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The Effect of a Struggling Economy on the Auto Industry

Powerful Essays
Introduction

When the “Sub-Prime Mortgage Crisis” began in 2008, it triggered a global recession. Demand decreased across all industries, but the auto industry was hit especially hard due to vehicles being big ticket items. Even prior to the recession, the high prices of raw materials and fuels, as well as increased pressure from the government and consumers for automakers to build “greener” cars meant trouble for automakers. Within the industry, Canadian and the American auto makers were hurt the most. The strong presence of unions meant that they had a much higher labour cost than their competitors. Also General Motors, Ford and Chrysler, known as the “Big Three” primarily focused on manufacturing pickup trucks and SUVs because of their high profit margin. Sales plummeted when the fuel prices drastically increased and consumers could not or would not get a loan to pay for a new car.

Analysis

In 2006, prior to the “Sub-Prime Mortgage Crisis”, General Motors Corporation (GM) was focusing on implementing a turnaround plan for North America, which focused on the company increasing production of SUVs and trucks while emphasizing size, strength, and value. When the crisis became apparent and consumers started spending less, GM’s sizeable book leverage of 0.259 (See Appendix A) multiplied the impact of the crisis on GM. Further impacting GM in 2007 was a new agreement with the Canadian Autoworkers’ union, who refused to make any concessions for GM regardless of the state of the economy, as well as drastically increasing oil costs. Due to these events, GM thereafter experienced major falls in net profit margin and ROA (See Appendix A) in 2007, 2008, and in the first half of 2009. From 2006 to 2009, it can be seen in GM’s increasi...

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...d on the other hand, posted a profit.

Future Outlook

For the past many years, the American automotive companies rode the economic booms and success that was built by them long ago. They also knew that the American governments employ the “Too Big to Fail” philosophy, believing companies that are too large and too interconnected to the economy are too valuable to be allowed to fail. It was this lack of incentives that lead to their demise. Apart from ford, the other two big players in the American Automotive industry failed to become competitive and they paid a heavy price. Now that they had their wake up call, consumers can only expect better things in store. The big three now realize that they are no longer untouchable and they must produce efficient cars, in the most efficient manner, and to the demand of their consumers. The consumer has emerged victorious.