The automotive industry in the 2009 economic crisis

Here I discuss the impacts of the 2009 Global Financial crisis on the Auto industry, in one of the subsequent posts on this blog I would discuss the ramifications and justifications for the government interventions in the Auto industry.

The global financial crisis that began in the fall of 2008 severely deepened an ongoing global economic recession that had been underway since early in the year. The impact of the crisis on the automotive industry has been more severe than for any other industry except housing and finance. There are several reasons for this.

First, the industry, especially the value chains led by the American Big 3 automakers, was in a dire state to begin with. For companies already on life-support, the freezing of credit markets meant cancelled orders, unpaid supplier invoices, and ‘temporarily’ shuttered plants. Huge debt loads, high fixed-capital costs, high labor costs, and immense pension and health care commitments to retirees added to the immediacy of the damage. Second, the high cost and growing longevity of motor vehicles prompted buyers to postpone purchases that they might have otherwise made. Consumers, especially in the world’s largest national passenger vehicle market, the United States, found it difficult to obtain loans for purchase and, driven by fear of job loss, moved aggressively to increase their rate of saving. Vehicle sales plunged and as a result, beginning in the fall of 2008, pushing the industry into its most severe crisis since the Great Depression.

Because of the co-location of assembly and parts plants in national and regional production systems, the effects of the crisis have been largely have been contained within each country/region. For example, the largest sales decline was experienced in the United States. While this had a dramatic effect on parts imports, which declined at an average annual rate of 20.2% over the 2008-2009 period (US International Trade Commission), the more severe impact of the crisis in the US was on assembly and parts plants within North America, some of which not only ceased importing parts, but temporarily or even permanently closed.
In this environment, the United States Congress, supported by a new administration unwilling to preside over the liquidation of the country’s largest manufacturing industry, offered several waves of bailouts, but only after a series of humiliating Congressional hearings where Big 3 CEOs made the case for government assistance and were aggressively cross-examined about management’s culpability for the crisis. In the aftermath, General Motors’ CEO resigned and the company was forced to file for Chapter 11 bankruptcy. Chrysler also filed for  bankruptcy, and narrowly avoided a break-up through partial liquidation and sale of its more lucrative assets to the Italian automaker Fiat, which is providing technology and management support in an effort to restructure the company to make it viable again.

While it is widely believed that Ford has not yet asked for or received government assistance, the company did accept a $5.7 billion ‘retooling loan’ from the Department of Energy to develop more fuel efficient cars and trucks in June 2009.

In Europe too, bailouts were provided, but in different ways. Credit support and loan guarantees were given directly to troubled firms. Scrappage or environmentally-motivated subsidies were given to consumers to boost industry sales and help firm indirectly.