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Greg Adams Kade Parry English 1010- Section 050 May 3, 2013 Auto Industry Crisis From 2008 to 2010 the automotive industry was one of the most affected industries during the recession. Although the effects were felt the most by American manufacturers, manufacturers from Asia and Europe also struggled through this time. There was, and still is in some cases, a lot of financial experts and consumers who did not believe the bailout was fair. The treasury department tried various methods to help save the American auto manufacturers, with no avail. Their final attempt was to bailout General Motors and Chrysler, Ford Motor Company did not receive a federal bailout but instead took out a loan for over $23B, putting up the entire company as collateral. Although Ford was not bailed out by the US government, they needed an exorbitant amount of money as well, so they will be included in bailout discussions although they technically did not receive a bailout from the government. Both the Bush administration and the Obama administrations contributed to bailing out General Motors and Chrysler. The Bush administration loaned Chrysler $5.5B and the Obama administration loaned $6.9B. General Motors was loaned $19.4B from the Bush administration and $48B from the Bush administration, including $17.2B going to GMs financing company (Klier; Rubenstein. p. 38, 2012). Between the big three a total of $102.9B from the US Treasury Department and a private loan for Ford Motor Company was borrowed. The bulk of the loans were paid off by mid-2011.

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The Big Three (Chrysler, General Motors, and Ford) were all on the brink of going out of business for good in 2008. There are many who believe that because the American manufacturers focused so heavily on their large vehicle platforms, mainly trucks and SUVs, that they should not receive financial help for being so short-sighted. There was a larger profit margin on these oversized vehicles that most who own do not need. Beginning in 2003 gas prices began to climb and continued to climb through 2008. The big three, for the most part, stuck to making their oversized, gas-guzzling vehicles. Asian and European manufacturers had been making reliable, appealing and most importantly eco-friendly vehicles (AP 2008). Klier and Rubenstein state in their article, written shortly after what most to be considered the end of the recession, that, As part of the severe recession of 200809, the United States experienced its sharpest decline in production and sales of motor vehicles since World War II (p. 35, 2012). This is an intimidating statistic since during World War II American manufacturers did not have the finances or the materials due to most being used for military purposes. This crisis seems to be more of negligence than shortage of resources, including gasoline. This statement is just evaluating cars and light trucks, some light trucks and SUVs can account for the decline in sales of gas-guzzling vehicles in America. The companies were making eco-friendly cars throughout this process so gas prices cannot account for why these vehicles were not selling. The big three were a decade or more behind some foreign manufacturers and it took them a few years to produce eco-friendly cars that consumers actually wanted to buy, along with billions from the government or private loans. The big three did not want to take loans out, they all tried to save their companies without intervention, but in the end they all needed enormous amounts of money in order to continue with day to day operations. Light vehicle sales in the US (cars and light trucks/SUVs) declined

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from 16.2 million sold in 2007 to 10.1 million sold in 2009 (Klier, Rubenstein, 2012). This includes foreign and domestic manufacturers. The problem for the American manufacturers is that consumers wanted reliable, eco-friendly cars and the big three were not producing. They also made a lot of money before this recession selling the domestic oversized vehicles in Asia and Europe. The big three began to discuss labor cost issues with the 2007 labor agreement. Klier and Rubenstein summarize the effects on the American manufacturers stating that soaring fuel prices, a miserable economy, and no credit for the consumers as the main reasons for the American auto industries financial troubles. (35-36). Economists claimed in 2007 that if the big three were to cease production of vehicles and close the doors for good that over 3 million American jobs would be lost by 2009. Each manufacturer employed hundreds of thousands in their plants and there were hundreds of thousands of workers who supplied parts, fixed these vehicles that would no longer be produced, and many other venders would be out of work if the big three no longer existed. The competition of the big three did not feel it fair that these companies could ignore the warning signs and continue to produce oversized, gas-guzzling vehicles, only to be bailed out by their government for their own negligence. Krishner states in his article in the San Francisco Chronicle, referring to Honda, that, with the most fuel-efficient model lineup in the industry, focusing on slow-but steady growth with popular cars such as the Civic and Accord (2008). A good deal of consumers who refuse to buy foreign vehicle, whether the assembly plant is in the US or not, were faced with buying a vehicle with unknown reliability or purchase the tried and true trucks or SUVs produced by these companies and pay a lot of money for fuel. Hondas executive vice president at the time, John Mendel, said, Were not geniuses, were consistent.

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(Krishner, 2008). This statement refers to Honda sticking to their guns and not getting in on the truck frenzy of the 1990s. They continued to work to improve cars such as the Civic and Accord, which had already proved themselves in the American market to be reliable, ecofriendly cars, before most consumers cared that much about gas prices, carbon footprint, etc. In the Associated Press article, Gas prices put Detroit Big Three in crisis mode, the author(s) state, As of April (2008), year-over year sales of large pickups were down 17 percent and large sport utility vehicles were down 29 percent, while sales of the subcompacts jumped 33 percent and the Toyota Prius hybrid was up 23 percent (AP, 2008). This article was written months before any of the big three went before congress to seek ways to keep their companies afloat. The American manufacturers knew their sales were down in the beginning of 2008, they had ideas of how to save their companies but they all involved money that none of the big three had at the time. Toyota and Nissan have been producing what are considered to be light trucks (trucks that can haul a half-ton) such as the Tundra and Titan since the 1990s and 2000s, respectively. The big difference between these foreign companies and the domestics is that these foreign trucks, which a great deal are assembled in the US, is that trucks and sport utilities accounted for 70% of Chryslers sales at the time (The most by any manufacturer, with the Ram and Durango models available with the relatively newly released HEMI engines). While Toyota, who produces the most foreign trucks, was only 41% of sales for the Toyota Motor Corporation, which includes their compact pickup, the Tacoma (AP, 2008). There were and still are many critics of the bailouts. Already mentioned is the competition of the big three. There are many media outlets that explain the distain of the American people, claiming that the bailouts would make our country seem more of a communist

