AUTOMOTIVE INDUSTRY REACTION THROUGH CRISIS IN THE WORLD
With the genesis in the USA and rapid spread all over Europe and Asia, financial crisis started in September 2008. Initially, affecting banking system as a result of mortgage turmoil for a very short period of time it threatened the automotive industry. According to the world economists reports it is considered to be the greatest financial crises after the great depression of 1930`s. First symptoms were the high rate of unemployment and inflation, collision of financial markets and collapse of financial and non-financial sector.
This global financial crisis associated with economic slowdowns has had a profound impact in the non-financial sector and particularly in the automotive industry, which is definitely an important contributor in the economic growth.
Since the performance of both countries is highly dependent in automotive industry, through this survey we want to point out causes, challenges and the need for state intervention during crisis.
After finalization of econometric models and results, we will update this abstract.
We can help you to write your essay!
Facts and general economic information
United States ' USA
The world`s largest economy with its nominal GDP estimated to 14,256,300 (millions of USD), is the leading country with ' of nominal global GDP. Just before the crises U.S. economy was known for its stable overall GDP growth rate, even though the total trade deficit for 2008 reached 696 billion USD, ranking it as the largest importer partnering China, Japan and Germany.
As an important tool of economy construction is credit, public debt is around 53.5% of GDP (2009 est.), while the largest holders are Japan and China. Estimates (2009) have shown that 1.2% of GDP is composed by agriculture sector, 21.9% industry and 76.9% by services. The US economy is oriented on open and highly competitive markets. There are no barriers for foreign firms, despite the fact that existing firms are at or near the forefront in technological advances. Leading industrial power, it is mostly specialised in petroleum, steel, automotive, aerospace, and telecommunications industries.
Compared to the world it occupies fourth place for the labour force (154.2 million as of 2009). More specifically, the manufacturing employs 20.3% of the US total workforce.
Largest economy in Europe, Germany with its nominal GDP estimated to 3,346,702 (millions of USD) is the world`s second exporter with 1.120 trillion USD in 2009. Public debt is around 73.2% of GDP (2009 est.), compared to its counterparty (US) the dependence in debts is higher. Estimates have shown that 20.4% of GDP is composed by agriculture, 29.7% by industry while services sector leads with 67.8%. In the path with most development countries Germany is specialised in electronics, heavy machinery, iron, steel, automotive, food and beverages and textile industries. Automotive industry is one of six largest sectors in Germany. For the labour force (43.5 million 2009 est.) it occupies the 14th place compared to the world. The driver of globalised economy has the highest qualified labour force and industry employs 29.7% of its total workforce.
The United States has shown stable growth tendency until 2008, while Germany graph shows more oscillations. In common property is the negative fluctuation in years 2008-2009, all this due to the financial global crisis. Purpose of this paper is to find out whether the effect of crisis in automotive industry had impact in GDP.
The Real Causes of the Automotive Industry'Crisis
The root cause of the crisis in the automotive sector has been blame on the credit'crunch that resulted from the mortgage meltdown. The economists and industry analysts believe that this unprecedented drop in sales of automobiles is the result of a cyclical downturn compounded by inability of market players (dealers and customers) to seek for credits. The sharpest drop year over year of automobile sales for any month on record, dating back to 1942 was reported also by REUTERS, the first sign of an impending automotive decline on May 23 of 2008.
Recalling the oil shocks of the 1970s, above $135 a barrel oil prices were pushing the average pump prices to the crucial level ($4 a gallon). Meanwhile crude oil prices, driven by worries about tight stocks of refined products in the short term and the great global demand over the long term have jumped 30 percent. On the other side gasoline prices went up 57 cents/gallon compared to 2007.
Without doubt automobile producers were stuck in an old and tired business model, at which they are being unable to sell their products. Uttered in economic terms, this means declining in the demand for automobiles.
Under these circumstances, The Huffington Post (December 12 2008) publicized the temporarily plans of General Motor (GM). The breaking news was that in order to adjust the dramatically weaker automobile demand the company will close its 20 manufacturers for at least 6 weeks and make sweeping cuts to its vehicle production. Along that time employees were temporarily laid off, receiving a portion of their normal pay from the company. Among other they were free to apply for state unemployment benefits, spokesman Chris Lee had declared.
Kevin Zeese (November 2008) also explained causes of the auto industry crisis. The three major problematic issues in US are listed as follows: health care system, the credit crunch and low efficiency cars. Considering health care as an out of control cost in USA (compared to German automotive industry at which this cost is under control) he does not hesitate to describe GM as e health insurance provider that happens to make cars. The fact that the company spends annually $5 billion on health care increases the cost of each vehicle produced for $1,500. This reality makes impossible the achievement of successful economic model for GM and furthermore it is something that cannot be fixed by company itself. Ongoing, commenting for credit crisis he treats the stock market as unregulated casino and blames the government for the inability of applying basic regulation to the financial markets and money supply.
