Car Companies And The Financial Crisis
Thursday, October 21st, 2010Body:
Car companies around the world sustained major blows during the Global Financial Crisis. We look at the causes, impacts and finally the sweeping changes that have occurred as a result. With sales of new cars plummeting, mechanics were better off being involved with used cars, rather than new cars.
Beginnings
The global financial crisis, brought about by lax lending practices, particularly to home buyers, caused major problems for the car industry. As increasing numbers of home buyers defaulted on loans, the banking industry hemorrhaged. Losses increased and lending dried up. The very wheels of capitalism, available credit, froze. A lack of trust had replaced too much trust on the part of lenders. This was the beginning of a major economic downturn.
Drop In Demand
The economic downturn brought about a drop in demand for new vehicles. Higher unemployment and lower job security was one cause. The financial crisis also exposed entrenched weaknesses that had been allowed to simmer. This was particularly so in North America, where the three major American manufacturers, General Motors, Ford and Chrysler had not shifted to changing consumer preferences.
Rising Fuel Prices
The “Detroit Three” as they are sometimes known, had become reliant (and some may say complacent) on sales of large gas guzzling Sports Utility Vehicles, or SUVs, which had higher profit margins than small cars. With the rise of fuel prices prior to the financial crisis, and a more environmental mood in the air, many consumers switched their preferences from SUVs to smaller, more fuel efficient cars. The Detroit Three were poorly equipped to cater for this market, and competitive Asian manufacturers gained market share.
Availability Of Credit
Something that affected all car companies was the huge reduction in lending by financial institutions in the form of car loans. With many consumers traditionally reliant on such lines of credit for car purchases, many of these sales simply evaporated.
Debt
Debt provided the killer blow to some of the North American car makers. While these car makers needed to drastically change their product line-up, huge debts, specifically in General Motors’ case, and minimal chances of tapping now frozen global credit markets in order to develop new products forced them into a perilous state. General Motors and Chrysler filed for bankruptcy protection.
The Effects
After heated discussions and inquiries, the US Government took major stakes in General Motors and Chrysler and provided loans to rescue these companies, in return for pledges and plans from the auto makers, such as the development of smaller eco-friendly vehicles in GM’s case, and an alliance with Fiat in Chrysler’s case.
In , the downturn forced Toyota into it’s first loss in 70 years. Declining sales resulted in redundancies, and much trimming of the fat, with both Toyota and Honda exiting their Formula One involvements, and Subaru severing links with the World Rally Championship. In Europe, the results of declining demand were similar.