Effects of the 2007-2009 Economic Crisis on

Global Auto Industry

Introduction:
The automotive industry comprises 3% of gross global product.
In many Western
countries this number is higher (3.6% in the US)1. Millions of
workers worldwide are employed in auto manufacturing, auto
parts, and supplies manufacturing as well as service and after
sales care and other derivative industries. The auto industry
produces more than 800 million cars globally. More than 250
million vehicles are produced in the
United States. Despite the numbers, the level of
interdependence caused by globalization is hard to quantify.
The poor performance of US automakers was exacerbated by
the 2008 financial crisis, which was then held responsible for
the automotive crisis.

Effect of crisis on Global Auto Industry:

The automotive industry is among the sectors that was hit the
most by the
recession. Demand for cars fell sharply, deepening the
economic downturn in major car producing countries. Because
of the strong linkages with other parts of the economy, the final
impact of a shock in the industry on the broader economy was
sizable.
The reduction in car sales from mid-2008 to 2009 was
magnified by the lack of
access to credit. Econometric estimations indicate that tight
credit conditions could explain more than 80% of the collapse in
car sales at the end of 2008 in the United States and in Canada.

In 2008, a series of damaging blows drove the Big Three to the

verge of
bankruptcy. The financial crisis played a role, as GM was unable
to obtain credit to buy Chrysler. As consumer credit tightened,
sales fell sharply. As mentioned, it became much harder for
people with average or poor credit to obtain a bank loan to buy
a car. During 2007, nearly 2 million new U.S. cars were
purchased with funds from home equity loans.
Such funding was considerably less available in 2008.
Meanwhile, major car manufacturers had in recent years
focused on manufacturing SUVs and large pickups, which were
much more profitable than smaller, fuel-efficient cars.
Manufacturers made a 15% to 20% profit margin on an SUV,
compared to 3% or less on a regular car.14 When gasoline
prices rose above $4 per gallon in 2008, Americans stopped
buying the big vehicles and Big Three sales and profitability
plummeted. Robert Samuelson advocated a more consistent
energy policy, arguing, Wild swings between low and high fuel
prices have crippled the U.S. industry by erratically shifting
buyer preferences to and from SUVs.

The above graph shows the impact of the automotive crisis on

the prices of stock of General Motors. It clearly shows how
much negative effect the firm suffered, not just because of a
lack of public interest in buying vehicles but rather through the
mismanagement from the top level which went on to cause
such a crash in prices.

Crisis In US:
In 2008, a global recession struck which greatly affected the
United States
economy. This recession had many negative impacts on various
sectors of the American economy. One of the most prominent
sectors was the automotive industry. Even before the recession
there were many factors such as declining automobile sales
and the lessening amount of credit present in the business
which went on to create a more disastrous and widespread
automotive industry crisis.

The U.S government intervened in this matter since it

threatened massive job
losses as well as posed the potential for huge damage to the
overall manufacturing sector.
The government provided a financial bailout in order to support
the companies in
restructuring. Both GM and Chrysler filed separately for Chapter
11 bankruptcy
protection.
Later on, General Motors emerged as a new firm from the
bankruptcy. It was now
majority-owned by the Treasury Department of the United
States government. Chrysler was now owned by the United
Auto Workers union as well as Fiat S.P.A. After their emergence
from bankruptcy, they also terminated many of their
agreements with their dealerships; General Motors also had to
discontinue many of its brands due to its bankruptcy
proceedings.
Of all the Big Three firms, only Ford survived without entering
into bankruptcy
mainly because of a huge line of credit that it got in 2007. This
automotive crisis was a global phenomenon, but the car
manufacturers in United States were more affected by this
crisis as compared to any of the other foreign manufacturers.
According to many analysts, the automotive crisis in the United
States was made
so much worse mainly because of improper business practices
by the big auto companies there, namely the three that have
been mentioned. When comparing the big American firms with
other global giants, especially those which originate in Asia,
then it can be seen that the Asian firms were not facing similar
problems, even those whose businesses were situated in the
U.S.

Unemployment problem:

During the first half of 2008, the total employees in the Big
Three firms, including
car-dealers and parts suppliers, totaled at more than one and a
half million. When looking at the entire employment figures
related to the automotive industry including the Big Three
then the total personnel this industry employed numbered at
around 3.1 million in the U.S, including after-market service
businesses. During the crisis, the employment rate in the
automotive industry declined.
According to the United States Bureau of Labor Statistics the
proper breakdown
of workers in the automotive sector until September 2008 was
as follows,: repair
operations involved eight hundred and sixty-four thousand
personnel, parts manufacturing involved five hundred and four
thousand personnel, wholesale operations involved three
hundred and forty thousand personnel, manufacturing involved
one hundred and fourteen thousand personnel, and dealer
operations had 1.2 million personnel.

