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Success of American Automotive Industry Post General Motors and Chrysler Bankruptcy

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Success of American Automotive Industry Post General Motors and Chrysler Bankruptcy Published by : International Journal of Engineering Research & Technology (IJERT) http://www.ijert.org ISSN: 2278-0181 Vol. 6 Issue 05, May - 2017 Success of American Automotive Industry Post General Motors and Chrysler Bankruptcy Muhammad S. Ahmed. Ph.D. Curtis M. Damon Associate Prof. Engineering Management Graduate Student Engineering Management Eastern Michigan University Eastern Michigan University Ypsilanti, USA. Ypsilanti, USA. Abstract— In 2008, when U.S. automotive industry was picked up market share if there were no bailout. As a facing a financial crisis, congress turned down GM’s, determination of whether the automotive bailout was a Chrysler’s, and Ford Motor Company’s request for $25 billion success, Goolsbee and Krueger, [3] consider GM and in emergency funding to prevent bankruptcy. However, in 2009 Chrysler’s profitability post bailout. This paper examines the U.S. Department of the Treasury loaned GM and Chrysler available research on the impacts of the 2008 bailout on the $80.7 billion as part of the Automotive Industry Financing U.S. automotive industry. Further analysis includes available Program (AIFP) (Auto Industry, [1]. Several researchers have employment, production, sales, profit, and U.S. GDP data in investigated the success and failure of the bailout [2],[3],[4],[5]; order to prove if the automotive industry has successfully however, such research did not cover the interactions of specific recovered. For consistency, research will include data from economic indicators like employment numbers, vehicle sales and the Big Three automotive companies, Ford, GM, and production, value added to U.S. Gross Domestic Product (GDP), and gross profit margin percentage. This paper utilizes Chrysler. For the automotive bailout to be considered a secondary data to analyze the success of the automotive industry success, we expect to see a direct correlation of year over post GM’s and Chrysler’s bankruptcy. Data analysis supports a year growth in employment, production, sales, profit, and significant growth in automotive employment that, still falls contributions to the U.S. GDP. short of its peak of over 1 million. Analysis reveals that post- bailout, the automotive industry has contributed $163.1 billion II. LITERATURE REVIEW of value added to the U.S. GDP. Research concludes that post- A. Bailout Overview bailout U. S. vehicle production and sales are at the highest level In December of 2008, General Motors (GM) and Chrysler in a decade, value added to the U.S. GDP has increased year- were facing a financial crisis, and congress turned down over-year, and the gross margin percentage for Ford, Chrysler, GM’s, Chrysler’s, and Ford Motor Company’s request for and General Motors are posting record profits for 2016. $25 billion in aid to provide emergency funding to prevent Together, these findings suggest that the automotive industry is bankruptcy, [2]. Just two months earlier the Bush healthy and profitable post-financial bailout after steady increases in vehicle sales, production, employment, profits and administration had signed into law the Emergency Economic value added to the U.S. GDP. Stabilization Act, which providing funding for the U.S. banking crisis. The Troubled Asset Relief Program (TARP) Keywords—component; : General Motors, Chrysler, Ford is part of the stabilization act, and congress decided to loan Motor Company, Automotice Industry, qualitative analysis, GM and Chrysler $20 billion to prevent the collapse of the bankruptcy, bailout, profitability, automotive, employment, vehicle automotive industry into the early months of 2009, [6]. The sales, production, gross domestic product. bailout provided $17.5 billion directly to GM and Chrysler, while the remaining $2.5 billion went to financing firms of I. INTRODUCTION GM (General Motors Acceptance Corporation (GMAC) and General Motors (GM) and Chrysler were on the verge of Chrysler Financial, [3]. Ford chose not to seek government financial collapse in 2008, and later filed for Chapter 11 support due to previously seeking support in 2006. The bankruptcy. The U.S. and Canadian governments loaned money Ford had received in 2006 allowed them to restructure Chrysler and GM $80 billion dollars to maintain employment before the financial crisis of 2008, enabling them to withstand and manufacturing operations, [2]. Studies conducted on the the current economic crisis. impacts of the 2008 government bailout of the U.S. Both GM and Chrysler were required to develop financial automotive industry provide conflicting views on whether the and restructuring plans by February 2009, leaving the final bailout was a success, [2], [3], [4], [5]. However, little approval for economic relief up to the