In times of crises, many a times and often governments have to swallow the bitter pill and take hard decisions, now with regards to the Automobile industry I propose ' a ladder of intervention' which I discuss below.
Virtually every Western government with a sizeable domestic automotive industry has intervened in some way or another during the 2009 economic crisis. As problems with individual companies worsened, governments have found themselves climbing this ladder quite rapidly.
1) Credit warranties: This is the least controversial form of intervention. Most countries have initiated schemes to guarantee or extend credit, and these are typically not limited to the automotive industry. A popular approach to support the automotive industry is to earmark loans for R&D or vehicle development to boost fuel efficiency or to secure the loan with company land or buildings.
2) Recapitalize financing units: Recapitalization is similar to credit warranties and to interventions in the banking sector, with an important difference that there is often very little or no equity participation by governments. The fall in both new and used vehicle demand forced large losses at financing units active in the leasing market. Compared with banks or other financial institutions, there are few retained earnings in automaker’s credit arms to strengthen the company’s equity position, because earnings are passed on to keep manufacturing units afloat.
3) Purchase subsidies for consumers: Providing purchase subsidies directly to the consumer benefits automakers and suppliers, stimulates the broader economy, and is easily monitored. In most countries, rules were put in place to yield environmental benefits as well. The macroeconomic effect of these programs has been large, but they are proving to be a drag on sales recovery.
4) Provision of working capital and interfering with management: The direct injection of working capital to specific companies is unlikely to come without policymakers gaining some influence over decision-making, although governments have been at pains to stress that they were not interfering with the day-to-day operations of firms and that they plan to sell their stakes at the first opportunity.
5) Takeover liabilities: This is similar to the provision of working capital without the expectation that the loans will ever be repaid. In this case, governments become even more extensively involved in the management of the firm. While these cash infusions are technically structured as loans, there is often no real expectation of repayment.
6) Quasi-nationalization: As part of the “quick bankruptcy” procedure of Chrysler and GM, the U.S. (and Canadian) government took large equity stakes in the restructured companies in exchange for debtor-in-possession financing. At this point, government intervention in strategic decision making became more explicit: appointing new top management, demanding larger wage cuts, restructuring of the product portfolio, and insisting on additional plant closures. The stated objective is to sell government ownership shares as soon as possible, but before this can happen it will have to be clear that the companies are financially stable.
Virtually every Western government with a sizeable domestic automotive industry has intervened in some way or another during the 2009 economic crisis. As problems with individual companies worsened, governments have found themselves climbing this ladder quite rapidly.
1) Credit warranties: This is the least controversial form of intervention. Most countries have initiated schemes to guarantee or extend credit, and these are typically not limited to the automotive industry. A popular approach to support the automotive industry is to earmark loans for R&D or vehicle development to boost fuel efficiency or to secure the loan with company land or buildings.
2) Recapitalize financing units: Recapitalization is similar to credit warranties and to interventions in the banking sector, with an important difference that there is often very little or no equity participation by governments. The fall in both new and used vehicle demand forced large losses at financing units active in the leasing market. Compared with banks or other financial institutions, there are few retained earnings in automaker’s credit arms to strengthen the company’s equity position, because earnings are passed on to keep manufacturing units afloat.
3) Purchase subsidies for consumers: Providing purchase subsidies directly to the consumer benefits automakers and suppliers, stimulates the broader economy, and is easily monitored. In most countries, rules were put in place to yield environmental benefits as well. The macroeconomic effect of these programs has been large, but they are proving to be a drag on sales recovery.
4) Provision of working capital and interfering with management: The direct injection of working capital to specific companies is unlikely to come without policymakers gaining some influence over decision-making, although governments have been at pains to stress that they were not interfering with the day-to-day operations of firms and that they plan to sell their stakes at the first opportunity.
5) Takeover liabilities: This is similar to the provision of working capital without the expectation that the loans will ever be repaid. In this case, governments become even more extensively involved in the management of the firm. While these cash infusions are technically structured as loans, there is often no real expectation of repayment.
6) Quasi-nationalization: As part of the “quick bankruptcy” procedure of Chrysler and GM, the U.S. (and Canadian) government took large equity stakes in the restructured companies in exchange for debtor-in-possession financing. At this point, government intervention in strategic decision making became more explicit: appointing new top management, demanding larger wage cuts, restructuring of the product portfolio, and insisting on additional plant closures. The stated objective is to sell government ownership shares as soon as possible, but before this can happen it will have to be clear that the companies are financially stable.
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