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Automotive industry crisis of 2008–2009

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The automotive industry crisis of 2008–2009 is a global financial crisis in the auto industry that began during the later half of 2008. The crisis is primarily felt in the United States' automobile manufacturing industry and, by extension, Canada, due to the Automotive Products Trade Agreement, but other automobile manufacturers, particularly those in Europe and Japan, are also suffering from the crisis.[1]

The automotive sector was first weakened by the substantially more expensive automobile fuels[2] linked to the 2003-2008 oil crisis which, in particular, caused customers to turn away from large sport utility vehicles (SUVs) and pickup trucks,[3] the main market of the American "Big Three" (General Motors, Ford, and Chrysler). The US automakers also suffered from considerably higher wages than their non-unionized counterparts, including salaries, benefits, healthcare, and pensions.[4] In return for labor peace, management granted concessions to its unions that resulted in uncompetitive cost structures and significant legacy costs.[5]

In 2008, the situation became critical because the global financial crisis and the related credit crunch[6] placed pressure on the prices of raw materials. In certain countries, particularly the United States, the Big Three have been under heavy criticism since their vehicle offerings were largely fuel inefficient SUVs and light trucks, despite the increase in the price of oil. Accordingly, they suffered both from consumer perception of relatively higher quality models available from abroad — particularly from Japan and to some extent from Europe —and from transplants, foreign cars manufactured or assembled in the United States.[7] The Big Three had neglected development of passenger cars and instead focused on light trucks due to better profit margins, in order to offset the considerably higher labour costs, falling considerably behind in these market segments to Japanese and European automakers.[4]

As of the beginning of 2009, the vehicle companies of the world are being hit hard by the economic slowdown across national boundaries. Car companies from Asia, Europe, North America, and elsewhere have been forced to implement creative marketing strategies to entice reluctant consumers to purchase vehicles, when many firms are experiencing double digit percentage sales declines. Major manufacturers, including the Big Three and Toyota, are offering substantial discounts. Hyundai is even offering to allow customers to return their new cars if they lose their jobs.[8]

Contents

[edit] General background

Most agree that the crisis has occurred mainly as a result of the poor business practices of the Big Three U.S. automakers, since Asian companies that manufacture automobiles in the U.S. are not experiencing similar problems.[9][10] A December 22, 2008 New York Times article stated, "For the most part, the so-called auto transplants — foreign-owned car companies with major operations in the United States — have deep pockets and ample credit, and they are not facing potential bankruptcy like General Motors and Chrysler."[11] In December 2008, Toyota Motor Corp. stated that it will post its first operating loss since the post World War II era giving credibility to arguments made by the Detroit automakers that the auto industry suffered due to the larger global financial.[12] While Michigan lost 83,000 Big Three auto manufacturing jobs between 1993 and 2008, more than 91,000 new auto manufacturing jobs were created in Alabama, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas during that same time period.[9]

The US automakers known as the "Big Three" had considerable benefit and legacy costs due in part to a large number of retirees and U.S. tax structure, including healthcare and pensions.[4] In return for labor peace, management granted concessions to its unions that resulted in them having uncompetitive cost structure and significant legacy costs. [13]

A "Jobs Bank" was negotiated with the UAW union in 1984, and in 2005 it paid 12,000 workers to show up daily and stay for their full shift, even though there was no work for them to do.[14]

[edit] Asia

[edit] China

In China, the government reduced taxes related to automobile purchases in order to spur flagging sales in 2008. In January 2009, Chinese auto-manufacturer Chery reported unprecedented monthly sales.[15]

[edit] India

In February 2009, the State Bank of India reduced interest rates on loans related to new automobile purchases. A downturn in automobile production compared to 2008 contributed to the bank's decision to lower interest rates.[16]

For the first few months of 2009, Tata Motors conducted a widespread marketing campaign leading up to the debut of the Tata Nano automobile. The low cost of the Nano, billed as "the people's car," is part of the company's strategy to improve automobile sales impacted by the credit crisis.[17]

[edit] Japan

The Toyota Prius is one of Toyota's Hybrid Fuel efficient vehicles which are in short supply

