Automotive industry crisis of 2008-2010

Introduction about the crisis

  • The automotive industry crisis of 2008-2010 played a crucial part in the global financial downturn.
  • With fewer fuel-efficient models to offer to consumers, sales began to slide gradually.
  • By 2008, the situation had turned critical which highly influenced the prices of raw materials required by the company to manufacture vehicles.

Most notable causes for the automotive industry crisis of 2008-2010

The U.S. Financial Crisis Inquiry Commission concluded that the crisis was certainly avoidable by all circumstances if carefree attitude was avoided. The scenario was caused by the following factors: (Click on each of the factor to know in detail)
Systemic breaches
Systemic breaches in accountability and ethics at all levels lead to a total failure.
Financial market factors
Due to widespread failures in financial regulation including the Federal Reserve's failure to stem the tide of toxic mortgages was one of the primary causes.
Risk-taking behavior
Dramatic breakdowns in corporate governance including too many financial firms acting recklessly being negligent and taking on too much risk without proper assessment certainly lead to the drastic dire strait situation.
Excessive borrowing
An explosive mix of excessive borrowing and risk by households and Wall Street put the entire financial system and its balance on a collision course with crisis made the crisis take control and predominant in all sectors of automotive industry.
Lack of understanding the financial system
Key policy makers unprepared for the crisis, lacking a full understanding of the financial system they oversaw and being negligent all the way through made it difficult to control the damage.

How do the U.S market shares declined

  • In the latter half of 2008, a global-scale recession adversely affected the economy of many countries, especially the United States.
  • Following dramatic drops in automobile sales throughout 2008, each of the Big Three U.S. automobile manufacturing companies namely
    1. General Motors (GM)
    2. Ford Motor Company
    3. Chrysler
  • A combination of several years of declining automobile sales and scarce availability of credit led to a more widespread crisis in the automotive industry of United States of America as they entered 2009.
  • By April 2009, the situation had worsened and taken its toil in every automotive sector.
  • The U.S. and Canadian governments provided unprecedented financial support to allow the companies to restructure their respective companies and stabilize.
  • While the Big Three U.S. automobile company's market share declined from 70% in 1998 to 53% in 2008, global volume of manufacturing increased particularly in Asia and Europe.
  • The U.S. auto industry has been profitable in every year since 1955, except those years following U.S. recessions and involvement in wars.

What are all the effects of the crisis on the United States

Effects of environmental expectations and changing product demand
During October 2008, the Big three received funding for about 25 billion dollars mainly to
  • Help them remodel their factories
  • Meet new fuel-efficiency standards by 2020.
Automakers could use these loans to equip themselves or establish facilities to produce advanced technology vehicles that would meet certain required levels of emissions and fuel economy standards.
Effect of 2008 oil price shock and economic crisis
  • In 2008, a series of damaging blows drove the Big Three to the verge of bankruptcy.
  • The US automakers also suffered from considerable high labor costs than their non-unionized counterparts such as salaries, benefits, healthcare, and pensions etc.
  • The Big Three in recent years had manufactured SUV's and large pickups, which were much more profitable than smaller, fuel-efficient cars.
  • When gasoline prices rose above $4 per gallon in 2008, consumers stopped buying the respective big vehicles. The Big Three's sales and profitability plummeted severely.
    Effect of 2008 oil price shock
  • The annual sales capacity of the industry was usually 17 million cars per year. In 2008 that figure dropped to about 10 million vehicles made in the U.S. and Canada.
  • All the automakers and their vast supplier network accounted to about 2.3% of the U.S. economic output, which has come down from 3.1% in 2006 and as much as 5% in the 1990s respectively.
  • Some 20% of the entire national manufacturing sector is still tied to the automobile industry and they depend heavily as well.
  • The transplants can make a profit when sales are at least 12 million dollars where as Big Three can make a profit only when sales are at least 15 million dollars.

What had happened after the decline in the crisis

  • The U.S. automakers were more heavily affected by the crisis than their foreign counterparts, such as Toyota etc.
  • Following the millennium energy crisis, the U.S. automakers failed to produce more fuel-efficient vehicles that were very popular in the late 1990's and early 2000's.
  • This led to excess inventory wasting space and undesirable, unsold products incurring more loss than usual.
  • As of December 19, 2008, oil prices had fallen to $33.87 per barrel, but the automobile crisis continues.
  • The crisis has affected auto companies around the world, with large decrease in sales.
  • As of today, Big three American automakers have increased sales of vehicles and have posted a profit.
  • Analysts point out that Asian companies that manufacture automobiles in the U.S. were not experiencing similar problems and they were the least affected.