2008 Global Automotive Crisis: Causes, Effects & Recovery

Introduction

The automobile industry is a very important part of the global economic structure. In many developed nations of North America and Europe, it comprises a significant share of the economy and employs a huge workforce. Globally, the automobile industry produces more than eight hundred million cars, with more than two hundred and fifty million vehicles produced in the United States alone. Therefore, any crisis affecting auto manufacturers in the U.S. is bound to create global problems for the rest of the industry.

The main cause of the crisis was, in fact, mismanagement by the top American firms. The instigator was the 2008 financial crisis, which was then held responsible for triggering the automobile crisis. Since the financial crisis affected employees of firms most directly, workers again became the target of mass cuts in wages, pensions, and jobs as companies ran short of capital for survival.

This paper presents many facts and examples that highlight the impact of this crisis at the global level. Although the main focus is on the U.S. market, many other important events related to major regions are highlighted as well. The purpose is to give the reader a thorough and detailed analysis of where the fault originally lies and what the reactions were from institutions and governments. Other related sectors with a key role in the automobile industry — particularly the energy sector — are also discussed in detail, since changes in energy costs greatly affect this industry.

Studying the automotive crisis is very important in order to avoid any such event in the future, as it tends to be extremely disastrous for global economies. Through thorough and detailed analysis of the problem, we may be able to find out the root causes, which in many cases are more hidden than the obvious reasons visible to everyone.

For any analyst associated with the auto industry, studying this crisis is extremely important in order to improve analysis and help those seriously affected by the event. What we already know is that firm management had a huge role in this crisis; this paper will analyze what caused management to behave in that manner. Many methods have been applied by analysts to better understand the crisis or even solve it, most of which involve assessing the history of the firms and their financials — and those methods will be taken into account here.

Previous research on this subject has provided a brief picture of the crisis, with many commentators giving their view regarding a particular firm and its gains and losses. Different prior studies have typically focused on a single nation and the effects suffered by its market. The framework for this study, by contrast, covers a broader perspective relative to all sides involved in the crisis. The work of many previous writers, commentators, and analysts in this field is synthesized here so that the reader gains a much broader understanding of the event, its causes, and its effects.

The format and narrative of this paper are kept straightforward so that both professional analysts and students can understand the details and causes of the event, and so that the reader may find it easier to formulate an informed opinion in accordance with the facts and figures — since much of the information available elsewhere can be confusing or present an unclear picture of the overall scenario.

Crisis in the United States

Some research questions that help clarify matters related to the topic include defining the roles and responsibilities of parties that later made recommendations regarding the solution to this crisis, such as the federal governments of the United States and other European and Asian nations. Another key question concerns the effect of oil prices and the role of energy firms in this event, since it was widely considered that the main cause of the crisis being exaggerated was improper practices by energy firms.

On analyzing many such questions in this study, it becomes clear that this crisis could have been avoided had the involved parties been more responsible — for example, by focusing more on serving the customer through better technology and quality rather than solely on profits. Auto firms also over-extended themselves in maintaining their level of debt. The response of American firms in the early phase of the crisis was observed to be extremely slow and inappropriate, which created more problems for everyone.

In 2008, a global recession struck, greatly affecting the United States economy. This recession had severe negative impacts on many sectors of the American economy, with the automobile industry being among the most prominent. Even before the recession, there were events such as declining automobile sales and reduced business credit that went on to create a more disastrous and widespread automotive industry crisis.

In the later half of 2008, dramatic drops in automobile sales were recorded by every car manufacturing firm in the U.S. The "Big Three" manufacturers — Ford, General Motors, and Chrysler — requested emergency loans to solve their cash shortage problems. However, the problems faced by these firms went beyond capital alone, and soon the situations at Chrysler and General Motors deteriorated to the verge of bankruptcy.

The U.S. government intervened, since a collapse threatened massive job losses and posed huge damage to the overall manufacturing sector. The government provided a financial bailout to support the companies in restructuring. Both GM and Chrysler separately filed for Chapter 11 bankruptcy protection.

General Motors later emerged as a new firm from bankruptcy, with the U.S. Treasury owning a majority stake. Chrysler became owned by the United Auto Workers union and Fiat S.p.A. After their emergence, both firms terminated many of their dealership agreements. General Motors also had to discontinue several of its brands as part of its bankruptcy proceedings.

Among the Big Three firms, Ford survived without entering bankruptcy, largely because of a large line of credit it obtained in 2007. Although the automobile crisis was a global phenomenon, U.S. car manufacturers were more severely affected than any of the foreign manufacturers.

As of 2012, the automobile industry as a whole had succeeded in its recovery efforts to a great extent. General Motors posted sales of more than nine million vehicles, surpassing even Toyota's figures. According to many analysts, the automobile crisis in the United States was so severe mainly because of improper business practices by the Big Three. When comparing the large American firms with global giants originating in Asia, the Asian firms were not facing similar problems, even at their U.S. operations.

