CASE STUDY

Automotive Industry Crisis of 2008-2010



Automotive Industry Crisis of 2008-2010

Question No: 01

Features of the Industry Causing Intensive Competition and Low Profitability

The automotive industry crisis took place in 2008-2010. It was a part of the financial downturn that was felt globally. This crisis affected the Asian, as well as, the European manufacturers of automobiles. However, this crisis was felt primarily in the American automobile industry. This downturn of the automobile industry also affected the Automotive Products Trade Agreement of Canada. There were many reasons behind this crisis that the automotive industry of the world was facing.

The crash of credit markets was the main reason of the crisis that the automobile industry faced. This made the loans to purchase cars very difficult as the global financial market crashed and was facing a major crisis. The automobile markets of the United States fell to 14.8% within the first 10 months of the year 2008 (www.nbcnews.com, 2008). The decline reached 31.9% by the end of the year. The reason behind this crash in sales was the fact that credit was not available for the people who wanted to buy these cars. This was not a fault of the automobile industry as well. All of this happened because of the poor government that made the stock market decline (www.autoblog.com, 2008). It was a failure on the part of Treasury Department, The Federal Reserve, Congress and regulators that they were not able to manage the financial market and the country was run into a financial crisis that affected all the industries, along with the automotive industry.

The major industrial borrowers were hit by the collapse of the credit markets. This led to a major drop in the consumer buying and borrowing and this ultimately led to a massive decrease in sales of the automobiles all around the worlds. The European and the Japanese car firms only saw this as a short-term challenge. However, this came as a war of survival for the American automotive industry and specifically the Detroit Three. General Motors alone in the year 2008 lost almost $30.9 Billion. The fourth quarter loss it had was almost $9.6 Billion and this decreased the revenue of General Motors by 39 percent. The losses were sustained not only in North America, but also in all of the world. The case reserves of the company were drenched. It was found that the cash reserves that the company had at the end of 2008 was only $14 billion that the GM of the General Motors claim is the minimum amount that the company needs to fund its operations. The figures were similar for Ford, as well as, Chrysler (www.autoblog.com, 2008).

The companies were unable to get credit from the private markets and the only option left for them was to borrow money from the government and the state. Both Chrysler, as well as, General Motors applied for loans and received loan guarantees from the government of the United States, as well as, ...