The American Auto Industry Is Back
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In his State of the Union Speech, President Obama touched on a number of key issues and initiative aimed at improving the economic system within the United States. Education, energy, trade policy, job creating and tax reform were all discussed in the president’s internationally watched address. With the 2012 presidential election just around the corner, Obama also noted some of his most important accomplishments during his time in office; the resurgence of the American auto industry stood out as the most noteworthy.
Collapse of the Auto Industry - 2008
Plagued with uncontrolled pension expenses, a heavy debt burden of $172.8 billion and slumping sales, General Motors (NYSE: GM) was a catastrophe waiting to happen. After several multi-billion-dollar losses amounting to over $80 billion between 2005 and 2008, the automaker was left with only $14 billion dollars of cash on its balance sheet and was not able to secure a source of financing. As production facilities began to halt operations, hundreds of thousands of Americans lost their jobs – in a factory stationed in Flint, Michigan, 40 km out of Detroit, only 6,000 workers remained, much less than in the heyday of the American auto boom when 100,000 GM workers were employed in the small city. Falling sales and an unsustainable financial position forced General Motors to file for Chapter 11 bankruptcy in the summer of 2009.
Ford (NYSE: F) and Chrysler did not escape the crisis either. With their products failing to attract consumer interests, the American auto industry saw steep declines in sales. Ford, for example, saw its revenue shrink from $177 billion in 2005 to $118 billion in 2008. The crippled domestic market was among the worst performing regions for the manufacturers. Falling dominance at home and abroad gave rise to international competitors such as Toyota (NYSE: TM), Volkswagen and Honda (NYSE: HMC). Between 2005 and 2008, when U.S. auto was facing slumping sales, these three international manufacturers actually saw their revenues rise considerably, largely driven by growing demand in the North American market (however, Toyota, Volkswagen and Honda did see a sales drop in 2009 with the spread of the Great Recession). During this period, Toyota gained the crown of world’s top auto maker.
Recovery of the Auto Industry - 2011
During the State of the Union Speech, Obama asserted: “On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen. In exchange for help, we demanded responsibility. We got workers and automakers to settle their differences. We got the industry to retool and restructure. Today, General Motors is back on top as the world’s number one automaker. Chrysler has grown faster in the U.S. than any major car company. Ford is investing billions in U.S. plants and factories. And together, the entire industry added nearly 160,000 jobs. We bet on American workers. We bet on American ingenuity. And tonight, the American auto industry is back."
General Motors reclaimed its top spot as the world’s number one car manufacturers after announcing that it has sold slightly over 9 million cars in 2011, beating out Volkswagen by 850,000 automobiles. Although Toyota has not reported annual sales yet, due to supply chain problems arising from the earthquake and tsunami in north-eastern Japan, analysts are predicting a 6% drop in annual sales to 7.9 million.
General Motor’s turnaround after it filed for bankruptcy protection has been fueled by consistently introducing innovative products that are competitive on the world stage – 28% of GM’s sales have come from China. With improving conditions in the company, the U.S tax payer can rest assured that GM is in a position to return the government’s $50 billion investment. Likewise, Ford’s U.S sales are up 17% year-over-year. (Ford will be releasing its fourth quarter results tomorrow.)
Conclusions
The auto business environment is very different today than it was in the previous decades; in 1955 80% of the world’s cars were manufactured in the U.S., half of which were built by GM. Globalization has pushed open the doors to international players who can now compete for the same markets as Ford and General Motors. While at first American firms were unable to compete, they have adapted to the fast-paced world of the auto industry to once again make cars that appeal consumers.
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