The Rebuilding of the Economy by the Automobile Companies

The Rebuilding of the Economy by the Automobile Companies.

Author: Tony.

Tony’s Business series.

Abstract

            The automobile industry does contribute significantly to the US economy. The US economy and the automobile industry are interrelated, and thus factors that affect the US economy do also impact on the automobile industry.  In 2007, the global economic crisis commenced. The resulting crisis did have a negative impact on the automotive industry in the USA. However, the industry was restructured. The restructuring of the automobile industry has contributed to the rebuilding of the US economy.

Thesis Statement

The restructuring of the automobile industry has contributed to the rebuilding of the US economy.

Objective of the Research

This research aims to show that it was not the emergency loan per se that saved the automobile industry, but that the industry was saved by the restructuring that was done as part of the financial package

Information Conveyed to the Reader

Apart from the above different approach to the issue of the financial bailout, there is relatively nothing new that this research introduces to the reader.

Solution to the Problem

It is apparent that the main solution to the economic crisis is that the US economy needs to be restructured into a state whereby market failures are reduced and economic sustainability and self-sufficiency is enhanced

New Lang or Approach to the Issue

The financial bailout package that was disbursed by the Obama administration did enable US automakers to avert liquidation and collapse. However, the mass media approached the financial package deal as a source of cash injection, but this research approaches the financial package deal as a source of guidelines that facilitated the appropriate restructuring of the US auto industry back to vitality and sustainability

Minority View

This research is based on the view of the majority of experts within the auto industry, and thus the research does not take the minority view concerning revival of the US auto industry.

Introduction.

            Automobiles are an important possession for most Americans. Research has shown that automobiles have revolutionized the American economic system, and as such it has contributed significantly to the overall US economy. The automobile industry is intricately interrelated to the manufacturing, service and retail sectors. The collective income generated by the automobile industry is mostly derived from the sale of automobiles and their accessories. Moreover, the industry has employed many people, and it thus has both direct and indirect (and sometimes spin-off) contribution to the local economy. The industry has upstream economic contributions that sustain other manufacturing industries (Luger, 2005). Its downstream contributions to the economy are due to its interrelation with the energy markets, vehicle sales, public transport and the advertising companies. These sectors of the economy provide employment opportunities to the population and also add value to the community life. Thus, most employees in the US are employed in sectors that manufacture, sell or use automobiles. Moreover, the technological inventions and innovations of the automobile industry, such as armored vehicles have found applications in the defense industry (McAlinden, Hill & Swiecki, 2003). Thus, it is clearly apparent that the US economy and the automobile industry are intricately interrelated, and thus factors that affect the US economy do also impact on the automobile industry. Hence, the global economic crisis that started in 2007 negatively impacted on the automobile industry. The most affected companies were the three main domestic automakers: Chrysler, Ford Motors and General Motors (Freedman, 2010). However, financial bailouts prevented these automakers from going bankrupt and the resultant restructuring of the automobile industry enabled the automakers to become profitable, and this enabled the US economy to recover (Ciravegna, 2012).

Background.

In 2008, global recession negatively impacted the overall US economy. The resultant credit crunch and the drastic decrease in car sales led to the 2008-2009 US auto crises. The auto crisis only affected the US automakers, while most foreign automakers were spared, probably due to sufficient liquidity base of their parent companies or their ample credit. This caused the largest US automakers to face an impending liquidity crisis. In 2008, Chrysler, Ford Motors and General Motors requested for emergency loans from the federal government in order to avert a possible bankruptcy (Freedman, 2010). However, the government was non-committal initially, and this caused Chrysler and General Motors to sink into further into financial calamity, and in April 2009, the two giant automakers declared that liquidation and bankruptcy were eminent, and this disclosure forced the US government to advance an emergency loan amounting to billions of dollars to Chrysler and General Motors. This loan was meant to stabilize the automobile industry and thus avert mass lay-offs. The emergency loans enabled these automakers to terminate most of their dealership agreements. However, Ford was able to avert bankruptcy because the company had secured adequate credit in 2007. Moreover, the crisis facing the automobile industry was aggravated by the contemporaneous energy crisis. The automobile companies were unable to manufacture enough fuel-efficient motor vehicles, and this caused an excess inventory of undesirable and unnecessary automobiles. The reason for this was that the fuel-inefficient vehicles were expensive to maintain, and this lack of cost-efficiency caused most people to stop purchasing such vehicles (Freedman, 2010).

