Impact of Recession on Automobile Industry

This essay proposes to investigate the effects of recession on the automobile industry in world specifically in United Kingdom, United States, India and Japan. This includes its effects on employment sector, advertisement sector, Research & Development Sector, Banking Sector and other sectors related to this, the effect on overall economy and the related terminologies thereof. Also, the aim is to the study of effect of recession on downturn in automobile industry due to changes in Trade Agreements between two countries regarding export and import policies of this industry.

‘The National Bureau of Economic Research formally defines a recession as three consecutive quarters of falling real gross domestic product (GDP). ’ (Company. , 2003). As such there is no perfect definition of recession but as per the past experiences and research the above definition has been brought into limelight. Some economist says that when there is fall in GDP of 2 quarters there arises a situation of recession. There are any times of recession and none of the recessions are alike.

If we take recent situation of recession, It has been caused by a shock to the availability of credit, a huge growing up of debt which needs to be unwound and its growing across the entire world. The global economic crisis began somewhere in 2007 and grew up in 2008 shocked most of the countries. Recession which started from USA spread all over the world in few months. There were all the sectors of business which were affected by this recession. The situation started to go from bad to worse day by day. Banks stopped financing to various companies so the working was affected.

In return the sales of various commodities started declining as purchasing power began to slow down. There was wide spread unemployment in various sectors of business. Many economists were struggling to find the remedies for this great recession but were not able to find the solution. Thus this crises was becoming a major issue for most of the countries of the world, as in order to protect their economy from falling the crises was to be controlled. Automobiles are vehicles primarily used on roads for transportation. Automobiles have changed the world in 20th Century.

The manufacturing, sales and maintenance of automobiles have become key element in the growth of industrial economy. Due to recession Automobile industry was even affected to a greater extend as people tended to spend less and there was less availability of finance also. The auto mobile industry, which is seen as a barometer of the world economy, is going itself into recession, with sales and profits falling down. Manufacturing plants are closing, jobs are being reduced, production being slow down and the share prices of the car companies are fluctuating.

The economic meltdown is seen in almost all the industrial sectors across the globe. While the scale of the crash was not explained, so was the response by the Government and Banks in providing and helping to get the financials from the markets and make the industry work again as normal and also to gain back the consumer confidence. The big three car makers Ford, Chrysler and General Motors have been hit by recession even harder than the most of the companies. (Anonymous, 2009) With last year's sudden oil price rises already have started consumers pushing away from the traditional fuel cars to more economical alternatives.

Graph showing Track of US Car Sales in year 2008 and 2009 (Hurt, 2009) From the graph above its clear that the sales of car in United States in 2009 has declined tremendously as compared to 2008. There was drastic fall of 95. 1% in the sales of Isuzu Motors. Sales of General Motors which was capturing the major part of the market has reduced by 40. 4%. This downfall had a great impact on the industry. There was huge loss in General Motors so it started developing new strategies to protect itself from becoming bankrupt. Ford even faced a huge loss due to recession which amounted to 30.

8%. There were many companies which suffered a huge loss however, there were companies like Subaru motors which were not much affected by the recession and the sales was just down by 0. 8%. But such companies having so minimal change were hardly seen. From the above chart we can see that each and every company is affected by and large. Due to such decrease in sales the companies started losing its liquidity and its existence was coming in danger. Chrysler needed $4bn (? 2. 4bn) in loans from the US government, (Krolicki, 2009) and was then taken over by Fiat.

General Motors became the biggest corporate failure for the automobile industry, offloading its European division just days before filing for bankruptcy protection. The government took major part of the debt of the company by putting some amount as loan as emergency loans as well. GM and Ford both having their components manufactured from India but with such a high fall in the sale of cars it made a tremendous impact on the auto components manufactured in India. A cut in the production made them to cut down their orders of the car components manufactures.

Thus due to this the production of various parts were stopped which led to decline in GDP and unemployment in the country. Thus the production of components in India is a strong and growing economy but the hit of recession has put red marks on the entire balance sheet of the Indian economy as well. Graph showing Car Sales in UK : (SMMT, 2009) As per the above graph of the Society of Motor Manufacturers and Traders (SMMT) it is seen that the trend of sales of cars of Top 10 brands in UK is falling down in 2007 and 2008. In the last quarter of 2006 the sales was high at around 1. 7 million units which started to fall and then came to around 1.

5 million units by the 2008. So the tremendous fall in the sales figure is seen during the said period. As per the Society of Motor Manufacturers and Traders (SMMT), the new Car registrations in United Kingdom were down 18. 6% to 63,225 compared with the same month in 2007 (BBC, 2008) . There was a decrease in sales in overall whole of the Europe because of recession. There was lack of consumer confidence as well in the mind of the people towards the manufacturing companies as to they will sustain or not. This decline was not stagnant or falling but it was increasing day by day. There was a further decline in the sales in 2009.

