The Automotive Crisis
Overview of the Financial Crisis
Between 2008 and 2010, the global economy has experienced one of the most extreme depressions in the modern history. The badly affected United States, through its Federal Reserve and government, attempted to stabilize the economy by lowering the interest rates as well as issuing tax rebates. However, despite these brave efforts, the economic crisis in the country expanded considerably throughout the rest of the world. Distressingly, the continued existence of numerous manufacturers, especially the automobile manufactures, was even more endangered not only because of the faltering American economy, but also of the soaring fuel prices that occurred during the period. Expectedly, the European automotive sector became equally powerless to break out the ongoing recession. Because of the global financial crisis, the worldwide automobile sales in 2008 dropped by three percent while the sales in early 2009 even more decreased to almost 35 percent when compared to the preceding year (Roland Berger, 2009). During this period, the overall profitability of the automotive manufacturers was undoubtedly in a low point.
The Automobile Crisis in the United States and Europe
Unlike the United States and Europe, automobile manufacturers in Asia were not significantly affected by the problems brought by the economic crisis, oil price increases, and the publics new expectations on automobiles. Statistics reveal that the market shares of automakers from the United States and Europe in the past several years have been noticeably eroding, while Asian carmakers, particularly the Japanese, are strongly gaining a toehold with the American and European markets. According to consumer reports, for the first time in the history of its inventory of most recommended automobiles, the Top 10 picks of car buyers were all automobiles manufactured by Asian carmakers. In view of this, many experts believe that the crisis in automobile industry in the United States and Europe was not mainly the consequence of the economic crisis, but also the result of poor business practices. In fact, many of the American-based manufacturers were filing for bankruptcy as a consequence of the admitted fact that they have not properly managed their capital, time, and products.
Unlike in the United States, however, where automobile manufacturers are somewhat persuaded to file for bankruptcy protection from creditors as part of an agreement with the government under which they can receive billions in loans from the treasury, restructure their debt, clear themselves of liabilities, and sell their assets, the scenario in Europe is generally very different given that closing plants is not an absolute option considering the role of the Union and the governments. Automobile manufacturers in Europe would more likely reduce their output by minimizing production line in any of its department or converting facilities to serve other functions like component plants. All the same, the restructuring would likely result in wage reductions for the workforce as well as streamlining throughout the company consistent with the goal of meeting lower operating cost-targets.
United States
Records show that from the time Chrysler, General Motors, and Ford (otherwise known as the Big Three) started their operations in the United States, they had been consistently and outstandingly profitable. However, at the onset of 2008, the car sales in the United States significantly declined, thus affecting these U.S. based automobile manufacturers. As a result, Chrysler, General Motors, and Ford started to experience diminished market shares, financial losses, and severe reduction of their respective employment levels. The most disappointing part for these American automobile companies, however, is the sharp plunge in their truck sales, particularly for Chrysler and Ford. These companies throughout the years had maintained a stable selling with their Sports Utility Vehicle lines, but following the financial crisis, oil price increases, and consumers preference towards smaller, foreign-made SUVs, their sales dropped sharply.
Alarmingly, due to the quick drop of Chrysler, General Motors, and Fords sales last year the operations of some of their factories were voluntarily discontinued. General Motors as well disseminated several of its workers in certain divisions into self-regulating companies in order for them to survive. Their ensuing application of enormous loans caused greater public assessment of Americas automotive industry apart from the usual criticism of the industrys high labor wages, product quality, and product range. Unfortunately, in early 2009, the prospect of Chrysler and General Motors to keep away from bankruptcy ultimately disappeared. The governments assistance to Chrysler and General Motors triggered the start of the most distressing automobile crisis in history. In order to assist the American automobile industry invest in modern production technology, the United States Congress endorsed an aid package amounting to 25 billion or as much as 19.7 billion euros. The companies poor business practices and management were viewed by many experts to have played significant roles in their eventual bankruptcy.
