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Introduction
At the time of writing this research essay on 12/12/2008, a proposal of $14 billion bail-out packages for the automobile industry in the U.S.A failed to get its approval from Senate. This has raised fears of imminent auto industry collapse and job losses in the U.S.A. The bail-out plan failed due to the failure of employee unions of the auto industry in the U.S.A, which declined to accord its approval for immediate wage cuts to bring their wages in tune with their Japanese colleagues.
U.S.A Senate discarded attempts on the night of 11/11/2008 to the governments approach to bail-out sinking American automobile industry as Republicans failed to extend their support the bill recommended by congressional democrats and the White House.
While rejecting, Senate has claimed that the greatest flaw in the bail-out package is that it guarantees taxpayer money today for restructuring process that may or may not happen tomorrow.
Rick Wagner, CEO of GM, tried to convince the Senate banking committee that the industrys quandary was not because of failures of management of auto industries in the U.S.A in general but due to the intensity of the global financial crisis. Wagner also warned if Senate fails to approve the auto bail-out packages, there will not only be loss of millions of jobs, but also Americas GDP could be lost by 4%
The chairman of the Senate Committee, Mr. Christopher Dodd, was of the view that industry was looking for treating the wounds that chiefly appear to be self-inflicted.
The Senate committee was of the view that major auto industries like GM, Ford, Chryslers manufacturing was fell short of their targeted units. Its labor costs were skyrocketing as compared to its foreign competitors.
However, Wagner of GM has denied this accusation and put the blame on the international financial predicament, which has rigorously limited availability of credit and lessened industry sales to the ever gloomiest per-capita intensity since the Second World War. (Erbe 2008).
Auto industries allege that if no bail-out package is extended to it, as in the case of the insurance and banking industry, there will be a loss of three million jobs within the first year of the predicament, which will have a tale-telling effect on the U.S economy.
Due to this turmoil, the share price of GM fell to just $3 in November 2008 from $76 in early 2008. In the last four years, GM has had an accumulated loss of $ 75 billion. (BBC 2008).
Company background
General Motors is a U.S based multinational company engaged in the manufacturing and selling of trucks, cars, and spare parts. Ford had delivered 9.4 million trucks and cars worldwide in the year 2007 alone. Some of its famous brands are Cadillac, Chevrolet, and GMC. Further, Ford also holds equity ownership holdings through multiregional subsidiaries like GM Daewoo, Shanghai GM, CAMI Automotive Inc, and SGMW. These subsidiary-holding companies engaged in designing and marketing the brand vehicles like Cadillac, Daewoo, Suzuki, and Chevrolet. Other than manufacturing activities, GM is also engaged in aftersales services through its dealer outlets like small repairs, maintenance, vehicle parts, collision repairs, and offering extended service warranties.
It is to be observed that the automotive business is a seasonal one and the manufacturing pattern differs from a month-to-month basis. Due to constant vehicle model changeovers and new market entrants, changeover happens throughout the year. Usually, in the auto industry, annual plant shutdown and product changeover will be taken over in the third quarter of a financial year, and hence in the third quarter, operations results will be much lower as compared to the other three quarters of the year. Further, the market for a car is associated with consumer spending patterns and general economic scenarios, which will have a great bearing on sales. Moreover, consumer spending and preferences will also be influenced by the fluctuations in the price of fuel.
GM has a strong brand image and markets its famous brands through its well-knitted dealer network around the globe. For instance, there were about 6777 GM vehicle dealers in the U.S.A, about 730 in Canada, and 331 in Mexico. Further, it has more than 14,053 distribution centers around the globe for marketing its products.
One of the major overheads in the auto industry is the research and development costs as it has to research on improving production, design enhancement constantly, improve vehicle emissions checks, enhanced fuel economy, and improved safety of inmates in their vehicles. For instance, in 2007 alone, GM has spent about $ 8 billion on research and development expenses alone.
GM is constantly engaged in developing advanced alternative propulsion technology to enhance its internal combustion engines, advanced diesel engines, and hydrogen fuel cell technology.
GMs insurance and finance business operations are carried through GMAC LLC.
