The Bailout of the US the Automobile Industry - Essay Example

THE BAILOUT OF U.S THE AUTOMOBILE INDUSTRY A historical background on the bailout In the year 2008, both Chrisler and General Motors came to the public to announce that they were likely to close off their operations due to the market trends that they were facing by then. The then president of the United States, George W. Bush, entered into an agreement for a temporary bailout which served to save them from the imminent closure. The long-term future of the companies was then handed over to the incumbent President Barack Obama who then saw a comprehensive bailout program being rolled out for the two companies. This saw the companies continue with their operations under set terms and conditions aimed at ensuring that the companies would return back to profitability or to their original positions. Why the bailout was undertaken The General Motors and Chrisler who are the major automobile industries in the United States, faced a number of setbacks in the period before the bailout. The two companies had failed to improve their standing and public image among the American consumers (Northrup, 2011). The sales had gradually subsided and the companies were facing bankruptcy should the trend have continued. The companies had lost trust among the local and international buyers on grounds of safety lapses. The Chief Executive Officer of General Motors had to be called upon by the Congress to respond on a number of issues regarding the safety measures that had not been undertaken by the company. The main safety error that had lasted for almost a decade was on the deadly ignition switch defect which had led to close to the death of 42 people. These factors led to a decline in the demand of General Motors’ products necessitating the government to intervene through the bailout. The bailout and restructuring of the General Motors was seen as a move aimed at securing the many job opportunities that would have been lost if the company could have been allowed to go down the drains. Reports indicate that close to 1.2 million jobs were saved as well as $34.9 billion in terms of tax revenue was recovered. How the bailout was conducted On the November 19th of 2008, the United States senate received a hearing on the crisis that was facing the automobile industry at the time. The top managers of the top three automobile companies namely General Motors, Ford and Chrisler presented their case to the senate in terms of the causes and the nature of the crisis that they were facing. They told the senate that they will need $25 billion so as to avoid being declared bankrupt. The Senate was largely divided on the matter as the Republicans spoke against any bailout while the Democrats were in favor of government assistance to the automobile companies. The Chief Executive officer of General Motors at the time, Mr. Rick Wagoner explained that failure of the government to bailout the company could result into an estimated loss of three million jobs in the first year alone and the situation was to affect the United States economy more the Great Depression. As the chance of getting the bailout continued to diminish, the shares of General Motors fell to their lowest price since the Great Depression was witnessed. Ford also experienced a similar scenario. The Democrats wanted the companies to come up with a comprehensive plan on how they were going to make use of the money should they be given a bailout and the measures that they would take to ensure that the companies do go the same direction again. December 2008 saw each of the three companies submitting a revised plan to the Congress on the list of plans that they were planning to undertake such as reduction of the amount of salaries paid to the top level managers, refinancing of the debts of the company and reduction in the number of brands. Chrisler requested for $7 billion to ensure its short-term operations while General Motors asked for $4 billion for immediate payment of its financial demands. The congressional bailout bill was presented for debate on December 9th 2008 and the bill indicated an agreement between the Congress and the Oval Office on a short-term bailout of $15 billion. The House Financial Services Committee then released a copy of the proposed bailout plan for the three companies (Thomas & Biette, 2014). Due to the strong opposition towards the plan, the bailout was largely rejected by the Senate on the 11th of December 2008 leading to a lot of disappointment and displeasure from the three automobile companies. On the 19th of December 2008, President George W. Bush made a keynote statement that he was going to approve the bailout plan so as to save the companies from the imminent collapse. In his announcement, $17.4 billion dollars was to be given General Motors and Chrisler (Peng, 2010).  He first issued $13.4 billion dollars with a promise that the remaining amount was to be issued by February 2009. The funds were made available to the companies through the Emergency Economic Stabilization Act of 2008. The plan prevented the companies from going into an immediate bankruptcy and they were required to restructure their operations in a bid to show long-term viability. The federal loan was to bear an interest rate of 5 percent and could change to 10 percent if the companies had failed to honor it within the set repayment period. Impact of the bailout It is recorded that by December 2008, the sale of automobiles by the three major companies had registered 37% decline. The worst hit were Chrisler and General Motors while the loss that was felt by Ford was close to that experienced by other companies in the East. The members of the Congress who expressed their lack of support for the proposed bailout argued that three companies had never adopted any competitive initiatives in the operations for a long period of time. They delayed in the manufacturing of alternative energy vehicles but continued to manufacture the Hummers and SUVs. After the bail out by the government, the automobile companies have registered a tremendous increase in their customer base which is evident by the increased sales. The companies have also been able to diversify their product line in a bid to widen their scope in relation to the customer base that they seek to appeal to. For example General Motors reduced its overdependence on Service Utility Vehicles (SUVs) and big trucks as its main products and they began to diversify their production by introducing midsize models such as Toyota Camry and the Honda Accord (Ingrassia, 2010).  As a result of the bailout, General Motors and Chrisler have gained heavily through the sale of trucks and SUVs since the year 2009. After the bailout, the companies were given a challenge of ensuring that they be the first to come up with the next generation of clean cars and they are currently striving to realize that dream in the midst of stiff competition from the Asia’s giant automobile manufacturers. Jobs were saved, the economic growth was ensured and the government will be repaid ahead of its schedule. The General Motors is currently registering high profits and its stocks have been diversified by the government thus allowing many people to own the company. Despite the politics that were playing around the whole idea of the bailout, many people across the political divide benefited either directly or indirectly from it. The bailout by the government provided the new car buyers with a lot of incentives. Some of the incentives include the backing of all new car warranties by the government, the deduction of all car sales and excise taxes through the Economic Stimulus bill to all new car buyers and zero subsidies financing for some of the vehicles bought from Chrisler. The bailout plan saw an increase in the sales of General Motors vehicles with a record 10 million being registered in each of the year that preceded the bailout (Ritholtz & Task, 2009).  In July 2009, the company had total sales of 10.758 million and the company emerged as two separate entities so as to increase its diversity and to fulfill part of its restructuring plan. The old GM took up a major part of the debt while the new GM had $17 billion of its assets in form of debts and it was able to move on as a profitable company. Conclusion The General Motors emerged from the bankruptcy period as a new company that had majority of its shares being held by the United States Treasury. On the other hand, Chrisler emerged from bankruptcy as being owned primarily by the United-Auto Workers Union and partly by Italian auto-manufacturer, Fiat. The General Motors had to let go of several pf its brands as part of the bankruptcy proceedings as well as terminating a number of dealership with other companies. Ford managed to survive bankruptcy owing to its large line of credit that it had obtained back in the year 2007. Since the crisis was avoided, the three companies have continued to operate with registered high profits and revenue. References Ingrassia, P. (2010). Crash course: The American automobile industrys road from glory to disaster. New York: Random House. Northrup, C. C. (2011). The American economy: A historical encyclopedia. Santa Barbara, Calif: ABC-CLIO. Peng, M. W. (2010). Global business. Mason, OH: Cengage South Western. Ritholtz, B., & Task, A. (2009). Bailout nation: How greed and easy money corrupted Wall Street and shook the world economy. Hoboken, N.J: John Wiley & Sons. Thomas, D. M., & Biette, D. (2014). Canada and the United States: Differences that count. Read More