            In 2009, President Obama administration finalized the guidelines and plans for the bailout plan. General motors and Chrysler were selected to receive the bailout package. This emergency financial package was released by the US government despite the fierce criticism that the government faced from congress members and lobby groups that stated that such a bailout would gradually make America a socialist republic. President Obama stated that the financial bailout would enable these two automakers to avert closure and the subsequent mass lay-offs. He stated that such a scenario (of the collapse of giant US domestic automakers) would plunge the US into another great depression. Thereafter, he released the financial bailout package, and also formed an overseer committee that monitored progress within the auto industry. Also, he formed a commission that reviewed the US energy policy with the aim of ridding the US economy of its addiction to oil. This committee worked in concert with the auto industry to ensure that more fuel-efficient and environmentally friendly cars were manufactured. These cars were a major hit on the market, and their large volumes of sales enabled the US auto industry to recover its losses, and regain its financial health (Ciravegna, 2012).

Political View.

When the energy crisis started in 2000, Barack Obama was an Illinois senator. After he was nominated as the Democratic Party presidential candidate, he campaigned on the platform of financial reform and reduction of national debt. In 2008, he defeated John McCain in the US election, and he thus became the 44^th US President (“Biography”, n.d). He inherited a shaky American economy that was plagued by two foreign wars. Moreover, the international rating of the US was unfavorable. He was conversant with the unstable financial health of the US automakers, and he was determined to help these companies avert bankruptcy and lay-off workers. His government thus formulated and executed several policies that led to the conception of the financial bailout package (Frankel, 2012).

President Obama stated that the financial bailout and its associated guidelines enabled the American automakers to avert liquidation, and the restructuring of the industry enabled the automakers to recover their losses and find their way back to profitability, as was exemplified by the fact that General Motors recorded huge profits in 2011. Also in 2011, both Chrysler and General Motors were able to create 200,000 new jobs. These employment opportunities enabled the US economy to reduce its unemployment rate, and thus gradually recover its stable financial health. The guidelines of the financial bailout were formulated based on the energy policies that the Obama administration put in place in 2008 (Frankel, 2012).

In 2012, President Obama stated that the financial bailout was necessary because there was no private investor who was willing to come forward and assist the automakers to avert bankruptcy. However, Romney replied that Obama should have let the market forces chart the economic course for the US market. Political pundits stated this objection from Romney, implied that Obama should have let the automakers go bankrupt. Obama expressed his disapproval of the bankruptcy plan that was being proposed by the Republican Party. He (Obama) stated that his decisions were grounded on the fact that he (in his capacity as the US president) had a moral responsibility to preserve jobs and other sources of livelihood for the American worker and other non-upper class families. Most Republicans stated that post-bankruptcy financing would enable the automakers to absorb all the retrenched workers. However, Obama stated that Post-bankrupcy financing was not assured, and any decision based on post-bankrupcy financing would have catastrophic consequences to the american economy and social fabric. Obama categorically stated that the financial bailout saved the American economy from collapse, something that the bankruptcy policy of Republicans would not do (Ciravegna, 2012).

Currently, the automobile crisis has substantially abated and the sales of automobiles have increased, and thus most automakers are now making substantial profits. Thus, it is apparent that the bailouts saved the automobile companies from bankruptcy (Ciravegna, 2012).

Automobile Industry and the US economy.