GMACs major profits and revenues were emanated from initiating, securitizing, and servicing residential mortgages, which include subprime loans. The year 2007 was a catastrophe year for the real estate market in the U.S.A as real estate value declined drastically with declined housing constructions, falling residential sales, and increasing rate of foreclosures and defaults. Due to the subprime crisis, GMACs profit was adversely affected. Due to this, Residential Capital LLC (ResCap), a subsidiary of GMAC in 2007, incurred a total pecuniary loss of $ 2.4 billion alone as equated to its net revenue of $ 2.3 billion in the year 2006. (Form 10-k 2007). Due to the subprime mortgage crisis, ResCaps mortgage loans were significantly written down, which were held for sale portfolios. Any prolonging of these situations may continue to drastically affect GMs results, its operations, and financial conditions.
Further, credit rating agencies have further downgraded their ratings for ResCap and GMAC, and there is every possibility of further downgrading. This will likely affect GMACs both operational and financial outcomes in the years to come.
Any insolvency filing by GM may badly impact GMACs future funding resources, and ResCaps access to capital can be badly affected due to transformation in the market conditions. (Form 10-k 2007).
The objective of writing the paper
Bailing out of General Motors has become necessary as it will have a larger impact on society and jobs in the U.S.A. If GM is allowed to fall, then it will have a greater impact on their employees, suppliers, middle-class society that depends upon GM. If GM files a chapter 11 petition or if it declares a lock-out, it will have a greater significance to communities whose housing and infrastructure may become nearly insignificant. Further, if GM crumples, it will have a telling impact on employment, mainly high-paying factory employment, which will vanish from the American service-related economy, and nobody knows whether it will revert back to American society at all. It is estimated that job losses would be more than three million, which includes both direct and indirect job losses with subcontractors and spare parts suppliers. These lost jobs will be restored to life in developing economies like India or China, where labor and technology are relatively cheaper.
Further, there is stiff competition in the automobile industry globally. Thus, competition from emerging Asian markets like India and China is considered to be very serious since they offer a competitive price and new models. Further, in the automobile industry, vehicle preference by consumers is influenced by factors like quality, price, safety, style, fuel economy, reliability, and functionality. GM is having a global market share of 13.3 percent as of 2007. Further, GM has had the highest market share in the U.S alone for the last 77 years.
Table 1: Comparative analysis of market shares by various automobile manufacturers on the global basis (Form 10-k 2007).
Table 2: General Motors Net loss for the last three financial years (Form 10-k 2007)..
The chore of Mr. Rick Wagoner, CEO of GM in restructuring GM
Chris Dodd, the chairman of the Senate banking committee, was of the opinion the present CEO of GM, Rick Wagoner, should resign as one of the conditions of the bail-out package. However, the GM board of directors, its employees, suppliers, dealers are strongly feeling that Wagoner is the apt person to guide GM at this challenging and incredibly arduous time. They recalled how Rick was able to turn around GM in the 1990s when its losses totaled a whopping $30 billion. Due to Ricks austerity measures like cost-cutting, modernization, improving the quality, GM was able to earn $4 billion per year in the middle 1990s. However, Ricks effort was turned to be futile due to pension obligations and health-care benefits offered to retirees, which denied billions of dollars for the new model developments.
The employee retirement benefits alone added $1400 to the cost of every vehicle manufactured at GM, which is totally absent for its competitors product from Asian and European markets. Loss-making cars of GM have to be manufactured in large quantities due to high demand. As a result, GM could not concentrate on the manufacture of high profit-yielding sport-utility and pickup trucks.
After Wagoner become CEO of GM, he had initiated many restructuring initiatives like halving employees force to 97,000 and had closed down 12 manufacturing units in America. (The Economist, 2008)
Literature Review
This research article has gathered its information from secondary sources available from peer viewed journal articles which have been listed in the works cited page of this research essay, and most of the statistical data have been culled out from the government publication like form 10-k from the website www.sec.gov. Further, news articles published on the web by BBC, New York Times have been used to throw more light on the subject.