Obama administration. research has been done to include the automotive industry According to Goolsbee and Krueger, [3], GM agreed to cut and its overall contribution on the U.S. gross domestic their debt by $30 billion and employment from 96,000 to product (GDP) from the years directly before the financial 45,000 by 2012, reducing their model offerings from 45 to 40 crisis in 2008 until present day. McNulty and Wisner [2] and selling the Saab, Saturn, and Hummer divisions. GM used fixed effects model to test the impacts of the bailout on was unable to meet the agreed upon conditions of the bailout employment and sales. Samuelson,[4] based the success of and filed for bankruptcy on June 1, 2009 with $173 billion in the bailout on manufacturing and dealership employment liabilities and $82 billion in assets. GM eliminated over numbers and the potential impact to United States total 20,000 jobs, 1,000 dealerships, and a dozen manufacturing unemployment estimations. Amadeo, [5] compared plants to emerge from the bankruptcy on July 10, 2009, [3]. automotive and parts manufacturing employment and wages, along with whether Ford, Honda, and Toyota would have IJERTV6IS050289 www.ijert.org 453 (This work is licensed under a Creative Commons Attribution 4.0 International License.) Published by : International Journal of Engineering Research & Technology (IJERT) http://www.ijert.org ISSN: 2278-0181 Vol. 6 Issue 05, May - 2017 Chrysler closed 789 of their dealerships with an additional Government backing for GM and Chrysler pushed both expectation of eight manufacturing plant closures as part of companies to keep less profitable manufacturing facilities their bankruptcy reorganization in April 2009, [3], [7]. The open, which would have otherwise closed. The view from United Autoworkers Union (UAW) cut wages in half, and the public for the bailout was unpopular, driving down reorganized their benefit offerings. In a final effort to save automobile and truck sales from these facilities, [2]. The the company, Chrysler merged with Fiat who in turn gained a Canadian government had a 10% stake in GM by loaning $10 minority ownership and corporate control, [3]. billion; this ensured that unprofitable Canadian factories remain open despite the economic impacts on GM [8]. In 2009, General Motors received a total of $51 billion McNulty and Wisner [2] question if it is more important to while Chrysler received $12.5 billion in assistance from the have higher employment with lower sales due to the bailout, U.S. Department of the Treasury as part of the Automotive or would higher sales and less or lower paid hourly Industry Financing Program (AIFP). GMAC was employees have been preferred? Table 2 shows U.S. total restructured and renamed Ally Financial, who in turn vehicle sales market share by company. received an additional $17.2 billion (Auto Industry, 2015) [1]. In May of 2011, Chrysler finished repaying the TABLE II. Treasury $11.2 billion, six years ahead of 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 schedule and by %/Totals 52.50 50.45 46.89 43.66 44.47 46.21 43.90 44.57 44.62 44.53 44.23 December 2014 Ally Chrysler/FCA 12.57 12.62 10.77 8.79 9.22 10.55 11.12 11.33 12.49 12.62 12.56 Financial paid he Treasury $19.6 billion, Ford 16.04 14.59 14.19 15.29 16.44 16.47 15.22 15.70 14.72 14.64 14.64 which was a surplus over GM 23.89 23.24 21.93 19.58 18.81 19.19 17.56 17.54 17.41 17.27 17.03 the original $17.2 billion borrowed [5]. In December of 2013, the U.S. Department of Note. Adapted from “U.S. Vehicle Sales Market Share by Company, 1961-2016,” WardsAuto, the Treasury had recovered $39.7 billion of its original 2017, Retrieved from http://wardsauto.com/datasheet/us-vehicle-sales-market-share-company-1961- 2014 Copyright 2017 by WardsAuto, a division of Penton investment with GM, [5]. The final total cost of the automotive bailout to the United States government, after Samuelson [4] argues that the automotive bailout was a selling shares and repayments, was $9.2 billion [1]. Table 1 success, albeit controversial at the time. Chrysler and GM displays a breakdown of bailout funding.\ initially laid off workers and closed manufacturing and dealership facilities. At the height of the automotive industry TABLE I. in 2006 (pre-bailout), automotive and parts manufacturers Date Sold To Company Invested Profit/Loss Bailout employed over 1 million workers [5]. As of 2014, Treasury Ended automotive manufacturing jobs had increased by 41% since $51.0 $39.7 -($10.3 December the low of 623,300 jobs in 2009, or an additional 256,000 General Motors Billion Billion Billion) 9, 2013 positions [4]. According to Samuelson (2015) [4], the Big $17.2 $19.6 +$2.4 December Three regained profitability as early as 2010 and increased GMAC (Ally) Billion Billion Billion 18, 2014 market share to 45.1% by mid-2014, which is higher than $12.5 $11.2 -($1.3 initial post-bailout, but still below pre-bailout 50.45%.
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