Effects of recession on the Detroit auto industry

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Effects of recession on the Detroit auto industry

The recession that was experienced due to the financial crisis in 2008 to 2010 affected the auto industry in the U. S negatively specifically the three big automakers. The three big automakers that include General motors, Chrysler and Ford, also referred to as the ‘Detroit three’, get their name since they are the largest auto industries in United States and Canada. The recession contributed to a decline in car sales in these industries, which was facilitated by high fuel increase. Due to the recession, the prices of fuel went up, making consumers opt to buy fuel-efficient cars therefore reducing the sales of automobiles from these industries. The cars the Detroit industry sell consume high amounts of fuel in volume compared to smaller cars.

The other reason that the sales in automobiles declined was due to a price increase in purchasing raw materials. This increase caused the industries to reduce its production since they could not afford to buy raw materials in bulk like before. The recession caused people with poor and average consumer credit rating not to access loans for buying cars, which resulted to less car sales. The instability in the job market and individual consumer finances caused by recession restrained consumers from applying for loans to avoid the payments, which reduced the purchasing power of consumers. Due to low volume sales, the industries had to lay off some of its employees and lower the wages it paid to the rest to stop them from being bankrupt (Borade, 2011). The companies had to reduce the payments it was making to the laid off workers since they did not have the money to pay them.

The industries requested the government for bailouts to sustain their operation since they were making losses and they were almost bankrupt. The bailout was needed to keep the industries afloat instead of sinking, which would have resulted to an economic crisis due to the resulting layoffs. The auto industries are responsible for creating three million jobs directly or indirectly. These opportunities would have ended with the closure of these industries. The bailout money enabled the industries to increase its production by purchasing raw materials and to pay up the debts they owed. The other reason bailouts were important is that they made it possible for consumers to purchase vehicles through the auto loans provided by bailout money. This increased the purchasing power of the consumers who previously could not access loans due to their credit rating and insecure jobs. This saw an increase in volume of sales as consumers took advantage of the auto loans to purchase cars.

The other reason why a bailout was necessary is that the auto sales drop to thirty-seven percent had reduced the competitiveness of the U. S auto industry in the global market. Therefore, a bailout was needed to restore the auto industry to a competitive high-level in the global market to increase purchases both in the local and foreign buyers (Amadeo, 2012). The bailout made it possible for the auto industries to develop low energy consumption cars that would compete with the other global auto industries who were selling these cars at increased sales rates. Another reason for the bailout was that the stock market price for the shares of auto companies had significantly gone down because of a decline in sales and rumors of bankruptcy. This was affecting the stock market negatively and making it unstable hence the bailout was needed to stabilize the stock prices that would result to a more stable stock market.

The auto industry that was greatly affected by the recession in 2008 is growing its volume sale therefore increasing its income. In the last two years, the auto industry has seen a rebound as the consumers emerge from the recession and are able to purchase cars. Detroit companies have made incredible profits more than they had in the past ten years after the bailout by the government. However, the demand for their cars has increased so much that the companies are faced with a shortage of workers with analysts predicting that there will be a hiring boom soon to meet the demand (Associated press, 2012). The companies, which laid off their workers due to a decline in production, will now be hiring more employees to meet the ninety percent production target estimated this year. In addition, the carmakers are increasing the number of shifts to increase the production of auto cars. This is in contrast to the production, which was thirty-seven percent during recession before the bailout.

The rebound has increased the number of employees being hired in automakers who manufacture parts that are assembled into each car. The rebound has led to an increase in production of raw materials and increased job opportunities. However, the rebound is causing fear that due to the high demand, the raw materials and parts may experience a shortage, which will lead to increase in their price. This increase and shortage of raw materials and parts can hurt the profits and production of the company in a negatively way though the companies are taking measure against these concerns. The rebound has also seen the companies add jobs in other states where they have offices benefiting the residents of those areas. In addition, foreign carmakers now prefer to produce their cars in America due to the increase in sales. Hence, they are increasing their staff to increase production, which gives the American citizens more job opportunity.

 

Work cited

Amadeo, Kimberly. The Auto Industry Bailout. U. S Economy, February 16 2012. Web. February 28, 2012.

Associated Press. Detroit carmakers race to keep up with demand as experts predict another hiring boom in 2012. dailymail.co.uk, 28 February 2012. Web. February 28, 2012.

Borade, Gaynor. US Economic Crisis: Impact on Automobile Industry. Buzzle.com, September 23 2011. Web. February 28, 2012.

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