Passage 2
The USes Big Three carmakers, General Motors (GM), Chrysler and Ford, are presently fighting for their survival.
The first two have now unveiled major new plans to see them through a period of global downturn, falling consumer demand, and loss of their market share.
They involve job and production cuts, and seeking more US government aid—and the numbers concerned are huge.
The pair are seeking $ 21. 6bn (£15. 2bn) in financial support, on top of the combined $17. 4bn they have already received. In return, they have promised substantial cuts, including axing 50, 000 jobs.
The crisis comes as the Big Three have seen US market share decline from 70% in 1998 to 53% in 2008, amid fears that they will not return to viability unless North American consumer demand for cars returns.
“The very simple take on how the US industry has got into this situation is that they have been making the wrong vehicles, having concentrated on light trucks,” Mike Tyndall, an auto specialist at Nomura in London, told the BBC website.”
“The slowdown in light truck sales in 2008 left them in a position with nothing to do.”
“If you look at the production mix in 2007—a total of 55% of production was in light trucks, which includes pickups and SUVs.”
“Demand for these stopped when the gasoline price went to $ 4 a gallon in the US.”
“Also, people in construction tend to drive pickups, and when the housing market slowed down—coinciding with a tightening of credit—then that also hit sales of these vehicles.”
In December 2008 the US government said it would provide $17. 4bn in loans to help GM and Chrysler survive.
At the time, President George W Bush said allowing the US car industry to fail would not be “a responsible course of action”.
And, although demand for light trucks has risen slightly—helped by the oil price coming down—since the two carmakers went to the US government in December, overall vehicle sales have been hit by rising unemployment.
“That is a key driver of sales,” says Mr. Tyndall. “People who are about to lose their jobs do not tend to buy new cars. So, overall, the situation is probably worse than it was in December.”
As part of their new survival schemes both GM and Chrysler said they had examined the possibility of going into Chapter 11 bankruptcy.
However they decided that this option would be more expensive in the long run than a straightforward cash bail-out.
“The [bail-out] requests pale in comparison to what it might cost taxpayers if GM or Chrysler go bankrupt,” warns Aaron Bragman, auto industry analyst for the consulting firm IHS Global Insight. American manufacturing.”
Automotive jobs are also the lifeblood of manufacturing in Michigan, the state with highest unemployment, where jobless rates are well above the national average.
And those jobless figures appear set to get bigger, with the firms planning to axe a total of 50, 000 workers in total, although more than half of those posts will be shed outside the US.
Meanwhile, those jobs figures could potentially be higher in the end, as not everyone believes vehicle makers should be saved at any cost necessary.
“We continue to believe that government support is not open-ended,” says Gregg Lemos-Stein, auto analyst at S&P in New York “Accordingly, in our opinion, even if this plan is approved and additional funding is provided, bankruptcy risk will remain high because of very uncertain consumer demand for light vehicles and other serious risks—for example weak credit markets, and potential supplier failures.”
GM has outlined plans to return to break-even status in 2010 as part of a reduced production volume of 11.5 million to 12.0 million vehicles—or units as the industry calls them—for the year.
However, analysts at Citi Investment Research predict that to also achieve a “significant recovery in unit profitability” GM will probably need improved pricing and content, as well as substantial lower raw material costs.
“While successful product launches and an improving economy could eventually drive a unit profit recovery, such a bounce by 2010 seems optimistic,” its analysts’ note says.
Meanwhile, a lot of work remains to be done before both GM’s and Chrysler’s drastic proposals could become reality.
“Much as we would like to see a rapid solution, there are some very delicate negotiations with unions, and bondholders, and the government, still ahead,” says Nomura’s Mr. Tyndall.
“So the fact that there are so many interested parties means it will take a while to resolve.”
1. What is the strategy that has led to the difficulty of the Big Three carmakers?
2. Briefly describe GM’s attitude toward bankruptcy? According to the outsiders, is GM likely to go bankrupt and why?
3. List the possible ways given by analysts to help GM return to break-even status.
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