One of the main factors that intensified the crisis was the high cost of automobile fuel, linked to the global oil crisis that preceded the automobile crisis. The rise in fuel prices caused consumers to shift their demand away from large vehicles such as pickup trucks or SUVs, since larger vehicles consume more fuel.

Another major factor aggravating the crisis was the considerably high cost of labor compared to non-union counterparts, including salaries, healthcare benefits, pensions, and other job benefits. Management, in demanding labor peace, granted many concessions to unions, which resulted in significant legacy costs and uncompetitive cost structures.

Furthermore, total automobile sales in the United States were significantly tied to home equity lines of credit, with approximately twenty-four percent of total sales financed this way in 2006. When these loans dried up due to the 2008 mortgage crisis, vehicle sales declined drastically — from over fifteen million in 2006 to just above ten million in 2009.

According to consumer reports published in 2006, the best cars preferred by critics and consumers were of Asian origin. In some reports, all of the top ten cars were from Asian manufacturers, with particular credit given to Japanese companies. At the same time, the Big Three were making major job cuts. Michigan alone lost eighty-three thousand auto manufacturing jobs between 1993 and 2008, much of which was associated with the Big Three.

During that same period, many auto manufacturing jobs were created elsewhere by foreign firms in cities such as those in Tennessee, Alabama, Kentucky, North and South Carolina, Texas, Mississippi, and Virginia, totaling more than ninety thousand new jobs. This further pressured the local American car manufacturers in competitive terms.

During the first half of 2008, the total employees at the Big Three firms — including car dealers and parts suppliers — totaled more than one and a half million. When considering the entire automobile industry, the total personnel employed numbered around 3.1 million in the U.S., including after-market service businesses.

According to the United States Bureau of Labor Statistics, the breakdown of workers in the automobile sector until September 2008 was as follows: repair operations involved eight hundred and sixty-four thousand personnel; parts manufacturing involved five hundred and four thousand; wholesale operations involved three hundred and forty thousand; manufacturing involved one hundred and fourteen thousand; and dealer operations had 1.2 million personnel.

An estimated two million personnel relied on healthcare offered by the automobile industry, and seven hundred and seventy-five thousand retired personnel collected their pensions from this industry. General Motors was a leading employer, directly employing more than one hundred and twenty thousand employees in the United States.

The hourly wages paid to workers were relatively similar when comparing the Big Three to the rest of the automobile industries. The basic hourly wage earned by a UAW (United Auto Workers) member working for any of the Big Three was close to what was earned by a Honda or Toyota worker at their U.S. plants. The average wage for an experienced UAW worker was close to $28 per hour in early 2008. For any new worker, the rate was close to $14 per hour, meaning experience was counted significantly as senior workers were offered better pay.

A large cost difference between employees working for foreign-origin firms in the U.S. and UAW members came in fringe benefits. The UAW has been regarded as one of the most successful unions in America in terms of fighting for health benefits and generous pensions for its members. Total compensation — the total cost of labor afforded by the firms — was close to $70 per hour for General Motors and about $45 for Toyota. The average cost difference between foreign nameplate firms and the Big Three was about $25 per hour, an enormous gap that impacted all departments, including wages, pension, and healthcare.

The average annual wages for Big Three production workers were estimated at around $67,500 in 2007, and about $80,000 for more skilled personnel. The ratio of retirees to active workers varied across the Big Three: for every active worker at General Motors, there were approximately four retirees as of 2006; at Chrysler, the retirees or dependents numbered around two per worker; and at Ford, around 1.5 per worker. This translated into a legacy labor cost burden that was much higher for General Motors than for any of its competitors.

According to many critics and business analysts, the enormous labor and product development costs kept the Big Three firms from developing high-quality products — which is essential for profits and survival in a competitive environment.

The employees of foreign nameplate firms operating in the United States were mainly non-unionized, whereas the Big Three bound their workforce through contracts with UAW. According to UAW data, total labor costs represented about eight percent of the entire cost of manufacturing and selling an automobile in 2006. The great majority of costs came from creating a vehicle and transferring it to its dealership — including engineering, marketing, design, and executive compensation.

In 2005, leading news outlets uncovered a story claiming that the Big Three had paid more than ten thousand idled workers their complete salaries and benefits through a program named "Jobs Bank." This program was created during UAW's 1984 labor contracts with the Big Three to protect employee salaries and discourage anticipated layoffs. The main interest of the union was to save jobs through a plan that guaranteed pay and benefits for union members whose jobs were displaced due to technological progress or plant restructuring. In many cases, employees received Jobs Bank payments only after exhausting company and government unemployment benefits, and many of those employees were later placed in retraining.

Under the Jobs Bank arrangement, American automakers were contractually obligated to pay approximately ninety percent of the benefits and union wages to UAW members who were not working, even if their manufacturing plants were closed. Under this agreement, General Motors would pay more than two billion dollars over four years; Chrysler allocated about $450 million for its own program alongside another $50 million reserved for salaried union employees; Ford set aside about $950 million for similar purposes.