With high gas prices and a weak US economy in the summer of 2008, Toyota reported a double-digit decline in sales for the month of June, similar to figures reported by the Detroit Big Three. For Toyota, these were attributed mainly to slow sales of its Tundra pickup, as well as shortages of its fuel-efficient vehicles such as the Prius, Corolla and Yaris. In response, the company has announced plans to idle its truck plants, while shifting production at other facilities to manufacture in-demand vehicles.[18][19][20][21] On December 22, 2008, Toyota declared that it expected the first time loss in 70 years in its core vehicle-making business. Loss of $1.7 billion, in its group operating revenue, would be its first operating loss since 1938 (Company was founded in 1937). Toyota saw its sales drop 33.9 percent and Honda Motor by 31.6 percent.[22]

On 5 December 2008 Honda Motor Company announced that it would be exiting Formula One race with immediate effect due to the 2008 economic crisis and are looking to sell the team.[23] Honda has predicted that there may be reductions among part-time and contract staff. Upper management bonuses would also be reassessed and directors in the company will take a 10 percent pay cut effective January 2009.[24]

Nissan, another leading Japanese car manufacturer, announced that it also would be slashing production and will reduce its output by 80,000 vehicles in the first few months of 2009.[25]

In December 2008, Suzuki Motor Corporation, Japan's second biggest car manufacturer, announced that it will cut production in Japan by about 30,000 units due to falling demand. The company is expected to face its first profit drop in eight years for financial year ending in March 2009.[26]

Reported in Bloomberg on Dec 23, 2008, that Mitsubishi Motors is to widen production cuts on falling demand. The Japanese maker of Outlander sport-utility vehicles, will scrap the night shifts at two domestic factories as the deepening global recession saps auto demand. The carmaker will halt the night shift at its Mizushima plant, excluding the minicar line. Nighttime work at the Okazaki factory will stop from Feb. 2. The cuts are part of Mitsubishi's move to reduce planned output by 110,000 vehicles in the year ending March because of tumbling sales in Japan, the U.S. and Europe. Japan's vehicle sales may fall to the lowest in 31 years in 2009, according to the country's automobile manufacturers association. Mitsubishi will also halt production of passenger cars on every Friday next month at the Mizushima factory in western Japan. The Okazaki plant in central Japan will close every Saturday in January and for another five days.

Toyota recently announced on Dec 22, 2008, it expects to barely break even this year and slashes profit forecasts amid sales slump. The Japanese automaker, often held up with Honda as a success story for the rest of the auto industry to follow, said it expects a slim profit margin of US$555 million for the year ending in March 2009. Toyota had originally been projecting a massive profit of $13.9 billion for that period. Their sales in the United States were down 34 per cent last month and were down 34 per cent in Europe as well. They are expecting a loss which would be the equivalent of about $2 billion (CDN)." Toyota President Katsuaki Watanabe said the impact on the company from the struggling global economy has been "faster, wider and deeper than expected." "The change that has hit the world economy is of a critical scale that comes once in a hundred years," Watanabe said, speaking in Nagoya.[27] Facing its first loss in nearly sixty years, Toyota is seeking loans from the Japanese government.[28]

[edit] Russia

In December 2008, protectionist tariffs of 30% were announced on cars imported into Russia, described by prime minister Vladimir Putin as vital to save jobs in the domestic auto industry.[29] The tariffs provoked protests across Russia. Riot police broke up protests in the city of Vladivostok, which is the main port of entry for Japanese cars.[30]

[edit] South Korea

The Hyundai Genesis is the first luxury sedan from South Korea and was named the 2009 North American Car of the Year.

South Korean automakers have been generally much more profitable than their US and Japanese counterparts, recording strong growth even in depressed markets such as the United States.[31] Despite a global economic slowdown, Hyundai-Kia successfully managed to overtake Honda Motor in Summer 2008 as the world's 5th largest automaker, climbing eight rankings in less than a decade.[32]

Unlike others, this crisis turned into an opportunity for many South Korean automakers. The continued growth and success is attributable to the country's fuel-efficient and well-equipped, yet affordable cars with generous warranties, such as the Kia Picanto, Kia cee'd and Hyundai i30, which attracted global consumers at a time of severe economic recession, rapidly rising oil prices and increasing environmental concerns. South Korean automakers had terefore a competitive advantage against expensive luxury vehicles and SUVs from US, Japanese and German automakers.

