Building Hybrids: The Automakers’ Risky Proposition

The news is sometimes ironic. On the same day that November auto sales figures reveal a drop of 34% (more than 400,000 vehicles) in sales across all manufacturers over November 2007 figures, Fisker announced that it will bring its $88,000 KARMA, which is supposed to enter production in November 2009, to the North American International Auto Show.

The funny thing about the Fisker is that it will sell. Not in great volume, perhaps only as a curiosity or collectible, and certainly not to Joe the Plumber, but the Fiskers and the Teslas and the Ronn Scorpions will sell. That raises the question: who buys an $88,000 car, especially in a market like this?

Demand for hybrid vehicles - along with demand for just about every other object that rolls on four wheels - has dropped like a stone. Honda reports that sales figures for the Civic Hybrid were off by a whopping 68% in November. Sales of the Toyota Prius fell by nearly half.

Today's $1.74 average cost of a gallon of gasoline has eased the quiet desperation of the US middle class. Some will argue that it has also blunted the demand for hybrids, but consumers will be pounding a path back to the dealerships once the price of gasoline rises again.

The reality is a bit different. Supply and demand aren't the only actors in this economic tragedy. Now, more than ever, the availability of credit factors into the equation as a hidden third-party to the transaction. Consumers need to make their best guesses about whether their jobs will outlast the four-, five- or even six-year note that comes along with a new car, and most people aren't in a gambling mood right now.

GM says that its financing arm, GMAC - mostly owned by Cerberus Capital, Chrysler's holding company - will only finance customers whose credit rating is above 700, which effectively cuts off about half of the car-buying population. Customers whose credit rating exceeds 700 aren't buying cars - hybrid or otherwise - in an effort to preserve their financial positions.

The availability of credit isn't a problem just for consumers, either. The manufacturers themselves can't get credit - short term or long term - to cover the cost of their operations. Their credit rating is effectively well below the 700 mark. While some private investors may offer capital to the Big 3, these loans come with interest rates that would make Shylock blush. Compounding the problem, GMAC and other manufacturer financing arms, have been cut out of the secondary loan market, and need to hold loans that they would have otherwise sold.

All of this raises real questions about how large a role hybrid vehicles will play in "saving" the Big Three. After all, how much impact can a 100-mpg car have on the marketplace when the manufacturer can't turn a profit on making it, and Joe the Plumber can't afford to buy it?