Response to The Auto Industry

http://enterpriserisk-jonf.blogspot.com/

The Auto Industry blog from Jon F discusses the request for bailout funds by auto companies such as GM and Chrysler. On one hand denying the bailout money would cause these auto companies to go bankrupt, costing thousands of people their jobs in a time of increasing unemployment. His other viewpoint is that if the US government does provide bailout money, they will be helping these companies that seem to be failing regardless of their numerous attempts to cut costs. In a system of survival of the fittest companies, the help could be useless. The blog states, "If you were a manager at a company still attempting to sell gas guzzling SUVs, within the past 5 years I have a feeling that the you and the other managers of your company failed to look around and analyze the current market." I understand that the auto company bailout will be saving companies that are failing and will continue to fail in the future, but many jobs are at stake. I agree with the idea that it seems wrong to help a failing company when it is going to continue to fail and drain taxpayers money, but I do not think the company is in bankruptcy for avoiding the needs of the current market. I think GM and Chrysler should be given bailout money and maybe be encouraged to use some of the money to switch a few production lines or design a few more mid sized cars.

Too many jobs are at risk with these major auto companies. An article in Forbes backs my opinion that allowing America's largest auto manufacturer, the employer of hundreds of thousands of people, to fold could start a recession all by itself.
-Saving GM

I think in just 5 years it would be extremely difficult to change your company product line. You can add new compact cars but you cannot completely abandon the makes and models of SUVs that have been a part of the company since conception. Chrysler has been around since 1925. GM was created in 1908. It is challenging to change the strategy of old companies like them. The auto companies would have to get new equipment to build cars and not mostly SUVs. Jobs would be affected in this way as well because people on the assembly lines have different specialties.

Because these companies are so old, they also have older employees who have seniority and special pensions that can be very expensive to the company. This is another reason for GM's bankruptcy which has nothing to do with avoiding the current market. GM has been in business a long time, meaning it has lots of old workers and retirees, which means doctor bills and pensions. If it had started 15 years ago, it wouldn't have this problem. GM has an $86 billion pension fund. If just half of this amount could be spent on developing new cars or engines, GM would have been able to begin to prepare for the current crisis.
-http://www.forbes.com/global/2005/0314/029.html?boxes=custom

The costs of changing the company's products from SUVs to environmentally friendly cars that are good on gas mileage could put the auto company into bankruptcy as well, maybe even more quickly than the loss of car purchases due to people no longer having a preference for SUVs. If they had changed their strategy to making compact cars, they would incur the costs of that change. I researched approximate costs of switching your manufacturing to cars and found Ford as an example. Ford decided to start to switch due to increased gas prices and SUVs remaining on lots longer. Ford decided to switch a few of its truck plants into car plants. The switchover is going to cost the automaker $75 million bucks just for a new bodyshop. The total cost to retool the plant will be in the hundreds of millions.
- From AutoCar

Also, car purchases are decreasing in general, not just SUV car purchases. Due to the economic crisis, people are trying to save money and one way to do so is to keep the car you already have, keep a lower or nonexistent car payment on the car you already own. People have been deciding they can make do with the car they already have. There is no need to make a large new car purchase when they are hurting financially. Luxury items are the first to go when in a financial crisis. Moreover, increasing unemployment is another reason for the decline in car sales. Spain is experiencing the same problem as in the US. Due to job cuts, people are unable to purchase cars. Decreasing disposable income is also reducing the car sales.
-Car Sales on the Decline
We see these same reasons affecting car purchases in the United States. What are auto industry companies supposed to do to prepare for fewer purchases? This reason is not GM or Chrysler's fault. GM has been trying to analyze the current financial situation, but maybe they think it will get better. Gas prices have gotten lower, but I'm sure they will change again.

Many reasons, not to the fault of the auto companies, have caused them to need bailout money. Too many jobs are at risk to neglect these major companies. Hopefully, after the crisis when money is more readily available for these companies, the auto industry's risk managers can assist the companies in changing their product lines to better prepare for a future financial crisis.