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state than free enterprise. In Reeves article about public opinion about the bailouts it explains that now (23 February, 2012) 56% favor the bailouts compared to the 44% that oppose. These numbers are almost exactly flipped from mid-2008 (The Atlantic Wire, 2012). While these polls give some insight to public perception, I feel that they may be skewed somewhat. These polls are taken in-line with the presidential elections, the numbers seem to mimic public opinion of former President George W. Bush and current President Barrack Obama. CBC News posted an article in 2008 criticizing the bailouts, it is their opinion that American car companies were not worth bailing out. If they could not make it on their own then they should be allowed to shut down and possibly open the door for new American manufacturers. The author(s) provide the following statistic, which contradicts statistics put out by the American manufacturers, The 2005 Harbour Report estimated that Toyota's lead in labour productivity amounted to a cost advantage of $350 to $500 US per vehicle over North American manufacturers (CBC 2009). US manufacturers claim they made more money per vehicle but did not sell as many vehicles, this may be why the author(s) uses a 2005 report as opposed to a 2008 or 2009 report. The United States Treasury Department had a monumental task of trying to save all three of its dying automobile manufacturers. In their 2012 article, Klier and Rubenstein state that, The key developments in order included: 1) Congresss inability to agree on a remedy regarding a request for assistance from the Detroit Three; 2) the issuance of a short-term loan by the outgoing Bush administration; 3) the creation of a presidential task force shortly after the inauguration of President Obama; 4) the rejection of restructuring plans drawn up by the carmakers; 5) the managed bankruptcy of Chrysler; 6) the managed bankruptcy of GM; and 7) several post-bankruptcy initiatives (37-40, 2012). The authors break down the bailout of

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American manufacturers into seven key developments, as stated above. On November, 18 2008 the big three requested assistance from congress, but the sides could not agree. George W. Bush and his administration issued short-term loans due to monumental losses by the big three. GM posted a near-record loss of $30 billion in 2008 and entered 2009 with a cash supply of only $14 billion (37). These statistics show that General Motors would most likely have gone under in 2009 without these interventions. President Obama created a task force to devise a strategy to deal with Chrysler and GM. In his Motor Trend article, Lassa states, The consequences of allowing General Motors to go into an uncontrolled Chapter 7 liquidation wouldve been devastating, the D word Id use would be devastating (Lassa, 2010). The author states that allowing one of these companies to go under would be devastating, there is no difference between Chrysler or GM bailouts at this point, GM is only used as an example. The treasury department rejected restructuring plans brought to them by the financial advisors of GM and Chrysler. The treasury department managed the bankruptcy of both Chrysler and GM, most were not pleased with the Bush administration bailouts and how this money to save big corporations was just being used to line the pockets of the already rich. The government wanted to ensure they had some control of where the money was spent (Klier, Rubenstein, 37-40). My opinion of the crisis has remained relatively unchanged through the research of writing this paper. Having 20/20 hindsight, most would agree that the bailouts were not only a good idea, but they actually worked relatively well. Millions of jobs were possibly saved, if the big three had gone under, we would have to import all automobiles or have only assembly plants here for foreign manufacturers. The problem with this is that the owners of these companies are on different continents and the work we would be doing on vehicles would be outsourced from

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these countries to ours. There could have possibly been new companies emerge if the big three had been allowed to go under. I dont believe any quality companies would emerge unless these same people changed their brands and would go on to build the cars they have built since receiving the bailout money. My opinion did change during this crisis, in the beginning I wanted the American companies to do what they did well, which is build large vehicles. I will most likely never own an eco-friendly car, but I began to see the need for the American manufacturers to make these eco-friendly vehicles because that is what consumers wanted. If American manufacturers learn from this, hopefully we wont have another problem of this nature anytime in the near future. There are many who are bitter about this subject, with most objections due to the fact that we are supposed to have free enterprise. Most of these people I have met or read articles from seem bias to certain foreign companies. While a very controversial subject at the time, this was the best option to save American jobs and money. Along with each companies multiple failed attempts to save their own companies, it took the US Treasury Department seven tries to come up with this strategy. Nearly $103B were loaned to the big three and nearly all of this debt was paid off within 2 years of receiving these loans, with interest. It is hard to believe that new start-up companies could have even generated that much in revenue over the same time period.

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Works Cited Gas prices put Detroit Big Three in crisis mode. Associated Press. 1 June 2008. Web. Harris, Jerry. The World Economic Crisis and Transnational Corporations. Perspectives on Global Development & Technology. Issue 1 (2012): 168-181. Print. Klier, Thomas H. and Rubenstein, James. Detroit back from the brink? Auto industry crisis and restructuring, 2008-2011. Economic Perspectives. Issue 2 (2012): 35-54. Print. Krishner, Tom. Why Honda is growing as Detroit falls behind. San Francisco Chronicle. 15 February 2009. Print. Lassa, Todd. The man who would be czar: Treasury Departments chief auto industry advisor takes pragmatic approach to saving GM and Chrysler. Motor Trend. March 2010. Print. Reeve, Elspeth. Most American Now Think Auto Bailout was a Good Idea. The Atlantic Wire. 23 February 2012. Web. The used-to-be-big-three. CBC News. 2 July 2008. Print.