During the fourth quarter of 2008 to the first quarter of 2009, which was the height of this automotive crisis, the extremely weak won, especially against the US dollar and Japanese yen, significantly boosted the price competitiveness of South Korean exports in key markets. Another factor that helped maintain this momentum was an increasingly improving brand awareness, attributable to the introduction of the country's own luxury vehicles such as the Hyundai Genesis and Hyundai Genesis Coupe, which received highly positive awards in the press and reviews. Hyundai's brand grew by 9% in 2008, surpassing Porsche and Ferrari, while it used the Super Bowl football broadcast, the world's most expensive commercial air time, to promote the Hyundai brand in the United States.[33]

Nonetheless, South Korean automakers were not completely immune to this automotive crisis and in December 2008 Hyundai Motor Company had begun reducing production at plants in the U.S., China, Slovakia, India and Turkey because of sluggish demand. The company missed an earlier projection of 4.8 million units for 2008 and announced a freeze of wages for administrative workers and shortened factory operations as demand weakens amid a global financial crisis.[34]

South Korea's fourth largest automaker, SsangYong Motor, owned by the Chinese automobile manufacturer SAIC (Shanghai Automotive Industry Corporation), is the worst effected company in this crisis as it manufactures mainly heavy petroleum consuming SUVs. The carmaker recorded its fourth straight quarterly losses by the end of 2008 with red ink of $20.8 million in the third quarter. Also during the July to September period, sales dropped 63 percent to 3,835 vehicles. Its production lines have been idle since Dec. 17 as part of efforts to reduce its inventory. The automaker has halted production twice previously this year. In December 2008, SAIC gave an ultimatum to the SsangYong union to accept its restructuring plan or face the parent company's withdrawal, which, if implemented, would mean certain bankruptcy.[35]

However, the South Korean Ministry of Knowledge Economy said that there will be no liquidity provision at the government level for five automakers - Hyundai, Kia, GM Daewoo, Samsung Renault and Ssangyong."We have no plans to inject liquidity into the carmakers, a ministry official said. "It has been repeatedly made clear.[35]

[edit] Europe

In Europe where car sales had also drastically decreased, consideration was being given to financial support for the automotive industry, particularly in France, Germany and Italy. German Foreign Minister Frank-Walter Steinmeier and Jean-Claude Juncker, Luxembourg's Prime Minister and head of the Eurogroup of single currency nations, discussed the possibility of a common rescue package to be agreed by all the EU member states.[36]

[edit] France

On November 20, 2008, French automobile manufacturer PSA Peugeot Citroen predicted sales volumes would fall by at least 10% in 2009, following a 17% drop in the current quarter. As a result, it planned to cut 2,700 jobs.[37] On the 11 February 2009, PSA announced it would cut 11,000 jobs world wide, however none of these are expected to be in France.[38]

Renault announced a net profit for 2008 of 599 million euros for the 2008 financial year. This was a 78% drop in profits from the 2007 financial year. European sales fell 4% and world wide sales 7%, forcing Renault to abandon their 2009 growth targets.[39] This however made Renault one of the few car makers to return a profit. Renault consistently struggled to return profits in the 1990s.

[edit] France/Germany

On November 24, French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed to support the crisis-stricken automobile industry in France and Germany.[40] Detailed plans would be announced shortly.[41]

[edit] Italy

Fiat and Chrysler hope smaller models like the Fiat Grande Punto could be successful in the US market

On December 16, 2008 Fiat in Italy announced that it will extend its temporary plant closures in Italy by a month; the Pomigliano d'Arco, the main plant for its Alfa Romeo cars will be shut for four weeks.[42] However, on February 20, 2009, reacting to actions by the Italian government to stimulate the automotive sector, Fiat said its plant closures would be curtailed.[43] The company also forecast that sales in Europe will drop by 14 percent in 2009.[42]

On January 20, 2009 the company announced that it had entered into an agreement, subject to regulatory approvals, to acquire 35% of Chrysler. Fiat's 35% stake in Chrysler would not involve a conventional sale of shares, but would be achieved in return for allowing Chrysler to utilise some of Fiat's fuel efficient technologies (Chrysler's February submission to the US government included a commitment to produce nine Fiat-derived vehicles over a four-year period starting in 2010, including four hybrid-electric and battery-electric models).[44] Chrysler would be accorded access to Fiat's sales outlets in Europe, while in reciprocation Fiat will also gain access to Chrysler's dealership network in the US, where it is predicted smaller models such as the Fiat Grande Punto may be successful.[45] In the past, Fiat has had trouble gaining a foothold in the American markets, whilst Chrysler has never held a strong market share in Europe since it sold its UK based Rootes Group and France based Simca to PSA Peugeot Citroen in the 1980s.