According to many analysts, the Jobs Bank scheme was one of the biggest problems the Big Three faced during and before the automobile crisis. It transferred an enormous amount of financial resources to workers irregularly — capital that could have been used by car manufacturers in many other ways, such as investing in car manufacturing technology to compete with Asian rivals, or introducing new environmentally friendly technologies to boost their public image.

This capital could also have been used in advertising campaigns to build consumer confidence — informing the public about the qualities of the firm, how it contributes to society, and what impact it has already made.

General Motors had a total of eight brands sold in America, not counting overseas brands such as Opel, Vauxhall, Holden, and GM Korea. It liquidated one brand because of bankruptcy. Comparing this with rivals like Toyota, which has only three brands in the U.S. market, shows a meaningful difference. It is well understood that more brands demand more marketing as well as product development expenditures, driving incremental costs relative to competition. According to some analysts, if General Motors had reduced its brands from eight to three, it would have saved approximately five billion dollars annually. Fewer brands would also have required less management expertise and given consumers more obvious choices.

Fewer brands would also have given General Motors a better chance of surviving a market crash scenario in which consumers' ability and willingness to buy declines drastically — something very similar to the 2008 crisis. This is another reason the Big Three suffered massive losses while their foreign counterparts, with fewer brands, were able to avoid a similar fate.

A reduction in the total number of brands demands consolidation or closure of dealerships, which often requires changes to franchise laws — a very expensive process. For example, retiring a brand like Opel might have cost General Motors approximately two billion dollars.

Chrysler and General Motors together had about ten thousand dealerships employing an estimated five hundred thousand people. These dealerships are well protected by state laws, making them very difficult to close without the payment of large fees. This greatly challenges dealership reform without some form of bankruptcy protection.

General Motors was carrying approximately forty-three billion dollars in debt, with nearly three billion dollars in annual interest. If bondholders had agreed to swap their stakes for equity — which pays no interest — General Motors' interest and debt burden could have been reduced greatly. However, the bondholders of General Motors and Chrysler completely rejected any debt swap offer, complaining that it provided unequal treatment compared to the UAW. They cited that their overall debt was more than twice that of UAW's healthcare trust. In this scenario, UAW had been offered a fifty to forty percent stake in the newly formed Chrysler and General Motors respectively, whereas bondholders would have only received 33 cents per dollar for Chrysler and a ten percent stake in the new General Motors. By U.S. Treasury approval, the original offer for bondholders was later amended to include an additional fifteen percent stake.

The bondholders also complained that the U.S. government had bypassed the larger precedence of claims by debt holders in favor of the UAW due to UAW's political contributions to President Barack Obama. There were even cases where the President publicly accused Chrysler's bondholders of being speculators, after they rejected the government's final offer, leading Chrysler to file for bankruptcy. A General Motors bondholder described the situation as comparable to a socialist state. Some Chrysler bondholders claimed to receive death threats after a bankruptcy judge declined to protect their anonymity. The hedge funds involved noted that their clients included university endowments and pension funds. An estimated seven billion dollars worth of General Motors bonds were held by so-called "Mom and Pop-type investors," with one lawyer describing the scenario as common retirees versus autoworker retirees.

The automobile industry is a very important component of the overall American economy. Many economists used data from 2007 and 2008 to estimate how a complete meltdown would cost the economy during the summer of 2008, also setting benchmarks to help policymakers understand the proper effect of potential bankruptcies.

These estimates were widely discussed by policymakers during late 2008. If the Big Three were to shut down completely, the automobile industry would lose about a quarter of a million highly paid jobs. Furthermore, a loss of approximately one million highly paid jobs was estimated at the local dealer and supplier level, plus the loss of over one and a half million additional jobs related to different other sectors of the economy. Combining all these job losses puts the total at close to three million.

Other estimates calculated that the shutdown of the Big Three firms would cause a great decline in the national personal income level — by some one hundred and fifty billion dollars in the first year and some four hundred billion dollars over the next three years. Many economists also concluded that if Chrysler and General Motors completely disappeared, there could be an increment of about a million imported vehicles every year, removing approximately twenty-five billion dollars from the American economy. It would also reduce GDP by about 0.2 percentage points annually.

In the later half of 2008, some investment managers claimed that if the key automakers were to shut down, foreign firms such as Toyota and Honda would find it easy to set up new plants in America, and this process would not allow any long-term loss to the economy in the employment sector. Some analysts also stated that, although a giant corporation failing may threaten the auto industry in general, it is better to liquidate failing firms completely rather than keeping them alive artificially in hope of future improvement.

