Effect of the Financial Crisis on the Automotive Industry
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Published: Tue, 27 Feb 2018
Globalization refers to the shedding down of the walls of distrust and the barriers of suspicion in between countries to make a bridge where ideas and beliefs can cross the borders. We are divided into different worlds, and therefore could never have managed to deal with deadly epidemics and natural holocausts which have time and again challenged us. Globalization has strengthened the nexus and has helped us to understand each other’s need in a better way. Globalization has helped us to break the walls that separated us and have restricted our natural identity of being fellow human beings. It is true that the impact of globalization is clearly visible and affects the politics and economy of the country but it also affects the mindset of the people and their way of thinking. Globalization has made way for free trade and business and has communication between various parts of the world. It was made a world a better place to live in.
Recently with the recession hitting the market, there has been doubts in many people’s mind weather globalization has made our lives better or not? Had the impact not been that great if the world was not that connected? Especially in the Automotive Industry with such heavy dependence on the Big three companies in the United States. There had been a sudden collapse in this sector which had made it difficult for car manufactures world over.
The car industry, which is seen as a barometer of the world economy, is storming itself into deep recession, with sales and profits dipping(BBC News). Manufacturing plants are closing, jobs are being axed, share prices of the car companies are tumbling and production being cut back. The economic meltdown has taken its toll in almost all the industrial sectors across the globe. While the scale of the crash was unprecedented, so was the coordinated response by the Government and Banks in providing to get the financial markets & industry working again and also to gain back the consumer confidence.
The 2008-2009 automotive industry crises were an integral part of the global financial recession. The crisis affected the European and Asian automobile manufactures, but it was primary felt in the U.S automobile manufacturing industry. It also had an impact on Canada by the virtue of Automotive Products trade agreement.
The Automotive industry was mainly weakened by the increase in the prices of the automotive fuels which is linked to the 2003-2008 energy crisis which dint encourage the purchase of low fuel economy vehicles such as the sports utility vehicles(SUVs) and the pickup trucks(MSNBC News). With the increase in the popularity and having high profit margins of these vehicles have motivated the Americas “Big Three” automakers also know as Detroit, General Motors, Chrysler and Ford to produce vehicles in this segment. With the fuel-efficient models presented to the consumers, sales began to go down. The pressure on the prices of raw material being so much it had turned the credit crunch by the 2008. The US automakers suffered from considerably higher labour cost than their other counter parts including salaries, benefits, healthcare and pension.
A letter to the CEO’s of the Big Three automakers were sent by the Democratic Congressional party leaders Nancy Pelosi and Harry Reid to present a “credible restructuring plan” involving “significant sacrifice and major changes of doing work”
At the beginning, U.S sales fell down to 32% which brought down the car sales of General Motors by 45%, Ford by 30% and Chrysler by 35%. GM and Ford both having their components manufactured from India, with such a steep fall in the sale of cars it made a tremendous impact on the auto components manufactured in India. A cut in the production made them to cut down their orders of the car components manufactures. India is a strong and growing economy but the hit of recession has put red marks on the entire balance sheet of the Indian economy. The business analysts have reported that the Indian car industry had recorded a continuous growth of about 17.2% over the past few years. But with the hit of recession it has brought the growth down to about 7-8%. Be it Tata Motors or Maruti Suzuki or even Mercedes-Benz the market has gone down to a negative terrain.
In addition, the uncertainty in exchange rate and increase in the dollar value against the Indian rupee has caused the slowdown. Increased dollar value has lead to an increase in the landed cost of imported machine tools and even the raw materials needed for production by approximately 14%. Steel and alloy prices have also not reduced which have forced the car manufactures to increase their car prices. To make the matters even worse is that the steel manufactures across the country are looking for re-imposition of custom duty on steel. Seeing the drop in the production numbers the State Bank of India has reduced the interest rates on loans in February, 2009.
In 2008, the Chinese government had reduced the automotive taxes in order to encourage flagging sales. In January 2009, Chery a Chinese auto manufacturer reported unprecedented monthly sales.
With the weak US economy in 2008, Japanese automaker Toyota recorded a double digit decline in sales. Toyota declared that it had expected a first time loss of $1.7billion in 70 years. Its sales saw a dip of 33.9% and that of Honda motor by 31.6%. In December, 2008 Japan’s second largest car manufacturer Suzuki Motor Corporation announced that it will cut down the production in Japan by 30,000 units due to the shortage in the demand. The company is likely to face its first plunge in the profit after eight years.