On January 22, 2009, Fiat announced a 19% drop in revenues in the last three months of 2008. Italian Prime Minister Silvio Berlusconi said the government would meet to discuss the issue.[46]

[edit] Spain

Spanish automobile manufacturer SEAT (a subsidiary of the Volkswagen Group) cut production at its Martorell plant by 5% on the 7 October 2008, due to a fall in general sales. This effected 750 employees. This is expected to continue until July 2009.[47] SEAT is still continuing to install solar panals in its Martorell plant near Barcelona.[48]

[edit] Sweden

On December 11, the Swedish government provided its troubled auto makers, Volvo and Saab, with support amounting to SEK 28 billion ($3.5 billion). The two companies had requested assistance, faced with the financial difficulties of their U.S. owners Ford and General Motors. The plan consists of a maximum of SEK 20 billion in credit guarantees, and up to SEK 5 billion in rescue loans.[49] On the 18 February 2009 General Motors warned Saab may fail within ten days, should the Swedish government not intervene.[50] On 20 February, an administrator was appointed to restructure Saab and assist in it becoming independent of its troubled parent General Motors. General Motors have confirmed their intention to sell their Swedish subsidiary, Saab, however have made no such plans regarding its German subsidiary, Opel or British subsidiary, Vauxhall.[51] Of Sweden's 9 million population, 140,000 work in the car industry and they account for 15% of exports.[50]

[edit] United Kingdom

Nissan Motors UK in Washington is to shed 1200 jobs

In the U.K., Jaguar Land Rover, now owned by Tata Motors, was seeking a $1.5 billion loan from the government to cope with the credit crisis.[52]

On December 22, 2008, Tata motors declared that it would inject "tens of millions" of pounds for Jaguar Land Rover company it had acquired from Ford Motor Corporation in early 2008. British Prime Minister Gordon Brown also stated the intention to help out car industry in U.K.[53]

On the 8 January 2009, Nissan Motors UK announced it was to shed 1200 jobs from its Washington factory near Sunderland in North East England due to the automotive industry crisis of 2008.[54] This announcement was made, despite the plant recently being hailed as the most efficient in Europe.[55][56]

General Motors UK subsidiary Vauxhall Motors, whose brand is the second most popular in the UK has two bases in the UK, a factory in Ellesmere Port, Cheshire and their headquarters and design and development centre in Luton, Bedfordshire. It is as yet unknown whether these plants will be effected by the GM cutbacks. The group along with their sister subsidiary, Opel of Germany was sold in their majority to Magna International, a Austro-Canadian company who supply many parts to large car companies.

UK bus manufacturer Optare received an order from Arriva in November 2008 for the manufacture of 53 buses in a contract worth over £6million, securing 500 jobs at the companies Assembly factory in Cross Gates, Leeds, West Yorkshire and the parts centre in Cumbernauld, North Lanarkshire.[57]

UK Van and commercial vehicle manufacturer LDV asked the UK government for a £30 million bridging loan to facilitate a management buyout of the group. On the same day this was refused.[58] LDV has since said it has a viable future and intends to become the first volume producer of electric vans should the management buyout take place. Production at LDV's factory in Birmingham, West Midlands (where it employs 850 staff) has been suspended since December 2008 due to falling demand.[59]

[edit] North America

[edit] Canada

The Canadian auto industry is closely linked to the U.S., due to the Automotive Products Trade Agreement and later the North American Free Trade Agreement (NAFTA), and is in similar trouble. Canada's 3,500 car dealers, which employ 140,000 people, told the federal and Ontario governments in mid-November they are at risk from the financial crisis; they are asking the national government to help out despite a record year[citation needed] of sales. Ottawa is considering providing financial aid to the Canadian subsidiaries of the Big Three, and possibly auto parts companies as well. The auto industry argued that loan guarantees and other help would try to save tens of thousands of Canadian jobs threatened by the sudden drop in North American car sales. Chrysler Canada has asked for $1 billion in aid, making it the only Canadian arm of the Big Three to make a specific dollar request.

