By Alexander Apostolides on February 26, 2009

The Crazy world of a ressesion: Ford, Jeep and AMEX

A dealer in Cyprus for Ford has recently announced that for every saloon car of approximately Euro 17,000 it will be providing a smaller car of Euro 5,000 for free.
Meanwhile the Jeep distributor of Greece has radio commercials: they promise that with the purchase of every new jeep, they guarantee they will buy it back in two years time at the price that you have purchased it.
Both deals are insane there are just there possible reasons for doing these deals:
1) the companies are so starved of cash they are placing a huge amount of premium on cash - in Ford's case the premium is close to 30% and of Jeep's is equal to the rate of inflation in the next two years (predicted to be low - about 5%).
2) The American loan to car companies might have a stipulation to increase sales - ergo the incentive to effective give cars away- I am not sure if this is true but it is worth investigating
3) The real price of the stock (including the expenses for its upkeep) is less than the sale price.
Any of the three is bad news for the car dealers in Cyprus and Greece- you can not run this sort of deal without becoming bankrupt. None of these deals will increase demand since the banks are not giving any loans to buy cars, while companies are postponing their investment decisions in order to hoard reserves. The Deal with ford is better than the Jeep by the way – if jeep does not go bankrupt in two years then it will when people take up its offer and give in their old car (assuming this deal stays in place).

Meanwhile, AMEX in the US is paying some of its customers up to $300 to close their accounts – another insane idea. Why does American express does this? Because it is afraid that its customers will use their card as a to keep their spending habits after they lost their jobs and then become bankrupt – thus increasing the amount of unserviceable loans for Amex, and increasing its statutory need to keep reserves (thus reducing the ability to make good loans). Unlike the offers above this is a very smart move due to the link between band loans and amounts necessary in reserve.

All of the above shows that all companies need to re-invent themselves to go through the crisis – and ideas that sounded whacky in 2007 (a credit card company giving you money to stop being a customer, and a car company wanting to buy back your car) are now acted upon. Its is crazy world for business right now

No comments:

Post a Comment