The motor vehicle links the automobile industry to the US market. The automobile is ubiquitous in the US, and as this has led the automobile industry to grow into a massive economic entity that is vital to the overall US economy. Car sales link the retail sector and the automobile industry. This is due to the fact that the retailers act as an interface between the automakers and the consumers (Domansky, 2006). Various studies have shown that the volume of car sales increased in tandem to the increase in the aggregate household and personal income. A huge proportion of this income is derived from salaries, wages and earnings (McAlinden, Hill & Swiecki, 2003). The US market employs many people, and destabilization of the US market would lead to massive lay-offs, thus reducing the disposable income of most people. It is well known that the employment rate provides a good indicator of the health of the national economy, with a high unemployment rate signifying a poor health of the economy. Moreover, lay-offs lead to a vicious cycle of economic destabilization, as the laid-off workers will be unable to purchase products offered in the market, thus disrupting the market demand-and-supply equilibrium (Peters, 2010). In 2008, the global recession started and it had a tremendous negative impact on the overall US economy. The reason for this was that the US economy is interrelated and wholly exposed to the uncertainties of the global economy. In 2009, Chrysler and General Motors released financial reports which stated that the companies were in dire need of cash input in order to avert insolvency and its associated massive lay-off of workers. The US Treasury came to the aid of these companies and the financial bailout enabled the automakers to maintain their creditworthiness. Moreover, the restructuring that occurred in the automakers after the bailout enabled the companies to reinvigorate themselves and thereby reestablish their commercial viability and lucrativeness. This enabled their employees to retain their jobs. Also, the auto industry was able to maintain the viability of the associated subsidiaries and other complementary industries, and this resulted in the gradual rebuilding of the US economy (Ciravegna, 2012).

Also, the economic productivity of the automobile industry can be measured in terms of value-added per employee (Luger, 2005). The value-added per employee is the aggregate sum of the rent, profit, earnings and interest that an employee accumulates during his period of employment within the industry. The total value-added per employee provides a more accurate and factual estimate of the productivity of the industry. A high level of productivity indicates a relatively high level of labor compensation (salary, wages and other benefits) within the industry. In 2002, the level of productivity within the automobile industry was ranked third overall in the US. Thus, the automotive industry has a relatively high level of labor compensation, and as such it injects substantial amount of cash into the economy (McAlinden, Hill & Swiecki, 2003). Another source of cash injection into the economy is the research and development that goes on within the industry. Thus, the automotive industry, by the virtue of its total value, is one of the main pillars of the US economy. Therefore, during the period of the economic recession, the US government provided loans and guidelines for restructuring the industry. This stabilized the automotive industry and in the process increased the level of liquidity in the market to the appropriate level. The resultant market liquidity helped to stabilize the US economy, and thus realign the market to a path of economic recovery (Ciravegna, 2012).

The high output of the automotive industry has made it an integral part of the US economy. This high output is driven by the necessity to satisfy the dynamic needs of the market. This has necessitated the need for technological innovations (Freedman, 2010). Continuous vehicle innovation and its associated model differentiation have enabled the automobile industry to offer its customers with a wide range of choices, and this has led to a constant increase in the volume of sales. Also, one of the main customers of the automobile industry is the US government (Freedman, 2010). Thus, it is apparent that the national economic value of the automotive industry is quite high. This economic value is manifested by the high retail value of light-weight vehicles, total inventory value and the taxes that the government derives from vehicle export, vehicle dealerships and car sales (Ell et al, 2011). From 1987 to 2002, the automobile industry output increased by about 50%, and this caused a growth in the US economy. However, the energy crisis and subsequent global recession led to the auto crisis because the fuel-inefficient vehicles were expensive to maintain at a time when the disposable income of most people was gradually decreasing. Thus, the volume of sale plummeted, and the automakers faced insolvency. Fortunately, the financial bailout advanced to the automakers and the restructuring of the entire automobile industry led to the production of clean fuel-efficient cars that had low maintenance cost. This led to an increase in the sales volume, thus enabling the automakers to save jobs and act as a stabilizing market force in the economy. Thus, the restructuring of the automobile industry led to the stabilization of the US economy (Ciravegna, 2012).