According to the United States Bureau of Labor Statistics the

proper breakdown
of workers in the automotive sector until September 2008 was
as follows,: repair
operations involved eight hundred and sixty-four thousand
personnel, parts
manufacturing involved five hundred and four thousand
personnel, wholesale operations involved three hundred and
forty thousand personnel, manufacturing involved one hundred
and fourteen thousand personnel, and dealer operations had
1.2 million personnel.
Also, some estimated 2 million personnel were relying on the
healthcare offered
by the automotive industry, and seven hundred and seventyfive thousand retired
personnel collected their pensions from this industry. General
Motors was a leading employer, directly employing more than
one hundred and twenty thousand employees in the United
States. For any new worker the rate of hourly wage was close to
$14 for an hour, therefore experience counted significantly here
as the senior workers were offered better pay. A huge cost
difference between the U.S. employees working for any firm
with foreign origin and the UAW members came in fringe
benefits. Here it should also be noted that UAW has been
regarded as one of the most successful unions in America in
terms of fighting for health benefits as well as generous
pensions for its members.

Crisis in India (Or Asian market):

When talking about Asian markets, the markets first need to be
separated into two
categories. The first category is that of an emerging market
represented by China and India. The second category is a
developed automobile market which represents Japan and
South Korea.

Crisis in India:
The Indian economy has grown at an average rate of around 9 percent over the
past five years and is expected to continue this growth in the medium term. This
is predicted to drive an increase in the percentage of the Indian population able
to afford vehicles. Indias car per capita ratio (expressed in cars per 1,000
population) is currently among the lowest in the worlds top 10 auto markets.
India is the second fastest growing automobile market in the
world. More than 3.7 million automotive vehicles were produced
in India in 2010. The industry has a turnover of more than USD
$35 billion and provides direct and indirect employment to over
13 million people.
In February 2009, after citing an upcoming fall in the production
numbers, State
Bank of India greatly reduced the interest rates applied to
automotive loans. In the starting months of 2009, a widespread
marketing campaign was conducted by Tata Motors involving
the launch of theTata Nano automobile. Described as a
peoples car, Tata hoped that the consumers would be
encouraged to buy this car at a time of severe financial crisis
because of its cheap price tag, which was about twenty-one
hundred dollars. Consumers tend to go for best quality product
at nominal rate.
These and many attempts taken by the government to take
control of the crisis or even to give advantage to the local
manufacturers went on to help the local consumers as well as
the manufacturers, and therefore the Indian automotive sector
not only emerged from the crisis but continued going stronger
on all terms such as manufacturing, attracting foreign
investment, and so on. One of the main reasons for this rapid
rise is the growing middle class in India, which prefers to buy
cars rather than use the public transportation system.

Indias automobile market has grown steadily over the last seven to eight years,
with the exception of the previous two years where the effects of the global
downturn were felt, primarily in sales of commercial vehicles. However, even
during the downturn, the two-wheeler and three-wheeler segments, which were
until then experiencing low growth or losing volumes, bucked the trend.
Indias vehicle demand is quite different from other top automobile markets
with the exception of China in that two-wheelers constitute a significant
portion of vehicle demand (more than 3/4th of the Indian market is in twowheelers).

While quite a few new vehicles launched in the Indian market have been
developed locally, vehicle affordability remains a significant concern as seen.
Although the price of an average motorcycle in India (about USD 900) I
comparable to the average per capita income, the prices of passenger cars have a
long way to go. Although the entry level car (Nano) is priced at around USD

2,500, the passenger car market could grow multi-fold if there is a breakthrough of another price level in the years to come.

Another key advantage that the Indian car manufacturers have

is cheap labor. This tends to make India a very profitable
venture to do business in for the rest of the world since it offers
such a large reduction in the costs of doing business when
compared to any developed Western nation. Cheap labor is
one of the main reasons why firms choose to invest in the
developing world.64 Still, whatever the cause, the Indian
automotive sector has the potential to grow even further and
take a much bigger share in the global market.

