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Swedish auto maker Saab could now be shut down completely after Koenigsegg pulled out of a deal to buy it from GM. Another buyer could emerge, but since Saab has only made a profit once in the last 20 years, that seems unlikely.

GM’s woes in revamping its global empire after it went into chapter 11 – it also had to shutter its Saturn brand after that sale fell through, and reversed a decision to sell its Opel/Vauxhall brands – sum up the state of the global auto industry.

The sector as a whole is still way too big and is being protected from the market forces that should bring it back into line.

Capacity in the global auto industry was 20% more than demand during the good times, when sales were rising year after year. Sales have slumped during the credit crisis and the resulting economic downturn, and yet most plants remain open, if partly idled. Companies that rightly should have gone bust have been bailed out by national governments, fearful of the impact of hundreds of thousands of job losses from the auto makers and their myriad of suppliers.

The bet being placed is that global sales growth will eventually return, fueled particularly by demand for new cars in the likes of China, India and Russia.

Growth is likely to return, but it is unlikely to be enough to fill all the excess capacity that stubbornly remains in the market, supported by taxpayers’ millions. And it has to be remembered that the industry is going through a fundamental change as environmental issues push demand towards smaller, lighter, fuel-efficient cars – cars that make less money for the manufacturers.

The auto industry has a history of being supported by governments because of the number of people it employs and because the exports help a country’s trade balance. But at some point it has to face the same market forces that dictate the size of other industries. The UK accepted this in the 1990s, letting Rover die in the hands of a foreign owner, rather than pouring in millions more of taxpayers money. Other countries need to follow suit, and other brands need to go the way of Saturn and possibly Saab.

The fact is, large swathes of the industry should be on the scrapheap. So governments and manufacturers need to face the reality that what is needed is a smaller, sleeker industry capable of driving its own growth and profits.

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