The Bailout
On September 24, 2008, Congress approved a $25 billion bundle of guaranteed loans for the U.S. auto industry. This $25 billion package will amount to roughly $5 billion to each General Motors, Ford, and Chrysler as well as several smaller loans to various suppliers for these manufacturers. These loans were approved during the same time that the controversial $700 billion bailout of the financial services industry was approved and therefore managed to slip through Congress largely unnoticed by the public. Upon learning about these loans one can’t help but wonder, what is to blame for the dismal situation in Detroit?
The Trade War
The first and possibly most interesting factor that has contributed to Detroit’s demise is the Japanese-U.S. Trade War. This trade war began when Japanese car manufacturers, with the subsidization of the Japanese government, managed to get a foot in the door of the U.S. car market and then proceeded to expand their market share until they were major competitors in the American markets. This was strategically done by first introducing models that the U.S. auto industry was not willing to fight for: subcompact and compact cars. As Japanese car makers such as Toyota and Honda formed favorable reputations in U.S. market, they were able to expand their offerings in the U.S. to larger more profitable vehicles. Though it is difficult to pinpoint exactly when this trade war began, it came to a point in the early to mid 1990’s when the Clinton Administration tried to curb the speed at which Japanese cars were taking over the U.S. market by imposing $6.5 billion in tariffs on selected luxury Japanese models. Attempts at doing this, however, proved unsuccessful and Japanese cars continue to be extremely popular in the U.S.
Corporate Governance
The blame for Detroit’s ailments, however, cannot be pinned on Japan or the failures of the Clinton Administration. After all, competition with international products is part of the free trade economy that Americans have so avidly supported in our country’s recent history. It comes down to the fact that those responsible for governing GM, Ford, and Chrysler failed to take necessary actions to remain competitive in the U.S. car market. It is apparent that the governing organizations of these corporations failed to take international competition seriously until it was too late. Had the auto industry matched the aggressiveness and effectiveness of the advancements made by Japanese manufacturers, they would not be facing the dire situation they face today.
The Economy
Though the trade war and Detroit’s poor leadership have are largely responsible for the current situation the U.S. auto industry faces, one cannot overlook the effect of today’s economic situation. It is not only the real estate market that has been effected by these uncertain economic times, but now also the car market. Since 2007, car sales are down 20%. In some industries, it would be possible to simply tighten the corporate budget and keep on keeping on, for the auto industry; however, this may not be possible. In order for car manufacturers to remain successful, they must achieve economies of scale. To attain economies of scale a company must produce in large enough quantities to obtain cost advantages. For example, a car manufacturer which uses large amounts of steel will receive a discount from its supplier for purchasing in bulk and by doing so will lower its variable costs and thereby increase its contribution margin and eventually its profits. Unfortunately, in order to produce in large enough qualities to attain economies of scale, companies have to take on larger fixed costs. For example, in order to produce the number of cars needed to obtain the discount on steel, a car manufacturer has to expand its factory or even build a second one. When companies like GM, Ford, and Chrysler are functioning at capacity, they are able to achieve economies of scale and the higher contribution margin they obtain by doing so manages to cover their high fixed costs and they cut a profit. In the current economy, however, these companies are not acquiring enough sales to justify producing at capacity and by slowing production, the auto manufacturers are no longer able to achieve economies of scale which raises variable costs and makes covering fixed costs extremely difficult.
Is the Money a Solution?
In one word: No. Granted, the $25 billion dollars would allow the auto industry to finance some much needed improvements and innovations which might allow them to compete more effectively with the Japanese models which have become so popular. However, this is not enough. The leadership in the American auto industry needs to change in order for a successful turnaround to occur. It is illogical to subsidize the same bad decision making that has destroyed Detroit, and by doing so expect improvements. Ultimately, what GM, Ford and Chrysler need is not an arbitrary lump sum of cash, it is better decision making and as a result: better sales volumes and the ability to attain economies of scale. The loans guaranteed by the government will not facilitate the changes that are truly necessary and will in fact further tarnished the image of the American auto industry.
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Import Car To Canada – Which Are The Most Popular Japanese Cars For Canada Import?About Author
Tabitha Goertz -
About the Author:
Tabitha Goertz is a third year accounting major at West Chester University.
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