The financial crisis is now escalating into an enormous proportion, with economists across the seven seas failing to comprehend the degree of damage that it is inflicting on the economies. Several industries and units are ravaged by this phenomenon, with certain sectors being in the frontier, which places them squarely in the firing line. The market was previously buzzing with the news of financial sector going down under; now it is rife with Detroit facing the axe and being the latest victim in this financial bloodbath.
Detroit is the home of the US auto Industry and the birthplace of three major auto giants – Ford, GM and Chrysler. This triad is the backbone of the auto industry in the US, and it has earned them the epithet of Detroit. The fortunes of the auto industry is inextricably linked to another commodity, which is prized and often coveted because of its scarce supply- Oil, or the liquid gold, as some people now refer it.
The Volatility of oil obviates any iota of predictability, which is considered premium in any sector. (Business men use all the techniques in the book, to hedge the risks and uncertainties of the business). The eighty percent of the world oil supplies is controlled by OPEC, and any disturbance in this region sends the oil prices through the roof. The auto industry had weathered two oil bubble shocks- the oil shock of 1973, and 1979, and to further compound the problems, the economic slowdown in the country wrought upon by the bursting of another tech bubble, the souring labor relations and the flurry of new models from exotic car makers of countries like Japan and Germany. All these variables independently are sufficient enough to break the back of any industry. The industry however, had escaped these upheavals and has managed to come out of the wash unscathed.
In spite of cruising the monumentally harsh times well, the industry is now finding itself in the midst of the crisis which has no parallels in the modern economic history (to make the matters worse, all the analogies are drawn from the Great Depression, which rocked the world in 1929). The profits of these auto companies hinges on the sales of pick up trucks and Sports Utility Vehicles, which lie on the upper end of ‘auto spectrum’. The lady luck smiled and the mini trucks, sports utility cars and mini caravans, were exempted from fuel economy regulations. It enabled them to produce expensive cars at the lowest cost, which straight away lead to swelling bottom line.
But as the crisis unfolded in United States, the predilection for expensive vehicles waned precipitously, and there was a discernible shift, with people opting small vehicles over their fancy counterparts. The diminishing demand reflected itself in the falling sales. There was a drop of 13.6% in this financial year and worsened in the month of October, with sales dropping to all time low of 31.9%.
The industry rankled with another round of layoffs which is increasingly becoming a norm for the industry. Since 2005, GM has issued pink slips to 30, 000 people and closed down factory plants nation wide. Following the footsteps closely is another industry giant, Ford. As a part of their restructuring plan directed to turnabout the sinking plants, it announced the job cuts of 14, 000 workers, nearly 1/3rd of their salaried work force. Joining the coterie was another car maker, Chrysler, who announced the layoffs of 13, 000 workers or 16% of the workforce. The two pronged measures of job layoffs and factory closings couldn’t salvage the industry, and they posted the cumulative loss of $30 billion. (Figures do not include Chrysler as the data wasn’t available).
The reduced circumstances of the trio coerced them to knock the doors of treasury, with the sole aim of receiving funds from the bail out package kept aside for the financial sector. Their first appeal came in the beginning of September and was before the collapse of Lehman brothers, and the proposed $700 billion bail out package, and it put the figure at the $25 billion. The demand was eclipsed by the financial package announced by the Fed.
With the purported money, as the car makers assured will be utilized to develop fuel efficient cars. The Senate refused to buy the argument and the matter was put to rest.
Six weeks later, the conditions further worsened with the Senate again refusing to provide any help to the sinking industry. The leaders of the industry were chided for the lack of clarity in the proposals submitted and their extravagant pay packages, which stood like a sore thumb. On Dec 8, the White House proposed a $15 billion dollar emergency fund to shore up the domestic automobile industry, but refused to extend the financial life line to the big three at the Detroit.
The charges laid at the door of the trio pre empts any move to resurrect these conglomerates. Critics have identified them as the principal offenders in environmental pollution. Their cars score lowest ranks in pollution tests. The top honchos get princely salaries matched only by their opulent lifestyle. The grievances against the companies have the same magnitude, but their disparate nature makes their case difficult to plead. Meanwhile, their fate is hanging with a fragile thread. All the efforts to reach a mutually amiable consensus have yielded no results. The clock continues to tick for Detroit and millions of people, whose livelihoods depend on it.
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