Mitsubishi Motor’s because of the fall in demand had to cut their production requirements. It was roughly reduced by 110,000 vehicles in this year because of the fall in the sales of Japan, the U.S and the Europe. Japan’s car sales will fall to the lowest in about 31years according to the countries automobile manufactures. Toyota’s President Katsuaki Watanabe said the Impact on the company from the struggling global economy has been “faster, wider and deeper than expected”. On 4th November, 2009, Toyota announced that it was pulling out from Formula One, ending the team’s sports involvement.
The crisis even affected the South Korean automakers, in December 2008, Hyundai Motor Company had reduced production in the plants at U.S, India, China and Turkey because of the sluggish demand. Amid the global financial crisis the company in an earlier projection had missed about 4.8 million units for 2008.they shortened factory operations and froze the wages of the administrative workers. South Korea’s fourth largest automakers, SsangYong Motor, owned by SAIC (Shanghai Automotive Industry Corporation) the Chinese automobile manufacturer is the worst affected in the crisis as they manufacture mainly high petrol consuming SUVs. The car maker incurred its straight fourth quarterly loss by the end of 2008 with losses amounting to $20.8 million in the third quarter. Also the sales dropped from 63% to about 3,835 vehicles.
In Europe the sales of the car have so drastically reduced that consideration was being given to give monetary support for the automotive industry, particularly in France, Germany and Italy. French automobile manufacturer PSA Peugeot Citroen sales dropped by 17% in the last quarter of 2008, as a result it planned to cut 2700 jobs. In February 2009, PSA announced a cut of 11,000 jobs worldwide. Renault also saw a steep dip in sales in 2008. There was a dip in profits by 78% compared to the previous year. European sales fell 4% and worldwide the sales fell by 7% forcing Renault to abandon their growth targets of 2009.
Fiat in Italy announced its temporary closure by a month. Alfa Romeo’s main plant of cars will be shut for four weeks. In January 2009 Fiat announced a 19% dip in revenues in the last quarter of 2008.
Spanish automobile manufacturer SEAT cut their production at Martorell plant by 5% due to fall in its sales.
In the United Kingdom, Jaguar Land Rover, now owned by Tata Motors, was demanding a $1.5 billion loan from the government to manage with the credit crisis. Nissan Motors UK announced that it was to get rid of 1200 jobs from its Washington factory near Sunderland due to the automotive industry crisis.
The Canadian auto industry is closely related to the U.S due to the North American Free Trade Agreement (NAFTA) and is in similar trouble. Canada has about 3500 car dealers which employ 140,000 people, are at the risk of losing their jobs from the financial crisis. Chrysler Canada demanded for $1 billion in support, making it the only Canadian arm of the Big Three to call for any dollar request. The CTF has opposed the bailout for the Canadian subsidiaries $3.5 CAD billion for the Big Three. The CTF noted that federal and provincial governments have already spent $782-million in the past five years. On December 20th, government of Canada and the province of Ontario offered a loan of about $3.3 billion on the auto industry. Under the loan GM got about $3 billion and Chrysler got the rest. Ford only asked for small amount of credit but they will not be participating in the bailout. Chrysler vice-chairman and president and Ford’s chief of manufacturing said that the “GM-CAW deal was insufficient” signifying that they will break the pattern set by the GM. Chrysler may also pull back from Canada if it fails to achieve substantial cost saving from the CAW. In March 2009, the Canadian federal and Ontario governments jointly discarded the restructuring plans given by the GM and Chrysler. This came a day later when US President Barack Obama had rejected the restructuring plans of the parent companies.
As recession was seeing in all parts of the world it was most affected in the United States. In November 2008, there was a hearing by the United States Senate in the presence of the heads of Chrysler, General Motor and Ford. They all demanded an aid of about $25 billion if they were to evade bankruptcy. The Republican Senators were reluctant to give aid; some even suggested that bankruptcy would be the best option as it would help the manufactures free from the deal between them and the unions. General Motors share prices steep down to the lowest since the Great Depression. Ford share prices also fell considerably. On 2nd December, 2008, the Big Three submitted a revised plan to the Congress which included more drastic measures. The total bailout aid demanded had now increased to about $34 billion, giving a gloomier image of what would happen if the Congress will not give aid. Chrysler required $7 billion by the end of the month just to continue the business, while Ford required $4 billion immediately. In an interview with the President Barack Obama said, ‘the last thing I want to see happen is for the auto industry to disappear, but I’m concerned that we don’t put $10 billion or $20 billion or $30 billion into an industry, and then six months to a year later, they come back hat in hand and say, ‘Give me more’. Under the Obama administration the idea of the car czar was approved and an agreement was reached on about $15 billion in emergency loans to the auto industry. On 18th February, 2009 Chrysler and General Motors again approached the U.S government on obtaining a second of $21.6 billion, of which General Motors asked for $16.6 billion, while Chrysler took $5billion. General Motors also agreed in line to reduce 47,000 jobs, close 5 plants and axe 12 car models. Chrysler managed to cut 3,000 jobs and reduce one shift from production and axe 3 car models.