Those who presented this perspective compared the 2008 crisis to the dismantling of Daewoo in South Korea during 1999. The impact Daewoo had on the South Korean economy was much greater than that of the Big Three in the United States. The overall belief that Korean conglomerates, especially Daewoo, were simply too large to fail caused many investors and bankers to waste money continuously on bailouts despite poor business plans and unprofitable projects, resulting in Daewoo being unable to repay its loans.

Once the perception that bigger firms are immune to failure was dispelled, large conglomerates were no longer considered safe for investment, and investors and bankers began creating new opportunities in areas that had been starved of capital — such as small firms and entrepreneurs. This caused the Korean GDP to recover better than expected after the unwinding of Daewoo.

A similar example comes from Japan during the 1990s, where banks allowed funding to flow into unprofitable firms in order to keep them alive, arguing that those firms were too large to fail. However, many of those firms were heavily debt-ridden and required far more than just bailout funds to survive. Many Japanese economists described this as the nation's "loser paradise." The Japanese economy properly recovered only after this period ended.

Many industry experts, media commentators, and academics made a number of recommendations concerning the restructuring and reforming of the Big Three firms. These recommendations included introducing a court-supervised methodology to assist in reorganizing the firms. Although the court process is considered very lengthy, it often provides the best possible solution for all stakeholders involved, and it often has the backing of the federal government — which, given how much the firms had relied on government support, could have been a worthwhile focus for all parties.

Other reorganizing processes included allowing the public to take more stake in the heavily affected firms. Although this process might bring some capital from the general public, it is far from certain to succeed, as people may show hesitance in taking stakes in firms deemed so fragile by numerous media outlets.

The bankruptcy-related topics centered on the code of conduct known as Chapter 11 bankruptcy, also known as restructuring, which is commonly used to give corporations an opportunity to reorganize. This involves renegotiating contracts, selling assets or other components of business to obtain cash, obtaining debt forgiveness, or undertaking a general internal reform.

The alternative, Chapter 7 bankruptcy, is used to liquidate or shut down a firm, or to sell its components, with proceeds going to debt holders. In both cases, the shareholder typically loses its investment and control of the corporation passes to the debt holders. During the 2008 automobile crisis, it was frequently debated which chapter to apply, and Chapter 11 was widely considered the more feasible choice.

Many arguments were made in favor of Chapter 11. Analysts argued it would make the automobile industry more sustainable and competitive, using the airline industry as an example. Chapter 11 was also thought to allow the city of Detroit to fully reorganize its jobs market. Many opponents of a bailout thought that the problems of automakers could be better resolved through bankruptcy court, which would authorize legal rights to dissolve existing contracts and shed unaffordable costs and debts. Opponents also suggested that complete government control of the car industry would be ineffective, since governmental actions could be influenced by official policies. Many politicians supported the bankruptcy procedure over federal aid, but none proposed a solid solution acceptable to all parties.

The TARP funds introduced by the United States government in 2008 involved the purchase of assets and equity from leading financial institutions to strengthen the financial sector. Signed into law in October 2008, TARP was cited by many commentators and politicians as a potential vehicle to help the automobile industry.

Critics of Chapter 11 argued that consumers would be unwilling to purchase vehicles from a bankrupt automaker, since the ability of automakers to support their warranties is the main thing affecting consumers' purchase decisions. Advocates noted that private lenders or the government could create a fund to enable warranty coverage.

General Motors argued that a bankruptcy procedure could threaten jobs as well as the solvency of the American federal government's pension programs, such as PBGC. The director of PBGC stated that General Motors had failed to answer questions related to the funded status of its pension plan. The pension funds of General Motors were thought to have sufficient cash for their obligations, but some reports suggested the pension could become underfunded by some $18 billion by the end of 2008.

A "prepackaged" Chapter 11 bankruptcy — where all important stakeholders agree on terms before proceedings begin — enables much more certainty regarding outcomes and a shorter time in bankruptcy protection. Many advocates considered this form preferable, while critics argued that it was very unlikely that all relevant stakeholders could agree on terms outside of bankruptcy.

A government-facilitated solution was advocated by the Brookings Institution, under which the assets of the Big Three would be transferred or sold to other corporations better positioned to deploy employee and plant resources. The Brookings Institution further stated that the government could play a productive role by providing short-term capital infusions alongside strict repayment rules requiring automakers to sell their assets to more successful firms.

Another key notion advocated was that the private industry alongside government should create a partnership to transform the entire automotive industry by creating a "high-mileage vehicle economy" based on fuel-cell and hybrid cars that emit less carbon and deliver more mileage. Loans for such projects were urged to be provided on an urgent basis. This notion also included a U.S. strategy for automotive technological leadership that would greatly improve energy security, climate security, national security, and American global competitiveness.

There were also arguments presented against government intervention. Some sources stated that by bailing out failing firms, the government was confiscating capital from productive sources of the economy and providing it to failing ones. By helping firms with unsustainable or obsolete business models, the federal government prevented their resources from being liquidated and made available for other firms that could put those resources to more productive use.

