Automobile Industry - Bailouts, Going Green and Hyundai

Topics: General Motors, Automotive industry, Ford Motor Company Pages: 10 (3296 words) Published: October 18, 2010
Auto Industry 2009
An important issue regarding business ethics is the theory of moral hazard which occurs when a person or business behaves differently when insulated from a certain risk. Moral hazard theory states that when a person or business is insured against the consequences of a particular event, this increases incentive for the insured to behave in a way that will cause the event (Glassman, 2009). The current government bailout of General Motors and Chrysler provides a vivid demonstration of moral hazard. In order to prevent bankruptcy, the Canadian government bought stakes in both companies totalling 14 billion dollars (Watson, 2009). Chrysler is now owned by Fiat while GM has appointed several Canadian government officials as its new owners (Morgan, 2009). This bailout plan can be perceived by these companies, as well as other large corporations, as a “safety net” which will protect them from economic failure, causing them to increase their risky and irresponsible behaviour. Economists argue that the auto-makers have to be accountable for their own situation. Unlike rival automobile companies, GM and Chrysler had poor contingency plans during the economic downturn and therefore should suffer the consequences (Watson, 2009). During a recession, companies are advised to shift their marketing strategies to emphasize quality, durability and value in order to maintain sales (Lamb et al., 2008). GM and Chrysler automobiles, while less costly, are not usually associated with high quality. The companies were not able to alter these public perceptions during the recession which greatly contributed to their economic crises. Other automobile companies, including Ford which is traditionally grouped with GM and Chrysler and considered lower quality, managed to restructure during the recession and avoid bankruptcy. However, after receiving their rescue packages, GM and Chrysler now have a smaller debt load than Ford, which is economically and morally unjust (Morgan, 2009). It makes little sense to reward companies that dealt with economic recession poorly while leaving the remaining better-run companies to fend for themselves. Although the government argues that this bailout will save millions of Canadian jobs, there are only about 100,000 automobile manufacturing jobs in the country, two thirds of which are for Ford, Toyota and Honda (Watson, 2009). Even after receiving 14 billion dollars, GM and Chrysler continue to shut down hundreds of dealerships across the country while not reducing salaries of any executive or higher-level managers (Christensen, 2009). In fact, each GM job saved costs taxpayers an estimated $2.5 million (USD) (Watson, 2009). Clearly the bailout money is not being used to save jobs but to continue paying the executives that nearly ran these companies into the ground (GM Rescinds Pay Cut, 2009). If the managers and decision-makers of GM and Chrysler suffer no losses, they have no reason to alter their behaviour post-bailout. The government also argues that the bankruptcy of two large automobile companies would only prolong the economic meltdown and create more financial loss for Canadians. However, economist James Glassman states that the fall of these companies would benefit the economy in the long run as it would allow for growth of other, more financially stable automobile companies (2009). Furthermore, when asked to identify their first ranked government stimulus option given the choice of; infrastructure spending, investment tax incentives, individual tax cuts or automobile and forestry rescue packages, Canadians in every region and demographic group ranked rescue packages as their last choice (Nanos, 2009). It seems that the government disregarded expert and general public opinion to create a rescue package that only benefits higher level executives of GM and Chrysler, the same executives that nearly drove their companies to bankruptcy. As well as encouraging companies to make risky decisions,...
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