Industry analyst Anthony Faria has criticized the labor contracts that Canadian Auto Workers then-president Buzz Hargrove negotiated with the Big Three US automobile manufacturers in 2007, predicting that the subprime mortgage crisis and currency would hit Canadian auto production especially hard. Faria noted that UAW president Ron Gettelfinger agreed to have the UAW's "all-in" wage, benefit and pension costs drop from a high of $75.86 per hour in 2007 to an average of about $51 per hour starting in 2010. By comparison, the CAW's cost per hour was $77 in 2007 and will rise to over $80 per hour by the end of the new contract. Faria said that Gettelfinger went into negotiations "with the right intention...Save jobs. The CAW strategy was to squeeze every dime out of them."[60] Hargrove was said to have "instilled backbone and an attitude that the union could always make the auto makers buckle at the bargaining table".[61]

Current union president Ken Lewenza has argued that labor is not responsible for the bankruptcy crisis facing the Big Three automakers, saying that his members would not make concessions part of any taxpayer-funded bailout. "We don't see this as us being the problem", Lewenza said, adding he would "absolutely not" accept any further cuts after losing tens of thousands of jobs in recent years. "We've suffered our share of pain."[62] Lawenza argued that the CAW agreed in 2007 to make concessions that will save the Big Three $900 million over three years.[63]

A spokesman for the Canadian Taxpayers Federation has criticized the CAW's "no-concession" stance, saying that it only serves to strengthen the opposition to a taxpayer-funded bailout for the struggling Detroit Three automakers. The CTF further pointed out that "It is especially difficult to understand anyone asking for government help that refuses to do anything to help itself to begin with", since they "fail to realize they've existed at the substantial largesse of taxpayers for decades".[64] Kelly McParland, a columnist for the National Post, has suggested that "if he won't give anything, he and his members are likely to lose everything." He also said that the problem facing the North American auto industry was borne equally by management and labor alike, criticizing labor for building up pay and benefits for themselves that was as unsustainable as it was enviable, while attacking management for its short-term strategy of selling gas-guzzling trucks and sales tactics (price cuts, rebates, free gas and cash-back schemes).[65]

The CTF has opposed the proposed $3.5 CAD billion bailout for Canadian subsidiaries of the Big Three, saying that it was an unfair financial burden on the average Canadian, as well as another excuse for the Detroit automakers to postpone much needed change. The CTF noted that federal and provincial governments spent $782-million in the past five years on the Big Three, saying "These have been a bottomless pit of requests for cash". Lewenza disagreed, saying that the bailout should be seen by Canadians as a loan that will be paid back when the country's economy is prosperous again.[66]

On December 20, the government of Canada and the province of Ontario offered $3.3 billion in loans to the auto industry. Under the plan GM will receive $3 billion and Chrysler will receive the rest. Ford only asked for a line of credit but will not be participating in the bailout.[67]

The CAW negotiated a cost-cutting deal with General Motors Canada on March 8, 2009. The deal would extend the current contract for an additional year to September 2012, and preserves the current average assembly-worker base pay of about $34 an hour. It would eliminate a $1,700 annual "special bonus," and reduce special paid absences or "SPA days" from two weeks to one week a year, while maintaining vacation entitlements which range up to six weeks a year for high-seniority workers. The deal also introduce payments by members toward their health benefits - $30 monthly per family for workers and $15 a month for pensioners. Lewenza said it also would trim by 35 per cent company contributions to union-provided programs such as child care and wellness programs. Lewenza called the package a "major sacrifice." However, observers noted that the deal did not go far enough; DBRS analyst Kam Hon described it as "not material." Automotive industry consultant Dennis DesRosiers said that General Motors had missed the chance to slash labour costs,[68] pointing out that bankruptcy was a looming threat, Ottawa and Queen's Park demanded cuts to the labour bill as a condition of the bailout, and that the deficit to the pension fund would prevent the CAW from striking.[61] He estimated the total hourly cost of a GM Canada worker, including benefits, is $75 to $78, and saying that "they [GM] got six or seven" when it should have been cut by $20. DesRosiers also said giving up cost-of-living increases is not significant when inflation is nearly non-existent and added that the 40-hour reduction in paid time off merely means "five fewer spa days." University of Toronto professor Joe D'Cruz calculated that it would save $148 million a year, though GM is seeking $6 billion in Canadian government support. [69][70] CAW autoworkers with seniority were able to maintain 10 weeks of vacation with full pay, while not contributing to their pension fund, relying instead on taxpayers (including these without pensions) to help make up their unfunded liabilities.[71]

