Microeconomic analysis of General Motors during economic crisis

General Motors

Microeconomic Analysis of General Motors

It is now without a doubt that the American economy is facing severe economic challenges, which affect all features of the everyday life. The causes of the crisis are numerous and multifaceted, including the crush of the real estate sector, the adoption of the fluctuating interest rate, the movements on the investment markets, the increasing federal debt, the growing trade deficit or the larger budgets allocated to the military and defense, in the detriment of other sectors. The effects of the crisis are also multifaceted and expand at several levels. The most stringent impacts have been felt by the business community, which now has a restricted access to financial, and consequently, development opportunities. This materialized in that numerous employers began process of downsizing in order to reduce their costs. Among the largest employers of the United States, the automobile industry is now forced to renounce some of its staff members. But the difficulties encountered by the vehicle manufacturers do not only revolve around an incapacity to retain their staff members, but also include reduced access to credits or a decreased demand for their products, often in favor of the vehicles of Asian origin.

The aim of this paper is to take a closer look at an icon of the American automobile industry and see how they are doing in these times of difficulties. This will be achieved through an analysis of the microenvironment of General Motors; the microenvironment is composed of numerous features which influence the organization in making its decisions, such employees, stock performance or revenues. Before launching such an endeavor however, it is of vital importance to present some background information on the corporation to be assessed.

2. Brief Information about General Motors

The General Motors Corporation was founded in 1908 in Detroit, Michigan by William Crapo Durant. This positioning in the heart of the American automobile industry generated numerous benefits along the years, the most outstanding one being the easy access to the developments made in the field. The organization produces automobiles and engines and its most reputable brands include the Buick, Cadillac, Opel or Pontiac vehicles. Along the years, General Motors has set the basis for strategic partnerships that spread throughout the globe this ensured them with opportunities to purchase the most cost and quality efficient commodities, but also to sell their finished goods throughout the entire world.

In the 1950s, the company owned a market share of 46%, followed by Ford and Chrysler with 44% and other automobile makers with a combined 10%. By 1962, its shared peaked to 51%, generating talks that the company should be broken down under antitrust legislation. This was however unnecessary as the company sales began to decrease due to the occurrence of international competition, combined with GM's inability to provide the American consumers with the cars they desired.

Throughout the 1980s and 1990s, the managerial team launched numerous innovative endeavors, but all ended in the same way - they failed to generate the optimistically expected outcome and additional money in their support was not offered, as the financial resources were required in other directions. The continuous failures generated frustrations and a low morale, which further created impediments in the path to success.

Throughout the 2000s, the company was affected by the changes in the international context. The growing prices of gasoline turned consumers to smaller size and more fuel-efficient cars, further reducing GM's sales of truck and large size vehicles. In 2007, the company cut its production by 10% and by 2008, their sales in the United States had decreased by 20% (New York Times, 2009).

3. Microeconomic Analysis of General Motors

The annual report is among the best sources of information when conducting an analysis for a company. General Motors has yet to release its 2008 annual reports; ergo most of the analysis will be based on the data available from the 2007 report. Information for 2008 will be retrieved from secondary sources.

Financial Highlights =million USD=

Net sales and revenue

Worldwide production

Net loss

Adapted from the General Motors 2007 Annual Report

The company's sales registered an increase in sales throughout 2006 comparative to 2005, but these decreased significantly in 2007. Relative to 2006, the revenues in 2007 decreased by 12% and by nearly 8% relative to 2005. The largest reduction has been felt at the level of financial services and insurance revenues, rather than the actual sale of automobiles. The volume of produced vehicles reveals however an increase of 2.4% relative to 2005 and a 0.9% increase when compared to the production volume of 2006. The net losses also indicate that General Motors had a good 2006, when its losses had decreased by 81%. In 2007 however, the losses were higher with nearly 2000%.

Stock Performance

General Motors currently trades a volume of 11,706,900 stocks onto the New York Stock Exchange. The opening value in the trading day of March 2nd, 2009 was of $2.25 but the average of the day was at $2.01 (Website of General Motors, 2009). The minimum reached was of $2.00, with a maximum of $2.35. The beta coefficient is of 1.65, its positive value revealing the stock's dependency upon the market fluctuations (Reuters, 2009). Historically, the GM stock would be traded for more than $40, with a plunge of $20 in 2005. 2006 and 2007 however saw tremendous revivals of the GM options, which were sold for nearly $40 again. This evolution is revealed in the chart below:

New York Times, 2009

2008 was less fruitful for General Motors, with their stock following the descendant trend commenced in the end of 2007. 2008 was also the year that saw the lowest trading value of the stock in the past fifty years. Its evolution throughout the past year is revealed in the chart below:

New York Times, 2009

4. Conclusions

The United States is currently facing some of the most severe economic challenges. The crisis affects all aspects of life, but among the most prominent victims of the difficulties was the automobile industry. Once the largest employer of the country, the automobile makers are now closing their plants and sending the workers into unemployment. The aim of this paper was to look at General Motors' microenvironment in light of the crisis and establish if the media coverage of the crisis within the automobile industry is accurate. Sadly, the findings indicate that General Motors is indeed facing some of its most drastic challenges since its foundation.

The American automobile and engine manufacturer is facing reduced sales and a declining stock price, which generates a need to reduce costs. This has been attempted through the commencement of downsizing processes, but it is less likely that the current approach will suffice. What has to be noted however about General Motors is that their difficulties emerged before there was even talk about an economic recession. It is true that the financial crisis further deepened their problems, but it is not the primary cause. Otherwise put, General Motors began loosing its competitive edge in the 1980s, when it did not adjust to the emergent market requirements. The micro-environmental analysis reveals a weak organization, highly dependent on the market characteristics and looking for salvation in the macroenvironment (namely the allocation of funds from the federal budget).