Wednesday, April 11, 2012

The American and German Automotive Industries: Trouble Lies Ahead

Regarded as the backbone of the United States and German economies, the auto industry has been affected tremendously by the economic crises in 2008 and 2010. However, the two nations’ major automobile manufacturers reactions have not taken the same route but instead headed in two completely different directions, one speeds down the highway of sustainable growth while the other has stopped for repair. 

Regarded as “The Big 3,” General Motors, Chrysler, and Ford are the manufacturers leading the American automobile industry. Evolving from Henry Ford’s invention of the automobile in 1896 to an industry worth $500 billion in 2008, these three companies have become major employers of American workers.

After the turn of the century however, the Big 3 companies have experienced falling sales and in turn operated below capacity leading to production cuts and layoffs. Facing bankruptcy, in December 2008 the Big 3 asked for a $34 million bailout from the US government to save their companies and prevent massive layoffs. This was a large concern for the US government as the American auto industry employs 850,000 workers directly in manufacturing and another 1.8 million workers indirectly through auto dealerships.

In 2009, the US government granted the auto industry $25 million mainly to GM and Chrysler as operating cash. $6 billion of this bailout was loaned for the purpose of continued availability of auto loans to potential buyers, thus propping up demand for vehicles in the US. Although the reasoning for the automotive bailout was and remains to be a debated topic, in the short-run it helped to evade an employment disaster. As a study shows, the bailout had an immediate positive impact on the auto industry as it helped to save over 1 million jobs. 

The Obama administration has used this bailout as leverage to persuade Detroit to take a new approach to the auto market. This new strategy has been to focus on producing new models that are less damaging to the environment and more fuel efficient.

As past cycles have shown us, when gas prices rise so does demand for energy efficient vehicles as Jim Tankersley mentions in his 2009 Los Angeles Times article:
When gas approached $4 a gallon last year, consumers who formerly bought Mercedes and BMWs flocked to the Toyota Prius hybrid -- for its lower operating cost, sleek styling and high-tech features.

However, when gas prices settle back down to normal price, the demand for these smaller cars appears to vanish.           
Since the 1973 Arab oil embargo, a pattern has repeated itself: Disruptions in world     markets -- engineered by producers or caused by events such as wars in the Persian Gulf region -- drive gasoline prices skyward. Consumers respond by looking for cars that inflict less pain at the pump. And every time prices level off, the demand for smaller, more efficient cars fades.

Across the Atlantic Ocean the German economy did not experience the recession in the same way the American economy did. The innovative German auto industry, which was put on a hiatus after World War II today produces over 6 million automobiles a year and includes world-recognized names such as Audi, BMW, Mercedes-Benz, Porsche, and Volkswagen.

Early on in the recession, the German auto industry actually grew due to growth in the Chinese consumption. As auto demand in China grew, Germany made sure that it weathered the American recession and remained optimized to produce manufacturing output through short-work programs. These programs provided by the German government promoted companies to retain employees by allowing them to work fewer hours rather than laying them off completely. The government provided support to the under-worked employee so that they were able to hold their job until auto demand rebounded. China soon appeared as an automotive consumer market and Germany was the most capable exporting country poised to meet that demand.

However, the Chinese demand for German cars may experience a considerable drop as China tries to build its own auto manufacturers and pushes to be the innovator first to succeed in the electric car market. Also with the looming crisis in the euro-zone, Germany will no longer benefit as an internal exporter to EU countries. Spain has been forecasted to include a 6.7% drop in car sales and Italy will experience a 5% drop, severely limiting their ability to pay for German cars.

Both the Americans and Germans have fashioned their industries in ways to follow changes in consumption. Although the economic crises have had varying effects on the two nation’s automotive industries neither seem to be down for the count. More so, with growing uncertainty in the stability of the global economic system and fierce competition arising from the East, it does not seem clear whether the two industries will be experiencing smooth sailing or stormy waters for the next decade. However, one thing is for certain: if these two industries want to succeed they must continue to be flexible in this forever changing market.


Elie Topaz said...

Thanks for the article. Though the U.S. has been undergoing a financial crisis the sales in 2012 has grown considerably. The Ford company has topped the list too. And the sales may rise (predicted in year 2013) to higher level too.

Anonymous said...

thanks for share.

JamesWilliam said...

The worlds biggest luxury car manufacturing giants are General motors,Chrysler and Ford. Recently the three car company's sales falling in a regular basis and the production level also goes to downward.This type of problems occurs due to recession. After US govt.approved loans to the buyer the demand for vehicle increases. The three car companies provides better service to customer.