The agreement is contingent on Canada being allocated 20% of GM's North American, and getting billions of dollars in federal and provincial taxpayer support, which Lewenza stressed will be loans. However, some suggested that this would not be the final time that automakers would request a bailout.[13] Dennis DesRosiers estimated that GM will go through its government loans in a couple of quarters, long before any recovery in the market. Furthermore, GM Canada president Arturo Elias had admitted to MP Frank Valeriote that GM had pledged all its assets worldwide to the U.S. government in order to secure the first tranche of a US$30-billion loan, leaving no assets to collateralize the $6-billion loan from the Canadian government. The Canadian Taxpayers' Federation noted that between 1982 and 2005, Ottawa handed out over $18.2-billion to corporations, of which only $7.1-billon was repayable, and only $1.3-billion was ever repaid. [71]

Chrysler vice-chairman and president Thomas W. LaSorda (himself the son of a CAW official) and Ford's chief of manufacturing Joe Hinrichs said that the GM-CAW deal was insufficient, suggesting that they would break the CAW's negotiating pattern set by GM. LaSorda told the Canadian House of Commons finance committee that he would demand an hourly wage cut of $20, suggested that Chrysler may withdraw from Canada if it fails to achieve more substantial cost savings from the CAW. [72] [73] [74]

On March 31, 2009, the Canadian federal and Ontario governments jointly rejected the restructuring plans submitted by GM and Chrysler. This came a day after US President Barack Obama had rejected the plans of their parent companies. Both federal Industry Minister Tony Clement and Ontario Premier Dalton McGuinty suggested the CAW's initial deal was insufficient in cutting costs and the union had return to the bargaining table to make further concessions, in order to show that taxpayers' money is justified. [75] As well, Fiat CEO Sergio Marchionne has asked that the CAW's wages be reduced to the levels of non-unionized workers from Honda and Toyota operating in Canada, or else they would walk away from the proposed alliance with Chrysler, resulting in the latter being forced into bankruptcy.[76]

[edit] United States

Main article: Effects of the 2008-2009 automotive industry crisis on the United States

The crisis in the United States is mainly defined by the government bailouts of both General Motors and Chrysler, while Ford secured a line of credit in case they require a bridging loan in the near future. Car sales declined in the United States, affecting both US based and foreign car manufacturers. The bridging loans lead to greater scrutiny of the US automotive industry in addition to criticism of their product range, product quality, high labour wages, job bank programs, and healthcare and retirement benefits.

In the United States under Chapter 11, if a company declares bankruptcy then they can go to a bankruptcy judge who will then decide what is in that company's best interest. The judge will look at all of the company's different aspects and from that they will create a leaner and stronger company.[77] GM, Chrysler, and Ford are all in trouble because they have not correctly managed their company's products, time, and money. With the bailout plan President Obama and his administration currently have available it will ensure that there is restructuring of the companies. They have planned for GM to be funded for 60 days during which they must come up with a sturdy plan for restructuring and the CEO also must resign. The plan that has been established for Chrysler is that they have 30 days to partner with Italian automaker, Fiat, and then they will receive $6 billion in loans.[78]

While the "Big Three" U.S. market share declined from 70% in 1998 to 53% in 2008, global volume increased particularly in Asia and Europe.[79] The U.S. auto industry was profitable in every year since 1955, except those years following U.S. recessions and involvement in wars. U.S. auto industry profits suffered from 1971-73 during the Vietnam War, during the recession in the late 1970s which impacted auto industry profits from 1981-83, during and after the Gulf War when industry profits declined from 1991-93, and during the Iraq War from 2001-03 and 2006-09. During these periods the companies incurred much legacy debt.[80]

Facing financial losses, the Big Three have idled many factories and drastically reduced employment levels. GM spun off many of its employees in certain divisions into independent companies, including American Axle in 1994 and Delphi in 1999. Ford spun off Visteon in 2000. The spin-offs and other parts makers have shared Detroit's downturns, as have the U.S.-owned plants in Canada. Altogether the parts makers employ 416,000 people in the U.S. and Canada. General Motors alone is estimated to have lost $51 billion in the three years before the 2008 financial crisis began. GM is set to reacquire factories from its Delphi subsidiary during its Chapter 11 restructing.[81]