Future of Automobile Industry:

The crisis in the automotive industry was a sharp decline in a
normal business
cycle, rather than a bubble. Auto demand in the developed
countries is expected to pick up again, though there may be
changes in consumers choices. In the emerging market,
continued growth of GDP and populations will provide additional
stimulus to demand.
In the developed world, the automotive industry will recover to
pre-crisis levels as the global economy recovers. Populations
continue to age; older households divert a greater proportion of
income to vehicle purchase as they are relieved of the expense
of raising children. Consumers may well be more cautious
about new car purchases in the future, shifting to slightly less
expensive cars. Thus the demand recovery may not be
completely proportionate, but will perhaps be in the region of
95%.
In the developing world, demand is likely to return to 100%
(even105%) of
previous levels with the return of economic health. One of the
reasons is that a large fraction of new car demand is first car

rather than replacement car demand; hence it is less

deferrable. The used car market is often very immature and
inefficient, so demand flows primarily to new cars. Car finance
availability has been patchy at best, such that few future
buyers are currently weighed down by vehicle debt. The income
elasticity of demand is higher than in the developed world, as
even a small change in average GDP can bring millions of new
buyers into car-buying range very quickly. As car purchase
credit does become more available, more people will enter the
car-buying market more quickly.

The nature of competition will have a particular influence. In

the future, the US
market is expected to be more similar to the European one.
Many autoworkers compete intensively for 8% - 15% of the
overall market. Developing countries will experience intense
competition among multinational OEMs, and new domestic
firms will arise, strengthened by this competition. New entrants
(e.g. Geely in China and Tata in India) will focus initially on high
demand in their home markets, but will in a short time also
start to export to developed markets. Not all automakers will be
huge; a place will remain for highly capable smaller firms.
A greater availability of low-cost cars (e.g. Tatas Nano, selling
for around
$3,500) is expected in the emerging markets. At higher
incomes, ownership levels will increase to multiple vehicles per
family. Even where the very best public transportation is
available, total person trips tend to hit a threshold and future
growth is absorbed by vehicle-based mobility.
There are several effective ways to solve overcapacity. First,
cutting production
on the manufacturers part. Second, encouraging consolidation
and joint ventures. Third, driving sales by incentives. Fourth,
raising brand profile to fortify market share. Fifth, increasing
vehicle exports to existing or new markets.

Conclusion:
This paper presented a detailed analysis on how the
automotive crisis of 2008
affected car manufacturers. First examined was the relationship
between the financial crisis and the auto industry. As consumer
credit and car loans tightened, car sales decreased
dramatically. Economic activity in the automotive industry
usually moves in line with the overall business cycle and a high
correlation is also found between car sales and private

consumption. Then, the paper focused on American auto

manufacturers, especially the Big firm General Motors.
The Big Three also pointed to some labor related statistics
which showed how
many personnel were employed by the auto industry in the
United States. Besides this the hourly wages as well as benefits
were discussed in some detail. In terms of salaries of
employees related to this industry, it was seen that experience
mattered greatly, and unionized workers such as from UAW got
benefits from their employers through schemes like the Jobs
Bank. It was also argued that from the perspective of the
employers, it was a huge expenditure to do business with the
workers since they were getting so many benefits such as
hourly rates, paid holidays, and even pensions.
It was also argued that the American companies were in severe
crisis because they had a lot of brands to look after, so after
this two main types of claims were analysed where the first
argued that the failure of the auto industry would be a great
failure for the economy itself. Supporters of this argument
asserted that since the auto industry was hiring millions of
employees as well as helping the nation to lift its standards of
living, therefore it should be rescued, whereas the opponents
said that the industry should be
made accountable for its mismanagement.
After the analysis of the American auto industry, there was a
brief look at how the auto industry crisis affected other major
markets around the globe.
The Asian markets were also affected greatly by the crisis but
they also emerged
much stronger, the Chinese manufacturers were aided by a
huge stimulus from the government, the Indians relied on their
domestic consumption.
Finally, the future of automotive industry and the role of
governments during
crisis was discussed. Though the government intervention was
quite controversial, it turned out to be successful. The future
trends of the auto industry in the developed and developing
world were also examined, along with some efficient measures
governments

might use going forward to rescue the auto companies. The

measures taken did, in general, benefit the auto sector but the
drawbacks they created cannot be ignore.
The crisis in the automotive industry was not just a result of the
credit crisis.
Otherwise, the industry only would have needed to wait until
growth picked up again. In reality, it needed to think how to
restructure and rethink products and strategies.
The restructuring of the automotive industry will bring both new
winners and new
losers. Production will shift to new auto zones, and new fuelefficient vehicles can potentially lead to a new boom in vehicle
sales. The final questions with regard to the crisis and the
future of the automotive industry are which companies and
countries will be able to take advantage of the industrys new
opportunities, and how this can be done as a joint collaboration
between all social partners