Europe
In Europe, the automotive industry had been considered as the most vital mechanism that moves the economy. Approximately 10 percent of jobs in Europe relied directly or indirectly on the automotive sector, benefiting about 12 million families. Throughout the years, the industry had been the leading promoter in innovation, had had a pool of high-skilled workforce that reinforced Europes international competitiveness, and had been an extraordinary factor in the export sector. European manufacturers have been able to easily address any problems concerning excess production numbers because of the industrys aforesaid superiority. The automotive industry in Europe had indeed been an essential industry and was expected to have a sound future due to its strong commitment to manufacturing high-tech, world-leading automobiles worldwide.
However, like in the United States, the European commercial vehicle and passenger car manufacturers were critically affected by the financial crisis and ensuing economic downturn that commenced more than two years ago. Automobile sales went down sharply that resulted in the trimming down of production of all automotive suppliers and manufacturers in Europe. Unfortunately, the credit crunch made the problem of financing daily operations of the European automotive sector as well as the diminishing consumer demand for new trucks and cars even more intense, which all the more resulted in a drop in demand for both commercial vehicles and passenger cars. In 2008, several European automakers were forced to cut back workforce, and even close their factories. Sadly, during the second half of 2009, additional insolvencies followed due to significant decrease in the production of some automobile facilities.
Aside from the trend towards smaller cars and global recession, experts believe that the current crisis in the automotive industry in Europe is basically the result of financial, structural, and economic failure. Because of an ever more diverse competition on product assortment, and the unexpected serious demand of vehicles that meet the environmental requirements, the automobile manufacturers in Europe were left with low profit margins. Alas, the manufacturers have significantly inadequate access to credit and, when available, it generally provides higher interest rates for suppliers and for prospective buyers of trucks and cars.
In view of the aforesaid difficulties, the affected European automakers cast an envious eye at the Americas approach to saving its automobile industry and, for that reason, sought a comparable action. Seeing the government of the United States provided billions of dollars to save Chrysler, General Motors, and Ford before they failed, European manufacturers called on European Union institutions and governments to help them achieve a strong and healthy automotive industry. Accordingly, last November 2008, the head of the Eurogroup of single currency nations, Steinmeier, and Prime Minister of Luxembourg, Jean-Claude Juncker, ordered the members of European Union states to formulate a general rescue package that would assist European automobile manufacturers suffering from the existing economic crisis.
The General Motors Company
General Motors Company is a United States-based automobile manufacturer with a head office in Detroit, Michigan. It was founded by William Crapo on September 16, 1908, initially as a holding company for Buick (The New York Times, 2010). From 1923 to 1946, and under the guidance of its chief executive, Alfred P. Sloan, Jr., General Motors almost single-handedly carried the automobile sector in the United States through its effort on meeting the amazing demands of the consumers, particularly by offering several diverse ranges of automobiles like Buick, Cadillac, Pontiac, Oldsmobile and Chevrolet. These new product offerings gave General Motors a 46 percent share of the American auto market during the 1950s, while Chrysler and Ford combined for only 44 percent, and everyone else shared just 10 percent. The peak of General Motors success continued in the next decades when the company owned 50 percent share of the truck and car market in the United States.
General Motors was considered as the leading company in the most significant industry in the world for the most part of the 20th century (The New York Times, 2010). Throughout the years of its operation, General Motors had not only piloted automotive modernizations, but also helped register the new breed of immense, domineering international corporations that formed the post-war economy. The company revolutionized Detroit into the Silicon Valley of its day, which eventually symbolized the countrys competence for modernization. The companys unprecedented growth was noticed in its hundreds of thousands of workers and numerous assembly plants that operated all over the United States. General Motors holds the record as the major car manufacturer in the world since 1931, which was only broken in 2009 when Toyota surpassed General Motors worldwide sales.
General Motors - Crisis in USA
By the fall of 2008, General Motors lost its distinction as the worlds leading car manufacturer. Despite General Motors two-year steep financial controls, the company all the same found itself on the boundary, thus forcing them to petition the federal government for the funding it needed to continue the companys operation. Through the order of former President George W. Bush in December 2008, General Motors received 9 billion in federal aid (The New York Times, 2010). In the following year, a restructuring plan was proposed by the companys chief executive, Rick Wagoner, which was eventually rejected by President Obama. President Obama instead ordered General Motors to adjust itself within 90 days into a smaller, leaner company and to win profound compromises from its bond-holders, suppliers, and unions. Nonetheless, after some time, the creditors of the company resisted and the auto task force of President Obama only became persuaded that the safeguard of bankruptcy court would be the most excellent move to save General Motors.
