:

“This is our best month for five years,” said Opel’s sales manager Thomas Owsianski. The company said that it had introduced extra shifts at its Eisenach plant in order to cope with demand, which had risen to three times the normal level.

I think it’s important to note that like the US, Germany’s government and citizens do not want to “nationalize” the auto industry. Their efforts are meant to help a struggling industry and it’s workforce (Opel alone employs 26,000 people in Germany). The government is willing to give credit, but not buy the car companies. Sound familiar?

Is it time for the US government to take an approach that addresses supply AND demand?

Dan Kowal is Vice President of Strategy & Sourcing Services at Ariba. Dan has over 20 years of combined industry and consulting experience in strategic sourcing projects, with a particular focus in purchasing, supply chain, logistics, and operational transformation and turnaround in the automotive industry.