Ford was able to stand on its own but General Motors and Chrysler had to file for bankruptcy. On 30th April, 2009 Chrysler filed for bankruptcy under Chapter 11after the talks with all the leaders had broken down. On 14th May, 2009 Chrysler announced to shut 25% of its U.S operations as a part of the restructuring process.
On 1st June, 2009 General Motors filed for Chapter 11 bankruptcy after the deals with the bond holders had failed. The application to the court in the New York marked the biggest collapse of an industrial company in the U.S. The restructuring process will involve a loss of about 20,000 jobs in the U.S. they also announced that nine other plants will be shut down while three more will be idle. It was the largest ever industrial bankruptcy in American history. In the new GM, in line with the financial regulation planned out by the U.S treasury, the federal government will take 60% of the ownership stake and the Canadian government about 12.5% along with the united auto workers getting a 17.5% share and the unsecured bondholders getting about 10% of the equity. Chapter 11 bankruptcies would allow Detroit to reorganize but not cause the massive job losses feared by some, “Any bailout of the auto industry is really a bailout for the health benefits of the UAW [United Auto Workers]. That’s all it is.” stated by Wharton finance professor Jeremy Siegel, author of the book The Future of Investors.
There have been made arguments made which feel that there was no need to file for the Chapter 11 bankruptcy. This will be a visible shift in the consumer choice to choose a car as they may not be able to depend so easily from the bankrupted companies, as there will be no warranty of the vehicles. G.M also states that the bankruptcy will also cause a loss of a lot of jobs and make it difficult for the governments as they will not be able to get so many jobs.
The bankruptcy served as a blessing in disguise for the Big Three as it helped them to void the outrageous union contracts and escape them from under worker obligations which were entered decades ago. It will also allow the automobile industry to be more competitive than before and be more sustainable. The government of America has also committed that it will help in the restructuring process of the auto industry as a whole and will wants the consumers to ensure on the cars they buy and also the suppliers to support them to weather the storm. The Administration will help stabilize the industry by the following ways: protection of consumer warrantees, supplier support program, unlocking the flow of credit for the consumers and dealers.
The hit of the crisis at the automobile industry affected the whole world economy. The crises have not only caused problems for the car manufactures but also squeezed the car component manufactures. The component suppliers are an important part of the car industry that contributes 70% in the production of the car. The car component manufacturing companies are impacting the overall car industry in a big way.
There were thousands of people being jobless and slowly people had no money with them to even buy a car. This drastically affected not only the sales of United Stated but the world over. Globalization played a crucial role in spreading this crisis world over as the automobile industry is highly dependent on United States and Canada for its manufacturing. Recession has hit the world economy through globalization causing problems not only in the auto industry but in every sector. There are millions of people world over who are jobless now as so many plants world over have been effected. Even with the inflation increasing such heights workers all over are facing pay-cuts which have made it difficult for them to survive. There is a constant pressure on the employees working as there is a fear of products being outsourced from the developing nations at a cheaper rate.
Although because of globalization it has marked a new civilization which has enabled the people to stay in touch with each other and making the world a smaller place. But still it has a lot of evils which we can’t overlook and we have to make sure that something is done to ensure that from the future such a thing is not repeated. There should be some measures or restrictions imposed to insure that if anything major happens either in Europe, India or even United States it should not cause problems for the whole economy. Unemployment, social degeneration and the main problems of globalization which people must be aware of that globalization is a one way tale. None the less, it is hoped that even after such an impact on the industry, the whole automotive industry which has stood the test in the previous recessions as well will bounce back once again.
- BBC NEWS. Jorn Madslien,Business reporter, BBC News Car companies look beyond recession(online)
- Available from: http://news.bbc.co.uk/2/hi/7674505.stm
- MSNBC News. Gas prices put Detroit Big Three in crisis mode(online)
- Available from: http://www.msnbc.msn.com/id/24896359/
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