Accordingly, in June of last year, the bankruptcy documents were filed by General Motors and the process was concluded a month later when the company sold its viable assets to a new, government-owned corporation. The federal government holds almost 61 percent of the new company, with the bondholders, healthcare trust for the United Auto Workers union, and Canadian government owning the balance. As a result of this development, the company becomes much smaller, with brands like Pontiac, Hummer and Saturn were either closed or sold. Moreover, brands like GMC, Cadillac, and Chevrolet were folded into the new company known as Vehicle Acquisition Company, but this company was all the same renamed eventually again to General Motors Company. With thousands of dealers having been severed throughout the reorganization, the new company is left with a smaller sales network. Likewise, as competitors profited from General Motors troubles, the new companys market share has also dropped to 20 percent, or down from more than 50 percent from its glory days, while the current international sales reveal somewhat comparable to its domestic sales.
General Motors - Crisis in Europe
Starting 2008, General Motors already declared an accumulated operating loss of about 30.9 billion. Following this announcement, experts believe that the gleaming future of General Motors in Europe likewise became uncertain. Struggling to stay afloat, General Motors appealed for AUS 6.6 billion assistance from individual European governments. Thus, in the following year, the head of the European Union arranged for a crisis conference of all the member states that have General Motors plants operating within their jurisdiction. European Union claims that as of the moment, General Motors has not demonstrated that it can be gainful in the future if bailout would in fact happen.
Last January of this year, General Motors finally announced the shutting down of its Opel plant in Antwerp, Belgium, which is the German unit of the faltering company. This particular facility was the first plant closed by General Motors in Europe from the time the company initiated a restructuring plan following the global economic crisis. The Antwerp plant had more than 2,600 workers, comprising about five percent of the Opel workforce in Europe. According to the company, the workers of this plant built almost 89,000 Astra compacts model last year, but in view of the existing economic environment that resulted in the enormous disparity between its production and sales, the company believes that the only reasonable approach left is to shut down the Antwerp plant .
Accordingly, the European Union demands that General Motors should reveal to the Union everything from the companys plans with its European facilities, the companys preparedness to sustain accountability for its European companies, to the things that the company is undertaking with its property rights. The European Union demanded that General Motors must incorporate an outline of its future business strategy and must likewise demonstrate that the company is capable of remaining viable. As of the moment, no date has been set for further crisis conference, but the head of the Union believes that the participants would similarly include Britain, Germany and other countries with General Motors plants.
The Opel Company
Adam Opel GmbH is an automobile company established by Adam Opel on 1853 in Rsselsheim, Germany. At the beginning, Opels business was mainly focused on manufacturing sewing machines in Germany. It was only four years after Adam Opels death in 1895 when the company, which by that time managed by Adam Opels children, became a full-fledged automobile industry. During its existence, Opel made significant investments in the expansion of its European operations and plants along with new facilities all over the world. In 1929, Opel eventually became a wholly-owned subsidiary of General Motors.
Throughout the years, General Motors made the Opel headquarters in Germany as its lead source for technology and design as well as its source of international product development plans (Opel Motorsport Club, 2008). During the 1990s, the company made noteworthy development in the internationalization of the Opel brand, in innovative product technology, and in expanding its model series. In early 2009, however, Opels future likewise became uncertain as global financial crisis constrained its parent company the General Motors towards bankruptcy. During this wearisome period, the company was subjected to a bidding process under the administration of a trustee, with controlling board composed of German government employees, and representative of General Motors.
Because of the global crisis, Opel decided to sell its majority stake last September 2009 to Russias Sberbank, and the latters partner Magna International, a Canadian-Australian auto parts company. A month later, however, General Motors pulled out from the aforesaid agreement to sell. General Motors believes that it would be best for the company to restructure itself for European business, which it had identified as a favored global approach for the companys small cars. Accordingly, General Motors restructured its European operations within the same year by combining Opel, based in Rsselsheim, Germany, with Vauxhall, based in Britain. Moreover, in an attempt to win the support of Chancellor Angela Merkels government, from which General Motors appealed for reorganizing assistance, the company promised not to shut down the operations of any of its four Opel facilities in Germany.