A prominent opinion column from December 2008 stated that there was no bailout for the horse and buggy industry a hundred years ago when it was replaced by cars, and that standards of living improved because winners and losers were then determined by consumers rather than politicians. The writer also blamed the gradual decline of the Big Three on economic policies adopted by some states, arguing that Japanese car manufacturers preferred to build plants in U.S. states with less hostile policies.

In 2009, Ernst & Young reported that policies protecting companies can reduce incentives for entrepreneurs to invest in innovative ideas and for large corporations to invest in R&D, because they face no competitive pressure to constantly improve their products — which is essential for maintaining or improving market share.

Many critics also urged the U.S. government to remove the senior management of the Big Three, especially at General Motors, since such removals are typical in bailout procedures. In terms of mergers, if two or more firms from either the Big Three or other crisis-hit firms had merged, that could have allowed significant cost savings and more focus on profitable brands. The UAW opposed any such move as it could have involved a great deal of layoffs. Chrysler and General Motors held many meetings regarding a potential merger, but no concrete results emerged.

The automobile crisis in the U.S. was also compared with the scenario faced by British Leyland during the 1970s, when that firm held some thirty-six percent of the total U.K. market share. Because of the crisis, the British government nationalized and invested many billions of pounds in the troubled business, which was simultaneously facing strong competition from its European counterparts. British Leyland also faced serious questions about product quality, which made it difficult to compete. The firm eventually reduced its product line to focus on its most profitable ventures — the Rover and Austin brands — achieving some relative success in the 1980s with models like the Austin Metro.

In late 2008, a U.S. Senate hearing was held on the automotive crisis, including testimony from the management of Ford, General Motors, and Chrysler. The heads of the Big Three explained they required approximately twenty-five billion dollars in financial assistance to avoid bankruptcy. The Senate was divided on many points of the issue. Republican senators were unwilling to provide any aid, and some even desired bankruptcy as the best option since it would free automakers from their union employment deals. Democrats, in line with President-elect Barack Obama's stance, wanted action to be taken sooner rather than later.

A senior officer from the Big Three was quoted saying that more than three million jobs could be lost within the first year if the automotive industry failed, and that the goal should be saving the U.S. economy from a catastrophic meltdown.

In November 2008, shares of General Motors fell to their lowest level since the Great Depression on rumors that hopes for a bailout had diminished. Ford shares also fell greatly. However, prices later recovered on rumors of bipartisan progress on a bailout. In the same month, an article in the Detroit Free Press claimed that the UAW was considering ending its Jobs Bank program as a condition of the federal bailout.

Leading Democratic Party leaders sent letters to the Big Three CEOs calling for a credible restructuring plan by December 2008 that involved significant sacrifices and major changes in business conduct as prerequisites for any government assistance. The letter included requirements such as varied financial forecasts, situation assessments, taxpayer protection, restrictions on executive pay and dividends, transparent reporting to an oversight body, and approaches to covering pension and healthcare obligations.

In December 2008, the Big Three submitted revised plans to Congress that included drastic measures such as lowering executive pay, reducing the total number of brands, and refinancing company debt. After assessment, the total bailout funds required had risen to more than thirty-four billion dollars. The auto firms also warned that if help was not provided quickly, the required sum could increase further.

Chrysler argued it needed seven billion dollars by month's end just to stay operational, while General Motors requested four billion dollars immediately. President-elect Obama said he did not want to see the auto industry disappear, but was equally concerned about committing tens of billions of dollars only to face further requests later.

Congressional negotiators revealed the terms of a proposed deal: a fifteen billion dollar short-term bailout for the Big Three overseen by a federal trustee. The House Financial Services Committee released a copy of the proposed financial bailout package. The bill proposed appointing a trustee to oversee automaker restructuring efforts, placing restrictions on executive bonuses, introducing golden parachute packages, and demanding the automakers divest or sell any privately leased or owned aircraft. The bill, however, failed to pass on December 11, 2008.

On December 19, 2008, President George W. Bush announced approval of a bailout plan providing more than seventeen billion dollars in loans to Chrysler and General Motors. He stated that under the current economic conditions, allowing the auto industry to have the funds was necessary; otherwise an immediate collapse of the entire industry was inevitable. Bush provided some thirteen billion dollars immediately and pledged a further four billion dollars until February 2009, with funds to be drawn from the EESA Act of 2008. In total, Chrysler would receive four billion dollars and General Motors more than nine billion dollars.

It was also argued that the U.S. Treasury lacked proper authority to direct TARP funds toward automakers, as TARP under Section 102 was limited to a selected number of financial institutions. This debate was laid to rest when on December 19, 2008, President Bush declared that TARP funds could be spent as he wished, thereby declaring Section 102 void.

The loans required the automakers to greatly restructure their operations and demonstrate long-term viability. During the Obama administration in February 2009, the government assessed the automakers' progress according to the loan conditions. If the conditions were met, the federal government would provide more aid; if not, the firms would have to repay their loans or face bankruptcy. The loans carried a five percent interest rate, rising to ten percent in the event of default.