The Big Three assembly plants are unionized (United Auto Workers and Canadian Auto Workers), which due to the number of retirees results in higher health care costs and benefit costs than more recently formed non-union foreign transplants.[4] The 2005 Harbour Report estimated that Toyota's lead in benefits cost advantage amounted to $350 US to $500 US per vehicle over North American manufacturers. The UAW agreed to a two-tier wage in recent 2007 negotiations, something which the CAW has so far refused.[82] Jared Bernstein, the chief economist of Vice President Joe Biden, noted in an interview with WWJ-AM in Detroit that most of the 2007 contract concessions apply only to new hires, while older workers "still benefit from contracts that were signed a long time ago." [83] However, only 30% of parts used by the Big Three employ union labor, with 70% sourced from non-union labor.

Delphi, which was spun off from GM in 1999, filed for Chapter 11 bankruptcy after the UAW refused to cut their wages and GM is expected to be liable for a $7 billion shortfall.[84][85][86]

In order to improve profits, the Detroit automakers made agreements with unions to reduce wages while making pension and health care commitments. GM, for instance, at one time picked up the entire cost of funding health insurance premiums of its employees, their survivors and GM retirees, as the US did not have a universal health care system.[87] With most of these plans chronically underfunded in the late 1990s, the companies have tried to provide retirement packages to older workers, and made agreements with the UAW to transfer pension obligations to an independent trust.[88] Nonetheless, non-unionized Japanese automakers, with their younger American workforces (and far fewer American retirees) will continue to enjoy a cost advantage.[89][90][91]

A Chevrolet TrailBlazer, one of General Motors SUVs

Despite the history of their marques, many long running cars have been discontinued or relegated to fleet sales,[92][93][94] as GM, Ford and DaimlerChrysler shifted away resources from midsize and compact cars to lead the "SUV Craze". Since the late 1990s, over half of their profits have come from light trucks and SUVs, while they often could not break even on compact cars unless the buyer chose options.[95] Ron Harbour, in releasing the Oliver Wyman’s 2008 Harbour Report, stated that many small “econoboxes” of the past acted as loss leaders, but were designed to bring customers to the brand in the hopes they would stay loyal and move up to more profitable models. The report estimated that an automaker needed to sell ten small cars to make the same profit as one big vehicle, and that they had to produce small and mid-size cars profitably to succeed, something that the Detroit three have not yet done.[96] SUV sales peaked in 1999 but have not returned to that level ever since, due to higher gas prices.

In the case of Chrysler Corporation, compact and midsized vehicles such as the Dodge Neon, Dodge Stratus and Chrysler Cirrus were produced profitably during the 1990s concurrently with more profitable larger vehicles. However, following the DaimlerChrysler merger in 1998, there was a major cost-cutting operation at the company. The result was the lowering of benchmarked standards for Chrysler to aim at. This directly led to the following in Chrysler's case. There was realignment of the Chrysler Group model range with those of GM and Ford (ie. a skew towards larger vehicles).

The Detroit Big Three had been slower to bring new vehicles to the market compared with foreign competitors. The Big Three have battled initial quality perceptions in spite of reports showing improvements.[97]

Falling sales and market share have resulted in the Big Three's plants operating below capacity (GM's plants were at 85% in November 2005, well below the plants of its Asian competitors), leading to production cuts, plant idlings and layoffs. They have been relying heavily on considerable incentives and subsidized leases to sell vehicles. which was crucial to keeping the plants running, which in turn drove a significant portion of the Michigan economy.[98] These promotional strategies, including rebates, employee pricing and 0% financing, have boosted sales but have also cut into profits. Promotions may drain the automaker's cash reserves in the near term while in the long run the company. Automakers have since been trying to scale back on incentives, while cutting production. The subprime mortgage crisis and high oil prices in 2008 resulting in the plummeting popularity of best-selling trucks and SUVs, perhaps forcing automakers to continue offering heavy incentives to help clear excess inventory.[99]