This essay is an example of a student's work
Concentrated in these assessments we qualify that the initial cause that pushed sales down is change in fuel prices.
Changes in fuel price
In reality, economies of both countries are challenged by fuel price changes. US Energy Information Administration data show that regular gasoline retail real price in 2000 was 1.89$ per gallon, while in 2002 dropped to 1.64$ per gallon. Since 2003 to 2008 the real price per gallon continued to rise until it reached the peak in 2008 at 3.32$ per gallon. In 2009 the prices started to drop but in 2010 and forecasts for next years are that prices will continue to rise (EIA 2010). Approximately, the same pattern was also followed for diesel fuel retail prices.
As in the US, the pattern of fuel prices was similar in Germany. In 2000 prices were about 2.05DM1 per litter for unleaded fuel and 1.77DM per litter for diesel. The prices decreased in 2002 as in the USA happened to 1.07DM per litter for unleaded fuel and 0.85DM per litter for diesel (The AA 2010). The prices peaked in 2008, the same happened also in Germany. In the reports of AA Public Affairs in October 2008 the price per litter for unleaded fuel was 1.35' and 1.29' per litter for diesel.
Fuel price changes headed the demand for more efficient cars. Current vehicles were unaffordable taking into consideration fuel price trends. As a result, the major automakers were working to revamp their inventories and seem to be increasingly focused on the development of smaller, fuel-efficient vehicles.
Fluctuations started with dramatic drops in automobile sales throughout 2008, maybe even earlier. Initially crisis was more perceptible in US rather than Germany. The lack of available credit for buyers and in the other hand the need for money to cover the dramatic losses in car sales of industry were major factors that the situation was becoming more and more convoluted. Financial losses came due to the increment of incentives or rebates that manufacturers were forced to do in order to help themselves on selling their products.
Industry was first weakened by the 2003-2008 oil crises which in particular caused customers to turn away from sport utility vehicles (SUV). In this regard, severely has been affected Porsche. Only in the US market, sales of German producer slumped by 50% compared to 2007. Furthermore, for four months the turnover was declined from 2.36 billion euro to just 2 billion. This represents a drop of approximately 20% compared to the same period of 2007. In the opposite, GM announced that it had sold nearly 36% fewer cars in Germany compared to November 2007.
Speaking in general, the overall US company sales dropped dramatically in 2008. Fall is estimated to be 38.28%, percentage significantly greater compared to Germany which has faced a drop to 18%.
The chart clearly highlights the declining of sales compared to 2007 in US. As it has been mentioned earlier the peak point is September 2008.
In addition by measuring sales as units of car sold, data provided by Bertel Schmitt for the year 2009 presents a downturn in US close to 21.2%. Whilst in Germany the opposite happens. An increase of 23.2% is appeared due to the improvement of demand for small efficient cars.
The purpose of treating sales fall is to justify the following battle on the production.
'Demand is reduced! What happens with production?'
With a virtually cocktail of negative ingredients, not surprisingly main carmakers announced a shrink of production. Initially it has been claimed for a temporarily reduction, but later on for the fact that the situation was not on the road to recovery many plants were closed by guiding the industry to fell into a true recession.
Only in December 2008, both together GM & Chrysler were planning to close 50 plants for at least one month. In this path many jobs were cut as well. For the reason that both economies are dependent on its performance, the failure of automotive industry would make the economic situation even more knotty. Faced with the high rate of unemployment and the failure of major macroeconomic policies, state bodies were willing to provide financial aid.
Based on statistics of `Organisation Internationale des Constructeurs d'Automobiles`, reduction in US production had begun in 2007 while the other counterparty was performing better at that time. Supported by the same data in 2008 the production was reduced for 19.4% in US, respectively 2.7% in Germany. This weakening prompted the US to lose the 2nd position in the global automotive industry race. Data of 2009 exhibit even a heavier breakdown with a shrinking of 34.3% in US and the onset of 13.8% decline for Germany.
Earn money as a Freelance Writer!
We’re looking for qualified experts
As we are always expanding we are looking to grow our team of freelance writers. To find out more about writing with us then please check our freelance writing jobs page.
Furthermore, a noticeable production reduction is perceptible from the global perspective. In 2008 the decline was estimated to be 3.7%, while in 2009 it became unbearable reaching the level of 13.5%.
Despite the fact that others were failing, in the other side were those who became more intense. Primarily displacing and later defeating US, China has been doing well. An increase of 48.3% through 2009 was result due to the specialization on producing more efficient vehicles, costless labour force and stabile credit capacity. In contrary, US and German automotive industry were more specialised on producing SUV`s vehicles and the transformation process should be backed with additional investments.