Around mid-February 2009, both Chrysler and General Motors applied for additional funds. President Obama's automotive industry task force was created in February and began holding meetings soon after its formation. On February 18, 2009, Chrysler and General Motors again approached the federal government for a second loan worth $21.6 billion. General Motors agreed to shed forty-seven thousand jobs, liquidate twelve car models, and close five plants as part of its restructuring. Chrysler agreed to cut three thousand jobs, slash an entire production shift, and liquidate three automobile types.

General Motors was also considering whether to sell its Swedish subsidiary, Saab, but announced no plans for its British subsidiary Vauxhall or German subsidiary Opel. Chrysler filed for Chapter 11 bankruptcy on April 30, 2009, after talks with its lenders broke down. In May, Chrysler announced plans to shut down twenty-five percent of its American dealerships as part of restructuring.

Only days after approaching the federal government for additional funding, General Motors disclosed severe losses of around ten billion dollars in the final three months of 2008, bringing total losses to more than thirty billion dollars. Adding to this, General Motors had suffered losses of thirty-eight billion dollars in 2007. General Motors conceded that it expected auditors to raise concerns about its future viability in its annual report due in March.

In June 2009, General Motors applied for Chapter 11 bankruptcy after failing to successfully negotiate deals with bondholders. On the day of the application, the American government owned sixty percent and the Canadian government approximately twelve percent. An application in a New York court marked the biggest industrial collapse in American history. General Motors announced it would shut down nine more plants and idle three others. Its chief executive appealed to customers to give the firm another opportunity, claiming that the General Motors which had let everyone down was now gone.

In May 2009, a news article reported that approximately seven to eight weeks after President Obama's administration dismissed General Motors CEO G. Wagoner Jr., he had yet to receive a severance package the firm had contractually promised him — reportedly worth some twenty billion dollars. A February 2009 CNN article claimed that the bailout process had cost American taxpayers around $130 billion, generating huge public unrest and protests. Critics argued that funding the bailout was like throwing money into a bottomless pit, creating significant challenges for the newly elected Obama administration.

As of June 2009, the Obama and Bush administrations had together spent more than eighty billion dollars in the process. In May 2011, Chrysler reported it had repaid the money to the Canadian and American treasuries, much earlier than scheduled.

One of the main concerns of auto manufacturers was their public image and how the crisis affected it. In December 2008, General Motors introduced a new advertisement in which the firm apologized to the public for violating and disappointing consumer trust. The firm assured future commitments regarding a refocus on key brands away from SUVs and pickups, noting that it needed to make such a statement because mainstream media was continuously providing a grim picture of the firm and its role in the crisis.

According to various news media outlets, the CEOs of the Big Three who attended the congressional hearing on November 19, 2008, in Washington, D.C. to request a bailout traveled to the destination on their own private luxury jets. A CNN article on November 19 noted that many senators and representatives argued it was very difficult to provide financial assistance to automakers when their CEOs maintained such a luxury lifestyle amid a crisis. The House Speaker issued a statement that until the car manufacturers showed a viable and working plan, the capital they desired would not be forthcoming, and demanded convincing turnaround plans be submitted by early December 2008.

Another CNN article from November 2008 quoted the president of a well-known non-profit organization saying that the CEOs were arriving in Washington to beg common taxpayers for help, making it completely unnecessary to travel in a flight costing twenty thousand dollars when the same trip could be made for around five hundred dollars. In response to these criticisms, many top CEOs decided to sell their corporate luxury jet fleets in December 2008 to give the public a better perception of them and answer their critics. For the December 2008 hearing, all three CEOs of the Big Three drove separately to Washington, choosing the latest hybrid electric vehicles because of the fierce criticism they had faced arriving by private jet the previous month.

From the perspective of many consumers, the Big Three firms had an extremely negative record regarding energy conservation. Sections of the American public greatly concerned about ecology had little sympathy for the big automaker firms, accusing them of profiteering and deliberately destroying the mass-transportation system as well as privately-owned railways during the decades from the 1920s to the 1960s. Many even alleged the Big Three contributed to the development of suburban areas seen as greatly fuel-inefficient, requiring commuters to drive long distances from distant suburbs to cities. In the early 1920s, when General Motors faced a highly saturated car market, it reportedly engaged in a controversial policy alongside road-builders that triggered a great shift from mass transportation systems to personal car travel.

In December 2008, Fitch Ratings downgraded the Issuer Default Rating for General Motors; Chrysler was also downgraded to C, indicating that its default was imminent. A Bloomberg article from the same month reported that Ford and General Motors had their overall debt cut far below investment status by Moody's and Standard & Poor's. The debt of General Motors was considered extremely insecure and was downgraded by one level to C — eleven grades below proper investment quality as set by Standard & Poor's. Moody's downgraded its rating of Ford by Caa3, nine grades below proper investment quality, due to twenty-six billion dollars in Ford debt.