Opel - Crisis in USA
In the wake of economic crisis in the United States automobile sector and the global market turmoil, General Motors announced that it is seeking assistance in countries where it has major manufacturing plants (Agence France-Presse AFP, 2008). In particular, General Motors claimed that the impact of the economic slowdown and international financial crisis led to the production trouble of two of its European plants that employed almost 6,000 worker. The assessment reveals that Opel needs at least two billion euros in possible public loan securities, which the General Motors obviously cannot afford. The objective of the request is to make sure that additional loans are availed of because the global financial condition made the parent company, General Motors, even more deteriorated. The said loans are planned to cover investment in assembly plants and product development. For that reason, the finance minister, the economy minister, as well as the federal government are taking control of the wavering company. The federal government consequently guaranteed one billion euros, while Thuringia, Rhineland-Palatinate, and Rhine-Westphalia, where Opel has plants assured the second billion (AFP, 2008)
Opel - Crisis in Europe
This year, General Motors forecasts that the West European car market will sharply decrease by 1.5 million vehicles from the previous years market, or a drop of almost four million from the peak in 2007. Unfortunately for Opel, its cars are distributed in countries where many experts believe there is going to be no market increase. In view of this, the streamlining analysis of General Motors calls for the shutting down of European operation by approximately 20 percent in order for the company to be profitable by 2012. Last January 2010, General Motors indeed closed its Opel plant in Antwerp, Belgium, which was the initial concrete action that the company had engaged toward overhauling its Opel division. According to General Motors, closing the Antwerp plant will facilitate the company in attaining its reformation target as it cuts roughly nine percent of its operation. The entire restructuring plan, however, involves cutting 1,300 administration and sales jobs, in addition to 7,000 in manufacturing, which would result to the biggest revamp in the history of the Opel car company.
Nevertheless, Opel likewise does not discard the possibilities of partially selling 25 to 50 percent of its share, which will transform the company into a joint-stock company. This option is also what General Motors has been planning since the start of 2009 when it was confronted with the reality that Opel is operating under billions in emergency federal loans. Although General Motors will have the ultimate decision on who acquires Opel, European governments are still playing a decisive role in the sale process given that they are being requested to dispense billions of euros worth of loan securities. The sale would eventually commence the detachment of Opel from the domain of General Motors.
Effects of the Crisis to Other Car Companies
From the inception of the global financial crisis, many experts have already suggested that the crisis would set off the constriction of the market, downsize investment, and eventually result in worker lay-offs. During the past months, the problem has indeed consistently led to retrenchment of numerous workers and, in a number of cases, even to the shutting down of various manufacturing plants. In the automotive sector, the crisis has likewise caused the reduction of the working hours in direct and indirect jobs as well as in job losses. Aside from General Motors and Opel that have been greatly affected by the financial crisis, other automobile manufacturing companies like Chrysler, Ford, Porsche and the Mercedes were also significantly affected by the phenomenon that took place during the past months.
Chrysler
Since 1925, the Chrysler Corporation had been a giant in the automotive industry (Ramsey Kary, 2009). The company was one of the biggest manufacturers in North America, and they became very popular due to its creation of the model vehicles like the minivan, K-car, Barracuda, and Jeep. Like any other automobile companies, Chrysler received its share of good and bad times during its existence. However, Chryslers most difficult problem to date took place during the onset of the global financial crisis when the credit markets in the United States were frozen. In view of that, Chrysler dealers were prevented from placing wholesale orders for new vehicles because of lack of access to market competitiveness funding, and its customers as well prevented from purchasing vehicles because of lack of access to competitive financing. This resulted in the constriction of Chrysler cash inflows thereby making the company incapable to pay its billions of dollars in cash payment obligations, particularly payment for raw materials and wages for the workers. In the end, Chryslers liquidity slowly fell below the level needed to maintain its everyday operations.