As per the Society of Motor Manufacturers and Traders (SMMT), new car registration in UK in October dropped 22. 2 % year on year, the sharpest monthly decline since May 2009 (Car, 2011). There were many car manufactures which incurred a huge dropdown in the sales because of recession. In the first year of recession itself many companies suffered, some of such companies are Rover which had a drop down of 97%, Tata had a drop down of 80%, Land Rover had a drop down of 30%, Porsche had a drop down of 31% and there were various other companies as well (POLLARD, 2009). In 2008, just when the recession has begun to hit the

world Ford the leading car company in the world sold Land Rover and Jaguar to TATA , India’s biggest vehicle maker for ? 1. 15bn (BBC, 2009). Ford had to sell these two factories in UK in order to manage the business and funds in USA. There was no significant change in the working of the company after its acquisition. Staffs, working conditions and strategies were same so it did not affect much on the other side of the coin. To cover up the recession and to keep the companies going Land Rover and Jaguar now the subsidiary of TATA Motors secured ? 340 million from European Investment Bank (Times, 2010) .

This loan will be utilised for research and development of the companies. The business analysts have reported that the Indian car market has being growing continuously over the past few years. But with the hit of recession it is also fallen down. Many companies are suffering huge loss may be it be Tata Motors or Maruti Suzuki or even Mercedes-Benz. So we can say that the market has gone down to a negative trend. “The complete lack of consumer finance and high interest rates are putting off consumers from buying vehicles” says Dilip Chenoy, Executive Director of Society of Indian Automobile Manufacturers (SIAM) (India, 2008).

Consumers don’t get easy finance as banks are not in a lending mood due to the economic situations prevailing in the market. Banks have increased the lending rates so that the income of the bank keeps on generating and at least some money is recovered by the way of interest. Finance was the main source of buying the cars in India as mainly people relied on that so it is a huge toll on the buyer's capacity. Even if finance is available the lending rates are too high so consumers cannot afford to buy the car.

In November 2008, the sales of passenger cars went down from 103,031 to 83,079, while there was a dip in the truck sales by half, which was the worst in the last 10years (India, 2008). So it is clear from the above figures that there was an overall dropdown in the industry which not included passenger vehicles but also transport and goods vehicles. There are many companies which import various parts of the vehicles from various countries and as due to the prevailing condition there was fluctuation in the foreign exchange and so the companies had to increase the price of the vehicles in order to cover up their expenses.

Uncertainty in exchange rate and increase in the dollar value against the Indian rupee has caused the slowdown to much extent. Increased dollar value has increased the landed cost of imported machine tools and even the raw materials required for production. Steel and other metal’s prices have also not shown any signs of reduction in the prices so the car companies are forced to increase their car prices. Tata has reported that their profit fell down from 34. 1 % to 3. 47 billion rupees because of the slower growth in the industrial sector. Further the company has recorded a 20. 1 % decline in the sales (Shah, 2011).

Tata Motors even suffered a huge loss and there was a need to close down some of its plants for 1-2 days a week in order to cut down the expenses. Recession has also affected the automobile industry in Japan to a greater extent. There was a huge decline of sales in Japan as well as Japan mainly used to export the parts to various countries in the world. Toyota Japanese biggest automaker Company said that its Global Sales reduced by 21. 8% in November 2008 which is the biggest drop in eight years (PRESS, 2008). Toyota suffered a huge drop down as there was a drop down in sales in US and UK.

Toyota made its first operating loss in fiscal year 2008 during recession. The main competitor of Toyota was General Motors which even suffered from a huge loss. Japan’s No. 2 carmaker, Honda also said that its global production in November 2008 tumbled 9. 9 percent, the biggest fall in five years, to 326,176 vehicles (PRESS, 2008). Honda also exports its cars to various countries so the global recession has played its impact on its sales figure. Nissan, Japan’s third-biggest car manufacturer said its global production dropped 33. 7 % to 222,212, the largest decline since it started compiling such data in 1985.

Worldwide sales dropped nearly 20 %, to 237,653 in the month (PRESS, 2008). As there was weak demand of cars in US and Europe there was fall in the sale of cars. There was even less sales in the Japan itself. But overall it can be said that the Japanese auto makers survived in the recession and fought with it. To conclude we can say that the crises have not only caused problems for the automobile manufactures but also affected the automobile component manufactures. The component suppliers are an important part of the automobile industry that contribute much more in the production of the vehicle.

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