What was the ultimate cause of the downfall of the auto industry resulting in a bailout?
automotive industry was hit particularly hard following the 2008 recession. The big three; General Motors (GM), Ford and Chrysler, all of failure, with two of the companies; GM and Chrysler, facing bankruptcy. A total of $25 billion in bail out funds was made available to the firms to help them survive (Isidore, 2008). Undoubtedly, the recession was a trigger for the difficulties, creating a significant decline in the demand for cars which pushed the firms over the edge (Hiraide and Chakraborty, 2012). However, while the U.S. industry faced a crisis, it was much deeper than the crisis felt by many other automotive manufacturing companies, many Japanese and Korean firms also faced challenges, and in some cases received government support, but the problems were not as great. This leaves the question; what was the ultimate cause of the downfall of the auto industry in the U.S. which necessitated its bailout?
Research has indicated that there were a number of factors impacting the problems. Watson (2009) documents a decline in the demand for U.S. cars, finding that in the period of overt 1 year the market share of the big three fell from 74% to 48%. It is hypothesized that issues which impacted on the decline in demand and the decline of revenues to firms included the cost of the car to purchase, and the cost to run, including their of fuel efficiency when compared to Japanese or European cars (Watson, 2009). A decline in the demand for products can often have a negative impact, it is one reasons cited by Ooghe and De Prijcker (2008) as being a major cause of business failure; established firms becoming apathetic to the need to change and adapt. However, one then has to consider how and why the businesses failed to change and adapt, and why they were unable to manage the downturn.
The ultimate issue is likely to be the ways in which the firms were managed, which lead to the unsustainable losses. Therefore it may be hypothesized that the ultimate cause of the failures in the automotive industry was the lack of control over the costs by the companies affected. The null hypothesis will be that the failure was not due to a lack of control over costs.
Dependent and Independent Variables
To assess this hypothesis research will need to be undertaken to assess the relationship between the dependent and the independent variables. The dependent variable is whether or not the firm failed and received funding to help it survive. To examine the causes the independent variables will be the costs associated with the production and sale of the cars, looking a both the direct and the overhead costs in the years prior to the bailouts, to assess the degree to which the firms appeared to have control over their costs. If there was a lack of control over the costs, the level of costs may be a predictor of future problems.
Definition of Terms
Before undertaking the research it is necessary to define some of the terms which will be used. The failure of a firm relates to whether a firm entered into bankruptcy. Bailout funding was the funding that was received from the government as part of an official bailout package in order to help the firm survive.
The costs will be assessed in terms of the overall costs incurred to manufacture cars; this may be the cost per car, or the cost in terms of the revenues, measured by the gross, operating and .
The research will start with an , examining the issues that have impacted the industry, with a particular focus on Chrysler, as a firm that has faced bankruptcy and received bail out funds. The position of the firm will be assessed using a , with the aim of identifying factors which may have indicated the forthcoming problems.
The research will also include analysis of the cost structure of firms that did and did not face bankruptcy or receive a bailout in the years before the recession, examining their overall cost structures and degree to which they were able to manage the costs according to changes in the demand for their cars. The statistical analysis will have the aim of identifying whether or not there were any common patterns that could be seen as indicators.
The resulting research report will provide insight into the reasons behind the failures of the U.S. automotive industry and the need for the bailout, with specific reference to Chrysler.
Isidore, C. (2008, November 17). Auto Bailout: Showdown. CNNMoney.com. Retrieved from http://money.cnn.com/2008/11/17/news/companies/gm_showdown
Hiraide Norikatsu; Chakraborty, Kalyan, (2012) Surviving the Global Recession and the Demand for Auto Industry in the U.S. — a Case for Ford Motor Company, International Journal of Economics and Finance, 4(5), 85-94
Ooghe, Hubert; De Prijcker Sofie, (2008), Failure Processes and Causes of Company Bankruptcy: a typology, Management Decisions, 46 (1-2), 223-242
Watson, Thomas, (2009), Automotive Trouble, Journal of Domestic Car Production, 82(7), 11-12.
Methodology designed so that the student can adapt it to their own needs