Economic Crisis Impact on Auto Industry’s Costs and Sales

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

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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 millions): 2008- $170,209, 2009- $125,612 and 2010- $130,508 (General Motors, 2011). The recent economic crisis has caused GM’s total operating costs to decline to extremely low levels. This is due to scaled back production levels in relation to the size and ability of the company. Chrysler LLC classifies its expenses on financial statements as “Cost of sales, Selling, administrative and other expenses and Research and development” (DaimlerChrysler, 2007).

The total annual operating costs for Chrysler over the three year period of 2005 – 2007 were (in millions of Euros): €147,491, €149,517 and €91,541 respectively (DC, 2007; DC, 2009). Since the beginning of the recession, the total costs were (in millions of Euros): 2008- €90,697, 2009- €79,861 and 2010- €91,459 (DC, 2009; DC, 2011). The operating expenses incurred by Chrysler reflected a downward trend from 2006-2009. Operating costs reflect the production level of a company, which in turn reflects the ability of the company to turnover its inventory. In 2009 the company received billions of bailout dollars to keep the company afloat.

It proved to be too little too late and shortly after they were reorganized as Chrysler LLC under Chapter 11 bankruptcy. Ford Motor Company was able to survive the recent economic crisis without accepting government bailout funds as GM and Chrysler had done. The annual expense of operating the company for the duration of 2005-2010 (in millions) was: $178,408, $177,038, $177,862, $160,211, $121,132 and $113. 5 billion in the most recent year (Ford Motor Company, 2008; FMC, 2010; FMC, 2011). These total expenses are grouped together by the cost of sales and selling, administrative and other expenses.

The cost of sales group consists of the following costs: “material/commodity, freight, warranty/product recall/customer satisfaction program, direct labor/development and manufacturing of product costs, depreciation/amortization and other associated costs” (FMC, 2011). The other half of Ford’s operating expenses consist of: “indirect labor/development and manufacturing of product costs, such as advertising and sales promotion costs” (FMC, 2011). As is now evident, the “Big Three” have experienced fluctuating operating costs over the past 6 years.

The general trend for these companies were similar, however 2009 proved to be the lowest point of the crisis thus far. The expenses incurred by these companies are variable. Some are based solely on production levels, which are directly affected by economic issues. The figures above do not illustrate the exact economic influencing factors, but it is evident that “in recent years, annual production volumes were heavily impacted by external economic factors, including the pace of economic growth, availability of consumer credit and cost of fuel” (FMC, 2011). It has been a matter of basic supply and demand for these companies.

Consumers have demanded fewer automobiles in the past 6 years because of lack of purchasing power. Less demand means fewer vehicles were produced and subsequently released into the market, which means variable operating costs were lower than years of maximum production operations. General Motors, Chrysler and Ford Sales Impact The sales levels for the “Big Three” automakers have equally been affected by the tough economic times of the twenty-first century. As will be demonstrated in the revenue figures below, 2009 has proven to be the most negatively impacted year for domestic automotive sales sectors.

It is important to recall that in 2009 GM and Chrysler were both re-organized after filing bankruptcy, which undoubtedly contributed to their dismal sales levels. Ford’s turnaround occurred in the midst of the 2009 year and has since been steadily rebounding. General Motors’ automotive sales figures prior to the financial crisis were (in millions): 2007- $178,199, 2006- $171,179 and 2005- $158,623 (GM, 2008). The sales levels experienced once the recession began were (in millions): 2008- $147,732, 2009- $104,116 and 2010- $135,142 (GM, 2011). Last year proved to be a turning point for the embattled GM Company. They were able to repay the $6. billion dollars of bailout funds loaned to them by the U. S. Government, earn a year-end profit, prepare for the public selling of stock options and entertain the idea of issuing record-setting profit-sharing payments to hourly employees (“Automotive Industry Crisis,” 2011). Chrysler LLC realized sales revenues over the past six years of (in millions of Euros): 2005- €149,776, 2006- €151,589, 2007- €99,399, 2008- €95,876, 2009- €78,924 and in 2010- €97,761 (DC, 2007; DC, 2009; DC, 2011). As is evident from the provided figures, 2007-2009 was the most economically impacted timeframe for overall sales revenue for this one U.

S. auto maker. As the economy continues to rebound, the most recent year shows a 15% worldwide increase for 2010 sales over the prior year (Chrysler Group LLC, 2011). The automotive sales levels experienced by Ford Motor Company during the same time frame as previously stated for GM and Chrysler were (in millions): 2005- $153,413, 2006- $143,249, 2007- $154,379, 2008- $129,165, 2009- $105,893 and 2010- $119,280 (FMC, 2010; FMC, 2011). These figures represent Ford’s total revenue for “vehicles deemed as sold once produced and shipped or delivered to customers, as well as parts and accessories sold to dealers and istributors (customers)” within their automotive sector (FMC, 2011). Automobiles sold to car rental companies or produced for internal fleet use are reflected in these figures initially as lease revenue and then lastly as auction gains or losses once the vehicle is returned (FMC, 2011). Economic Implications and Recovery Elements The recession which began in 2008 has impacted every facet of the U. S. economy, especially the domestic automobile industry. An under-performing, slumping economy fosters the existence of an unprofitable auto market.

The crises in this economy have consisted of: drastic payroll declines, the elimination of over 4. 4 million jobs, tightening of the labor market, record-level unemployed and underemployed rates, a reduction in hourly wage rates, minimal discretionary spending by consumers, rising crude oil prices and a volatile GDP (Borade, n. d. ). These negative aspects of the economy had a direct impact on the ability for General Motors, Chrysler and Ford to be profitable in the U. S. market. Although the recovery began in June of 2009, the industry is slowly climbing its way back to the profitable levels they were accustomed to achieving.

The operating costs and automotive sales revenue stated on each company’s annual financial reports very closely reflect the ups and downs experienced economy-wide from 2005 to present day. The future of the auto industry depends on the overall worldwide economic recovery, surplus production ability, automobile pricing demands, rising commodity and energy prices, ability of consumer spending, availability of consumer credit, growing sales’ volume of small cars, currency exchange rate instability and growing government deficits, which may require higher long-term taxes and interest rates (FMC, 2011).

As the economy continues to rebound, the auto industry’s progress will mirror the improvements. A profitable economy will create a lucrative automobile market and vice versa. Ford has proven to be the first of the “Big Three” to completely overcome their dismal sales records, with GM closely behind and Chrysler continuing to work toward their profitable sales goals (AIC, 2011). These three companies were forced to restructure their organizations in response to the economic downturn, which has enabled them to prioritize their focus on improving their business ractices. All three companies are slimmed down versions of their former entities, in which many aspects have been streamlined or eliminated entirely. The major economic hurdles yet to be overcome in the recovery are tight credit markets, high unemployment rates and impending fiscal and monetary policy modifications (FMC, 2011). As these aspects of the economy improve, we will witness a flourishing U. S. auto industry with higher sales revenues and operating costs. The future is bright for the “Big Three” automakers and the overall domestic U. S. utomobile industry.

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