The Effect of a Struggling Economy on the Auto Industry Essay

1430 Words 6 Pages
When the “Sub-Prime Mortgage Crisis” began in 2008, it triggered a global recession. Demand decreased across all industries, but the auto industry was hit especially hard due to vehicles being big ticket items. Even prior to the recession, the high prices of raw materials and fuels, as well as increased pressure from the government and consumers for automakers to build “greener” cars meant trouble for automakers. Within the industry, Canadian and the American auto makers were hurt the most. The strong presence of unions meant that they had a much higher labour cost than their competitors. Also General Motors, Ford and Chrysler, known as the “Big Three” primarily focused on manufacturing pickup trucks and SUVs because of
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Furthermore, from the decreasing collections period it can be seen that GM had to write off portions of its receivables due to the fact that consumers would no longer be able to pay the company with the financial crisis happening (Appendix A). As the crisis continued it can be seen through decreasing liquidity ratios that GM became less solvent, and the company’s decreasing payables period shows that suppliers became far less tolerant of GM borrowing from them (Appendix A). Finally, the extremely low price-earnings ratio of GM signals that shareholders had very little faith in how well the company would do in the future (Appendix A).
The crisis eventually pushed GM to file for chapter 11 bankruptcy in 2009, to receive bailout money from both the US and Canadian governments, and to be purchased by NGMCO Inc., who are now called General Motors Company. General Motors Company is a new entity that is not comparable to the old GM and that is focusing on “greener” cars, fewer brands, an improved cost and operating structure, and the use of less leverage. The changes General Motors Company has made to keep the company from falling too far back into financial duress can be seen in the company’s very low book leverage and increasing liquidity ratios (Appendix A). From these increasing liquidity ratios it is clear that the company is now keeping a large portion of its current assets in cash and accounts