The bad times of Chrysler went to its pinnacle when the company filed for bankruptcy protection on May 2009 along with its proposal for partnership with Fiat, an Italian automaker. At this time, the company has roughly 54,000 workers, listed assets of over 39.3 billion, and a debt amounting to over 55.2 billion. Upon reaching the agreement, Chrysler sold most of its assets to Fiat, while the remaining holdings were sold to a recently formed company identified as Chrysler Group LLC. The payment for the remaining holdings amounting to 6.6 billion to the insolvent Chrysler was financed by the federal government. Some of the biggest creditors of the company, particularly the parts suppliers, were likewise paid off during bankruptcy as part of the government supported streamlining.
The government asserted that the bailout was produced and approved to prevent the number three automaker in the United States from sliding into a bankruptcy. The government believes that if the bailout was not provided to Chrysler, it would have resulted in the retrenchments of hundreds of thousands of direct and indirect jobs as well as sent tremor through the countrys financial markets. Like General Motors, the assistance from the government and bankruptcy process allowed Chrysler to get rid of much of their debt far more reasonably, thus leaving both companies with healthier financial statements .
Ford
Unlike Chrysler and General Motors, Ford has carefully secured a line of credit lest the company needs a bridging loan in the near future. The company mortgaged much of its operations to amass money to disburse for its downsizing and reorganization of its operations in North America. However, Ford is unquestionably not out of the woods yet as many are still in doubt concerning how much higher the market shares of the company could go. Although Ford posted sturdy gains in its United States market share throughout most of the months in 2009 against its long time competitors, this accomplishment would not be enjoyed by Ford anytime soon seeing that Chrysler and General Motors are no longer in bankruptcy.
Aside from the problem of market share, there are likewise uncertainties on the massive pool of borrowed funds on which the company draws given that these will eventually become a heavy weight for the company to carry while moving forward. Ford has approximately no less than 26 billion in debt that is burdening on its financial statements. To stay vigorous, the company perhaps needs to shell out at least 5 billion for its debt, an amount which cannot be easily generated out of the market sales. In view of this, many investors believe that Ford will sooner or later sell additional shares in order to cut back on its debts, thus diluting the holdings of current shareholders. Therefore, one of the crucial questions now developing to Ford Company is whether its move to avoid bankruptcy is essentially good or bad for the company in the long-run.
Porsche
Porsche Automobil Holdings SE is a German automotive manufacturer of luxury vehicles. The first Porsche automobile was built on June 8, 1948 by Ferdinand Porsche. The initial batch of Porsche automobiles was hand-built in GmndKrnten. However, it was only in 1959 when Porsche started its extensive operations by introducing a new generation of Porsche design to the market, including the 911 model, which eventually became one of the leading sports cars in the world during the 1960s. In modern years, Porsche have produced a number of other popular high performance vehicles, including Cayenne SUVs, and Cayman and Boxster sports cars. In 2009, Porsche entered to a merger agreement with Volkswagen, the leading automaker in Europe, which will take effect in 2011.
Unfortunately, some time during the global financial crisis, the Chief Executive Officer and President of Porsche Automobil Holdings SE, Dr. Wendelin Wiedeking, announced that just like any other automotive companies, Porsche was likewise not able to break out from the general downward movement in the global automotive industry during the first half of 2008. As a result, last January 2009, Porsche declared a sales plunge of approximately 14.3 percent or about Euro three billion. Expectedly, the global financial crisis has turned over several previously secured dealings of Porsche, particularly the companys objective to get the better of Volkswagen.
Mercedes-Benz
Mercedes-Benz is a Germany-based manufacturer of trucks, coaches, buses, and luxury automobiles. The first Mercedes-Benz vehicles were manufactured in 1926, which integrated several safety and technological innovations now common in many automobiles. Throughout the years, the company has created a full range of passenger, heavy commercial and light commercial equipment, as well as maintained a reputation for its durability and quality. Because of Mercedes-Benzs success and popularity, its vehicles are now greatly patronized by up-and-coming economies, like India, Russia and China. In China, Mercedes-Benz became the fastest-growing automobile brand with 65 percent market share. Nonetheless, because of the global recessions impact on the luxury car sector, the worldwide sales of its compact urban Smart cars and luxury Mercedes-Benz cars plunged by more than 10 percent. Last year, the sales of Smart cars dropped by about 13 percent, while Mercedes-Benz luxury cars dropped by 9.7 percent. In view of this, Mercedes COO Rainer Schmueckle announced in 2008 that the company is likewise experiencing a full blown sales crisis and is already cutting the number of its temporary workers.