The automobile manufacturing industries have contributed significantly to the private sector in various ways that have been stated hereafter. Studies done in 2001 showed that the automotive industry had an aggregate employment multiplier value of 3.9. This means that for every single direct employment in the automobile industry, there are 2.9 indirect employments opportunities that have been generated. Also, the industry has provides a high level of compensation to the private sector. Moreover, there is the spin-off effect attributed to the expenditure-induced effect of the industry (McAlinden, Hill & Swiecki, 2003). Thus, it is apparent that the automobile industry is a central pillar of the private sector, and hence any crisis affecting the auto industry is likely to have a negative impact that will suffuse into the entire private sector. The auto-crisis that occurred subsequent to the global recession threatened to disrupt the cohesive integrity of the private sector. There were indications that the massive lay-offs in the automakers were negatively impacting the local subsidiaries (Peters, 2011). However, this disintegration was averted when the automobile industry was restructured and thereby restored back to its appropriate financial health (Ciravegna, 2012).

The upstream economic contribution of the automotive industry is described below. To begin with, material producing industries especially the metal industries rely substantially on the purchases made by the automobile industry. Material recycling plants do recycle over 96% of scrapped vehicles. The sole purchaser of these recycled materials is the automobile companies. Also, automobile companies incorporate microprocessors and other electronics into their car, and thus they sustain most manufacturers of electronic materials. Moreover, the automobile industry also supports apparel, rubber and plastic industries. The automobile industry is also intricately interrelated to business services, such as warehouse provision and trucking services (Cooney & Brent, 2007). The employment opportunities created in these upstream companies do contribute to the indirect jobs created by the auto industry. Thus, it is apparent that the automobile industry is integral part of the industrial base of the nation (McAlinden, Hill & Swiecki, 2003). During the auto crisis, these upstream industries were also in danger of insolvency. However, they were spared from insolvency when the automobile industry was restructured and thereby restored back to its appropriate financial health (Peters, 2011). Hence, it is apparent that the restructuring of the automobile industry helped to rebuild the US economy.

Automobiles need fuel for operation. Thus, during the energy crisis, the increase in the price of fuel led to a decrease in the output of the automobile industry. However, the restructuring of the automakers enabled them to adapt themselves to manufacturing fuel-efficient vehicles instead of the conventional sports utility vehicles (Peters, 2011).

The downstream economic contribution of the automotive industry is described below. To begin with, vehicle transportation has necessitated the creation of a vast network of support industries. These support industries include retail outlets, rail system, service industries and utility services. The rail system has enabled the automakers to transport components of automobiles and finished automobiles from the manufacturing plant to their retail outlets. The service industries maintain and repair the automobiles, and as such they depend on the automakers to provide them with technical details of their vehicles. OEMs (original equipment manufacturers) have established dealership networks that retailed their cars. Thus, the car dealers acted as the retail outlets for the car manufacturer. These car dealers used the services of advertising companies to advertise their automobile cars and accessories to potential customers. Moreover, the automobile industry indirectly sustains the used-car dealerships (Cooney & Brent, 2007). During the auto crisis, these downstream industries were in danger of insolvency. However, they were spared from insolvency when the automobile industry was restructured and thereby restored back to its appropriate financial health (Peters, 2011). Hence, it is apparent that the restructuring of the automobile industry helped to stabilize and rebuild the US economy.

Conclusion.

            The automobile industry is intricately interrelated to the manufacturing, service and retail sectors. In 2008, global recession negatively impacted the overall US economy. The resultant credit crunch and the drastic decrease in the car sales led to the 2008-2009 US auto crises. The US treasury advanced emergency loans to the automakers. Also, during the period of the economic recession, the US government provided financial bailouts and guidelines for restructuring the industry. This stabilized the automotive industry and in the process increased the level of liquidity in the market to the appropriate level. The resultant market liquidity helped to stabilize the US economy and thus realign the market to a path of economic recovery. The restructuring of the automobile industry has contributed to the rebuilding of the US economy.

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