Findings/Analysis
GM is able to introduce new models like the Cadillac CTS, Chevrolet Malibu, and the Buick Enclave. GMs Opel Insignia was elected as European car of the year in 2008. Further, in 2010, GM is due to introduce its innovative Chevrolet Volt, an electric car with a range extending internal combustion engine that is likely to make its competitors product like Toyota Prius as an outdated model.
As a restructuring process, GM closed its Janesville, Wisconsin plant, which was established in 1919, and laid down 2,500 workers. However, the state of Wisconsin paid General Motors $0.10 billion in financial grants during the year 2004 to facilitate General Motors to invest in $175-million to modernize the production capacity. In return, General Motors had undertaken to employ 3,331 employees at the production facility through 2009. Now, Wisconsin state is aspiring into by what means it can recollect some of the grants to General Motors. (Manufacturing & Technology News 2008).
Wagoner successfully negotiated with the workers union for transfer of liabilities on health care to a union-run fund and to minimize the pay structure of newly recruited employees.
Workers Union has to change its adamant attitude in not cooperating to reduce pay packages in tune with its Asian counterparts as suggested by Senate to revamp the American automobile industry.
Conclusion
Knowing that pension benefits were the culprit of GMs financial debacle, Wagoner successfully negotiated with the workers union for transfer of liabilities on health-care to a union-run fund and to minimize the pay structure of newly recruited employees. The failure was not only restricted to GM alone but also to other major auto-players like Chrysler and Ford in the U.S.A. Further, the increase in oil price and credit crunch was also reasons for the failures of auto majors in the U.S.A.
Recommendation/Applications
Bail-out packages of $ 25 billion of loan should be immediately sanctioned to auto industries in the U.S.A including GM, which will assist the auto industries in developing more fuel-efficient vehicles, in making a settlement with employees union to agree for wage cut in lieu of lay-off and to minimize the retirement benefits or else U.S government should come forward to draw a retirement package for auto industry employees which would be equally burdened by the U.S government so as to relieve the auto industries to use the funds so saved to improve their manufacturing techniques and to introduce more fuel-efficient cars to make them fit and compete in the global automobile market. The Republicans should not reject the above package but extend their support to save the U.S automobile industry from going to the graveyard.
Having Republicans rejected the bail-out proposal (as of 12th December 2008), the only viable option available to the American government is to employ the Treasurys greater financial structure stabilization fund to bail out the U.S automobile industry provided if the adequate fund is available. (David M Herszenhorn, 2008).
The U.S government should think of exploring alternate short-term financial assistance schemes to save its sinking automobile industry.
Works Cited
Erbe, Bonnie. If We Bail out Citicorp, Why Not Bail Out GM, Too? (General Motors Corp.). U.S. News & World Report (2008): NA. General One File. Gale.
Face Value Mr. Detroit 2008. The Economist 13, 2008.
General Motors. (Plants Closing in the United States) . Manufacturing & Technology News. 2008.
Herszenhorn, David M. Senate Abandons Automaker Bailout Bid New York Times 2008. Web.
Form 10-k General Motors Annual Report for the year 2007.
General Motors Cashes in on World Series. The Washington Times 2006: C05.
General Motors Falls Pounds 579m into the Red. The Birmingham Post (England) 2005: 22.
General Motors Plugs into Hybrid Vehicles. Daily Herald (Arlington Heights, IL) 2005: 1.
General Motors Plugs into Volt Concept. Daily Herald (Arlington Heights, IL) 2007: 1.
Hosking, Patrick. The Business: General Motors Is Less a Car-Maker These Days Than a Bank, but a Bank with Debts in Excess of $300Bn. Now the Penny Is Finally Dropping on Wall Street. New Statesman 2005: 30.
Taylor, Michael T. OSHA, Lockout/tag out and General Motors: The Specificity Requirement of the Federal Lockout/tag out Standard Attorney Michael T. Taylor Analyzes a Recent Occupational Safety and Health Review Commission Decision Involving Lockout/tag out at General Motors Corp. and the Impact of the Decision on Workplaces. Occupational Hazards 2008: 44+.
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