However, fortunately for the company, during the last quarter of 2009, Mercedes was able to post a 13 percent increase in sales, basically due to the companys efforts to penetrate in the aforesaid key emerging markets. Overall, as compared to other giant car manufacturers in the United States and Europe, Mercedes-Benz has somewhat escaped from the impacts of global financial crisis. In 2009, the companys monthly sales on mainland China increased by 21 percent. During the same period, the company sold around 1,600 units of its SUVs, which became the foremost contributor to the companys overall growth in China. Moreover, the S-Class model of Mercedes-Benz was able to hold the top position in the high-end division in Chinas luxury car market. This year, the company is expected to introduce its latest luxury grand tourer automobile to the market, the Mercedes-Benz SLS AMG, which the company expects to generate high sales.
Steps to Accomplish
The wellbeing of automobile industry is of enormous importance to the condition of economy of any country. It is important for the governments to safeguard their respective automobile industry from impacts of the global financial crisis by maintaining their industry strong and fresh. It is therefore without doubt that the automobile crisis that has taken place during the past months can only be blamed to the governments failure to establish a sound policy that protects the industry, particularly on the wariness of banks to take risks on providing loans to automakers.
Year 2009 was certainly a challenging time for the automotive industry. After the enormous restrains during the said year, the key players in the global automotive market are now planning to invest intensely again in future vehicle programs. Thus, it is very crucial that the United States and European institutions and governments continually guarantee automobile companies access to liquidity, through investment banks. Governments must formulate a sound policy that provides banks some form of financial package every time they extend loans to distressing automakers. Moreover, it is equally important that governments refrain from adding new expensive vehicle regulations for a specified number of years so that the distressing companies will be given ample time to recuperate their financial problems.
For the automobile companies that survived the impact of the recession, it is likewise important that they carefully plan for the unpredictable future by formulating innovative approaches in almost everything they execute. Companies must make sure that the new approaches include their system of reporting to the investment community and to the stakeholders as well as their decision making process, particularly on the legal and tax structures in depressed markets. Companies must additionally rethink their business structure completely to get rid of complexity that suppresses innovation and hinders their competitiveness.
Hence, it is important for the automobile companies to have transparent and clear communication of outlooks, risk exposure, and management strategy. It is likewise very important for them not to apply their established transfer pricing guidelines during this unstable economic condition due to the unpredictable automotive market. Finally, companies should evolve and grow from their crisis experience through the simplification of their business model in order to improve their viability.
Conclusion
The automotive industry crisis that transpired between 2008 and 2010 that affected many countries around the world was basically the consequence of the global financial recession, along with the oil price increases and publics new expectations on automobiles. During these times, the worldwide automobile sales started to drop sharply, making the period a low point in terms of overall profitability of the automotive manufacturers. As a result, many of the American- and European-based manufacturers filed for bankruptcy because of the admitted fact that they have not properly managed their capital, time, and products. The sales of Chrysler, General Motors, and Ford, otherwise known as the Big Three, which were historically the giants of the worldwide automotive industry, have significantly declined at the onset of 2008. Meanwhile, the sales of European manufacturing companies such as Opel, Porsche, and Mercedes have been likewise negatively affected by the crisis that took place during the past months.
However, unlike in the United States and Europe, automobile manufacturers in Asia were not significantly affected by the problems experienced during this time. In fact, Asian carmakers have strongly invaded the markets of the United States and Europe that resulted in the significant drop in market shares of American and European automakers. Despite the efforts these American and European manufacturers, they still found themselves on the boundary, thus forcing them to petition their governments for funding to continue their operation. In view of this, it is undeniable that the consequence of the global financial crisis was indeed principally experienced by American and European American automobile manufacturing industry seeing that many of their automobile companies were driven to the threshold of bankruptcy.