In 2008, with high oil prices and a declining US economy due to the subprime mortgage crisis, the Big Three are rethinking their strategy, idling or converting light truck plants to make small cars. Due to the declining residual value of their vehicles, Chrysler and GM have stopped offering leases on the majority of their vehicles.[4][100]

On September 30, 2008, the first automaker loan package, for $25 billion, was signed into law. The bill sets aside $7.5 billion in taxpayer funds needed to guarantee $25 billion in low-interest loans to help US automakers produce more fuel-efficient cars and trucks.[101]

The crisis has led to forecasts of massive unemployment and economic recession if not contained, and Democrats in Congress, supported by President Barack Obama have called for a "bridge loan" to assist the Big Three. On October 13, 2008, Obama said that he wanted Congress to double its guaranteed loans to the U.S. automobile industry from $25 billion to $50 billion.[102]

On June 2, GM Motors announced the sale of the Hummer brand of off-road vehicles to Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., a machinery company in western China, in which the transaction is expected to close in the third quarter of 2009.[103][104][105]

[edit] Effects of environmental expectations and changing product demand

Environmental politics and related concerns regarding carbon emissions have heightened sensitivity to gas mileage standards and environmental protection worldwide. In a 2007 edition of his book An Inconvenient Truth, Al Gore criticized the Big Three. "They keep trying to sell large, inefficient gas-guzzlers even though fewer and fewer people are buying them." For example, Japan requires autos to achieve 45 miles per US gallon (5.2 L/100 km; 54 mpg-imp) of gasoline and China requires 35 mpg-US (6.7 L/100 km; 42 mpg-imp). The European Union requires 52 mpg-US (4.5 L/100 km; 62 mpg-imp) by 2012. By comparison, U.S. autos are required to achieve only 25 mpg-US (9.4 L/100 km; 30 mpg-imp) presently. Other nations have adopted standards that are increasing mpg requirements in the future. When California raised its own standards, the auto companies sued.[106][107]

The Big Three received funding for a $25 billion government loan during October 2008 to help them re-tool their factories to meet new fuel-efficiency standards of at least 35 mpg-US (6.7 L/100 km; 42 mpg-imp) by 2020. The $25 billion in loans from the Department of Energy to the auto manufacturers were actually authorized by Congress early this year but not funded. Automakers could use these loans to "equip or establish facilities to produce ‘advanced technology vehicles’ that would meet certain emissions and fuel economy standards; component suppliers could borrow funds to retool or build facilities to produce parts for such vehicles."[108]

[edit] Effect of 2008 oil price shock and economic crisis

Medium term crude oil prices 2003-2008, (not adjusted for inflation)

In 2008, a series of damaging blows drove the Big Three to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.). The Big Three had in recent years manufactured SUVs and large pickups, which were much more profitable than smaller, fuel-efficient cars. Manufacturers made 15% to 20% profit margin on an SUV, compared to 3% or less on a car.[109] When gasoline prices rose above $4 per gallon in 2008, Americans stopped buying the big vehicles and Big Three sales and profitability plummeted. Robert Samuelson has advocated a more consistent energy policy, arguing "wild swings between low and high fuel prices have crippled the U.S. industry by erratically shifting buyer preferences -- to and from SUVs."[110]

The financial crisis played a role, as GM was unable to obtain credit to buy Chrysler.[citation needed] Sales fell further as consumer credit tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car. During 2007, nearly 2 million new U.S. cars were purchased with funds from home equity loans. Such funding was considerably less available in 2008.[111] In addition, stock prices fell as shareholders worried about bankruptcy; GM's shares fell below 1946 levels. Furthermore, the instability of the job market and individual consumers' finances discourages consumers who already have a working vehicle from taking on a new loan and payments, which affected almost all major manufacturers.

The annual capacity of the industry is 17 million cars; sales in 2008 dropped to an annual rate of only 10 million vehicles made in the U.S. and Canada. All the automakers and their vast supplier network account for 2.3% of the U.S. economic output, down from 3.1% in 2006 and as much as 5% in the 1990s. Some 20% of the entire national manufacturing sector is still tied to the automobile industry. The transplants can make a profit when sales are at least 12 million; the Big Three when sales are at least 15 million.[112]

The crisis has affected auto companies around the world, with large sales decreases experienced by all.

As of December 19, 2008, oil prices had fallen to $33.87 per barrel, but the automobile crisis continues.[113]


[edit] See also

[edit] References

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