The Big Three firms spent approximately fifty million dollars on lobbying efforts in Congress during the first nine months of 2008. General Motors sent letters to its vast network of supplier executives, dealers, union members, and employees, asking all of them to write to Congress and inform them about potential side effects of bankruptcy.

The Big Three CEOs traveled to Washington, D.C. for the December 2 congressional hearing on hybrid cars after sustained criticism, and this trip was part of a new national turnaround strategy aimed at winning the confidence of the general public. Their initial plan was to commit more to electric vehicle and fuel-saving technologies and to present long-term viable plans before the congressional committee assuring their dedication toward solving the crisis.

Ford unveiled an aggressive electrification plan, including plans for a fully electric van and a battery-powered sedan launched in 2011. By 2012, Ford also planned to bring a wide variety of plug-in hybrids, regular hybrids, and battery electric vehicles to market, at relatively affordable prices to maximize consumer uptake. Ford aimed to invest about fourteen billion dollars in fuel-efficient technologies over several years and set a target of thirty-six percent improvement in fuel economy across its complete fleet by 2015. The firm also applied for various government programs to gain technologies, allotting five billion dollars for this purpose, and sought up to nine billion dollars in bridge loans.

Automotive Crisis in Canada

General Motors unveiled its production version of the Chevy Volt, capable of traveling up to forty miles in electric mode. GM also initiated a widely publicized effort for plug-in hybrid models and planned to employ the Volt's drive train across other vehicles. GM planned to launch predominantly fuel-efficient cars and crossovers over the next three to four years, investing some three billion dollars in fuel-efficiency and alternative fuel technologies. It planned to offer fifteen varieties of hybrid vehicles by 2012, with about half of its entire fleet composed of flex-fuel vehicles able to run on ethanol-rich E85 or gasoline.

GM was seeking twelve billion dollars in bridge loans throughout 2009 and also asked for the revival of a six billion dollar credit line it could draw on if sales forecasts fell short. It ended the third quarter of 2009 with around sixteen billion dollars in cash reserves, but estimated it needed approximately eleven billion dollars on hand to maintain operations. Without a federal loan, the firm expected reserves to fall to ten billion dollars by year's end and to three and a half billion dollars by February of the following year.

Chrysler predicted that for its 2009 model year, approximately seventy-three percent of its total vehicles would be more fuel-efficient than their 2008 models. The firm also intended to launch many smaller and fuel-efficient cars and planned to introduce a hybrid vehicle — the Dodge Ram — by 2010, alongside its first-ever electric-drive vehicle. Chrysler planned to launch three additional electric-drive vehicles by 2013 and, like General Motors, planned to make half of its fleet flex-fuel capable by 2012. It sought a bridge loan of seven billion dollars and ended the first half of the year with around ten billion dollars in cash, though it was likely to end the year with only about two and a half billion dollars remaining.

The automakers, especially the Big Three, submitted applications for retooling loans worth twenty billion dollars to fund vehicle projects addressing fuel efficiency and reduced carbon emissions.

In December 2008, General Motors announced the temporary closure of twenty of its U.S. factories. Shortly afterward, Chrysler announced it would also temporarily close thirty of its plants for one month. A February 2009 article in the Herald Tribune claimed that General Motors was about to invest one billion dollars in Brazil, with the money reportedly sourced from the government bailout. General Motors planned to consolidate its American business around the Buick, Cadillac, GMC, and Chevrolet brands while possibly selling or phasing out Hummer, Pontiac, and Saturn. In June, GM announced that it had sold the Hummer brand to a Chinese firm, with the transaction to close in the third quarter of 2009.

Critics argued that by selling off brands, the firms would not only lose a great share of market value but would also create a negative perception among consumers who would see jobs being shifted overseas. In June 2009, a bill was introduced proposing that the government distribute the stocks of Chrysler and General Motors to individual taxpayers, but it failed to pass.

The auto industry in Canada is closely linked to its American counterpart mainly because of the agreement known as the Automotive Products Trade Agreement, which later evolved into NAFTA (the North American Free Trade Agreement). Canada has a total of three hundred and fifty thousand car dealers providing employment to one hundred and forty thousand people. These dealers informed the federal government in November 2008 that they were at huge risk from the global financial crisis, and they asked the government to provide help despite having recorded strong sales numbers that year.

Ottawa considered providing financial aid to the Big Three's Canadian subsidiaries as well as to auto parts companies. The auto industry argued that loan guarantees and other help would rescue tens of thousands of auto sector jobs in Canada that were greatly threatened by the sharp drop in car sales in the United States market.