Consequently the cut of production has in turn affected dramatically employment. The US vehicle industry employs 880,000 workers or approximately 6.6% of the manufacturing workforce. With the bankruptcy and restructuring of GM - Chrysler, plus the ongoing recession, unemployment became the major problem for both economies.
Statistically speaking, for every one of the millions of Americans directly employed by the auto industry, seven other Americans are indirectly employed by the glass industry, the steel industry, the rail industry, the plastic industry, and many other industries that all rely on the successful and continual creation of cars. This means that any fiscal crisis that impacts the auto industry impacts not only those employed by the auto industry, but seven times as many other workers as well. In year 2008-2009 the US automotive industry experienced the financial crisis. The American industry came to the conclusion that the attack of the financial oligarchy as well as an intense management of the subsidies or tax breaks represented an applicable solution.
Without the governmental rescue package the General Motors could not be helped, on the other side the auto companies were facing increased foreign competition due to public perception of foreign cars' superior quality and pricing. Furthermore, as a result of the oil crisis and the rising popularity of the 'green' movement, Americans preferred to buy more environmentally friendly automobiles, which were more readily available abroad.
Even prior to the US financial crisis, Americans perceived US cars to be inferior to foreign cars. This perception was furthered by the media, which told Americans that American cars were less reliable, and of lower quality. This led to increased demand for foreign cars, which of necessity, led to a decrease in domestic car sales. Chrysler was forced politically to undergo a merger with the Italian carmaker Fiat as a prerequisite to receiving any additional government aid.
On the other side of our comparison: the German Car Exports had a robust rise of 44% in the first half of the year 2010 thanks to Strong Premium Market Recovery. The accelerated increase was aided by the low base level recorded in the first half of 2009 and a sustained recovery in the global premium passenger car market spearheaded by extremely strong growth in China.
The export trend also accelerated in June, with volumes rising 26% month-on-month during the month to 395,000 units. The difference between this marvellous German recovery and the US automotive industry lies in the German industrial politics. With a clear packet of investing and well managing the demand towards the foreign markets, the automotive industry proved to be the real promoter of the German quality and prestige of the unique brands such as Mercedes-Benz, BMW etc.
China was the real growth engine of the global automotive industry in the first half of 2010 and this was especially the case for the German OEMs, with the premium brands such as BMW, Audi, and Mercedes-Benz enjoying accelerated growth during the first half of the year. Audi has announced that it delivered over 100,000 units in China for the first time in the first half of 2010, with the company's sales rising by 64% y/y to 109,887 units.
Mercedes-Benz saw its sales in China between January and May rise by 107% y/y to 46,800 units, while BMW also experienced a strong rise in volume. Mercedes-Benz and BMW have significant passenger car manufacturing joint ventures (JVs) in the country through Beijing Automotive and Brilliance, respectively, while Audi already has a significant Chinese manufacturing presence.
Whereas in the other industry: On December 19, 2008,' the bailout plan was announced, which would give loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions. Bush provided $13.4 billion now, with another $4 billion available in February 2009. The federal loan would have prevented the General Motors from going into immediate bankruptcy. The bailout requires both companies to dramatically restructure their operations to demonstrate long-term viability. On 18 February 2009, the American automotive industry again approached the US government, in regard to obtaining a second bridging loan of $21.6 billion ('15.2 billion). $16.6 billion of this would go to General Motors, while Chrysler would take $5 billion. General Motors agreed to shed 47,000 jobs, close five plants, and axe 12 car models. Chrysler agreed to cut 3,000 jobs, cut one shift from production, and axe for three car models.
In order to support our analysis empirically, we have used following econometric model which is being estimated for both USA and Germany separately:
Auto= ?_0+?_1 ?FSI?_t+ ?_2 X_t+?_t
Where Auto is representative for automobile industry progress, FSI is financial stress indicator and X is the set of control variables.
We used financial stress indicators from IMF website for each country to capture the impact of stress on automobile industry. We used value added by automotive industry in GDP as an indicator if automobile industry performance. The data was downloaded from http://www.bea.gov for all the indicators of USA. We used real GDP as well as control variable. The source of GDP data was also the same as of automobile value addition.
Following are the preliminary results of our model for US. We found that financial crisis immediately affected the automobile sector. The relationship was found to be negative and significant. The relationship of GDP was found to be positive with automobile sector performance which is in line with the economic theory.
Model 1: OLS, using observations 1-45
Dependent variable: Value_added__Mo
Mean dependent var
These are only preliminary results for USA. Our target is to do the same estimation with Germany. We intend to improve our analysis with few more equations in Phase 4 contingent to the availability of data. We also plan to improve specification of our existing model if necessary.
If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal: