Economic Crisis Impact on Auto Industry’s Costs and Sales

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  • Topic: Automotive industry, General Motors, Chrysler
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Economic Crisis Impact on Auto

Industry’s Costs and Sales

B.W.

Strayer University

Abstract

The 2008 economic crisis negatively impacted the U.S. domestic automobile industry. GM, Chrysler and Ford reported annual operating costs and sales revenues that mimicked the movement of the overall economy from 2005-2010. Until 2009, all three companies displayed a downward trend in operating costs and sales revenues. These two aspects of automobile manufacturers are directly related to one another. As sales levels increase, inventories and production levels must also increase, resulting in higher operating costs. The opposite is true when sales levels decrease. U.S. economic stability determines the profitability level of the industry. Continual economic recovery in areas of employment, credit markets, energy prices and consumer discretionary spending must continue in order for the domestic automobile industry to maintain its profitable growth in 2011 and beyond. Economic Crisis Impact on Auto Industry’s Operating Costs and Sales

The United States’ domestic automobile industry came to life in 1886. There were thousands of makers involved in the early stages of the industry, but over the one hundred and fifteen years of existence the number of players has substantially dwindled. Intense competition, mergers and acquisitions by the automobile makers led to the survival of the “Big Three” automakers and created the industry as we know it today (Wright, 1996). The three companies in the U.S. domestic automobile industry are General Motors, Chrysler LLC and Ford Motor Company. These companies have survived many tough economic, war and organized labor times throughout their histories. The latest economic crisis of the twenty first century has proven to be nonetheless challenging for the “Big Three” automakers. With the onset of the energy crisis in 2003, these companies began to experience financial implications due to the manufacturing focal point they had been placing on their larger, more profitable, fuel-inefficient vehicles. With large inventories of SUVs and trucks on hand, these companies were forced to offer drastic sales incentives to move their inventories. These urgent marketing actions in turn caused a devastating reduction in their liquid assets and financial stability. As the global financial crisis and credit crunch came to fruition in 2008, these three companies were well on their way to bankruptcy in part due to declining sales revenue and fluctuating operating costs. General Motors, Chrysler and Ford Operating Costs Impact

Operating costs for the three domestic automobile manufacturers consist of the cost of goods manufactured combined with the company’s operating expenses. These costs may include fixed, variable, overhead and non-overhead costs. Examples of these costs are: raw materials, supplies, equipment repairs, real estate fees, human capital, insurance premiums, advertising, utilities, fuel, equipment depreciation and taxes. During the approach of the economic crisis and the eventual onset, General Motors experienced declining operating costs and insufficient revenue levels needed to generate a profit. In June of 2009, GM was forced to apply for reorganization under Chapter 11 Bankruptcy. Financial statements now compare the “Predecessor” (up to July 9, 2009) to the “Successor” (July 10, 2009 to present) GM entities (General Motors, 2010). The total expenses GM captures on their financial statements itemize the individual groups as: “automotive cost of sales, GM financial operating expenses, selling, general and administrative, and other automotive expenses” (General Motors, 2011). In the years leading up to the recent economic crisis, the combined total expenses were (in millions): 2005- $209,094, 2006- $211,424 and 2007- $185,512 (General Motors, 2008). From the beginning of the credit crunch to the most recent yearly data available, total annual expenses were (in...
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