The Effect Of A Struggling Economy On The Auto Industry

1399 words - 6 pages

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 increasing book leverage and decreasing fraction of debt that is long-term debt, that GM relied more and more heavily on selling assets and borrowing to maintain operations (Appendix A). Furthermore, from the decreasing collections period it can be seen that GM had to write off portions of its receivables due to the fact that consumers would no longer be able to pay the company with the financial crisis happening (Appendix A). As the crisis continued it can be seen through decreasing liquidity ratios that GM became less solvent, and the company’s decreasing payables period shows that suppliers became far less tolerant of GM borrowing from them (Appendix A). Finally, the extremely low price-earnings ratio of GM signals that shareholders had very little faith in how well the company would do in the future (Appendix A).
The crisis eventually pushed GM to file for chapter 11 bankruptcy in 2009, to receive bailout money from both the US and Canadian governments, and to be purchased by NGMCO Inc., who are now called General Motors Company. General Motors Company is a new entity that is not comparable to the old GM and that is focusing on “greener” cars, fewer brands, an improved cost and operating structure, and the use of less...

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