Chrysler Canada asked for one billion dollars in aid, making it the only one among the Big Three's Canadian arms to make a specific dollar request. Many industry analysts criticized the labor contracts negotiated by the then-president of CAW (Canadian Auto Workers), Buzz Hargrove, with the Big Three in 2007, noting that they failed to anticipate the subprime mortgage crisis and how currency fluctuations would impact Canadian auto production.

It was also noted that the president of UAW in America agreed to bring the "all-in" wage of UAW down significantly, causing pension and benefit costs to drop from a high of $75.86 per hour in 2007 to about $51 per hour on average in 2010. By comparison, CAW's cost per hour was $77 in 2007 and rose to more than $80 per hour at the end of the new contract period. Analysts noted that the UAW president went into negotiations with one primary objective — to save jobs — whereas the strategy of CAW was to extract every possible concession from the employers.

The then-current union president in Canada, Ken Lewenza, urged that labor should not be held responsible for the bankruptcy problem facing the Big Three. He said his own members would never make concessions as part of a taxpayer-funded bailout, stating that he did not see labor as the source of the problem, and that he would not accept further cuts after already losing many thousands of jobs in previous years.

Lewenza also said that in 2007 CAW agreed to make concessions that would help the Big Three save approximately nine hundred million dollars over the next three years. The Canadian Taxpayers Federation (CTF) sharply criticized the "no-concession" stance of the CAW, saying it would only strengthen opposition to a taxpayer-funded bailout. The CTF further noted that it was very difficult to understand asking the government for help while refusing to contribute anything toward solving the crisis.

A columnist, Kelly McParland, suggested that without concessions, union members including their president were more likely to lose everything. McParland urged that the main problems of the U.S. auto industry should be borne equally by labor and management, criticizing labor for building unsustainable pay and benefits while also attacking management for short-term strategies and sales tactics.

The CTF opposed the proposed $3.5 billion Canadian bailout for the Big Three's Canadian subsidiaries, arguing it would create a great financial burden on the average Canadian taxpayer and provide an excuse for American automakers to postpone necessary change. The CTF noted that the provincial and federal governments had spent about seven hundred and eighty-two million dollars on the Big Three over the previous five years. Lewenza disagreed, saying Canadians should see the bailout as a loan to be repaid after the economic crisis ended.

In December 2008, the province of Ontario and the government of Canada together offered more than three billion dollars in loans to the automobile industry. Under this plan, General Motors would receive three billion dollars and Chrysler the rest. Ford was not participating in the bailout and only requested a line of credit.

A cost-cutting deal with GM Canada was negotiated by CAW in March 2009. The current contract was extended by one more year to September 2012, preserving the base pay of the average assembly worker at almost thirty-four dollars per hour. It also eliminated a seventeen-hundred-dollar special annual bonus and reduced overall paid absences to one week per year. Vacation entitlements were preserved at up to six weeks per year for high-seniority workers. The deal also introduced member contributions to the health benefits scheme — fifteen dollars per month for pensioners and thirty dollars per month for family workers.

Lewenza claimed this would trim by thirty-five percent the firm's contributions to union programs like wellness and child care. However, observers assessed that the deal did not go far enough. An analyst from DBRS called it "not material." A prominent automotive consultant claimed that General Motors had lost a great opportunity to cut labor costs, noting that since bankruptcy was an ongoing threat, Queen's Park and Ottawa had demanded cuts to the labor bill as a condition of the bailout, and that the pension fund deficit would prevent CAW from striking. He estimated the average hourly cost of a GM Canada worker at seventy-five to eighty dollars including benefits.

A university professor calculated that the process would save around one hundred and fifty million dollars annually, even though General Motors was seeking six billion dollars from the government of Canada as support. Senior autoworkers from CAW were allowed to keep ten weeks of vacation alongside full pay, without contributing to their own pension fund, relying on taxpayers to help cover their unfunded liabilities.

The agreement was contingent on Canada receiving approximately twenty percent of the new General Motors, along with many billions of dollars in provincial and federal taxpayer support — which Lewenza stressed would be in the form of loans. Many critics argued this would not be the last request from automakers for a bailout. It was also estimated that General Motors would work through the government loans within a few quarters, long before any market recovery was expected.

The president of General Motors Canada admitted that the firm had already pledged its entire worldwide assets to the United States government to help secure the first tranche of a thirty billion dollar U.S. loan, leaving no other assets to collateralize the six billion dollar loan from the Canadian government. The Federation of Canadian Taxpayers noted that between 1982 and 2005, about eighteen billion dollars had been handed out by Ottawa to various firms, with only seven billion dollars being repayable and close to one and a half billion dollars ever repaid.

Conclusion

This paper presented a detailed analysis of how the automotive crisis of 2008 affected car manufacturers worldwide. The emphasis was placed first on the American manufacturers — especially the Big Three firms, General Motors, Chrysler, and Ford — since they were the most severely affected. It was seen that automobile sales in the United States were in decline even before the crisis started, mainly due to factors closely related to the auto industry such as the financial crisis and the oil crisis. This greatly caused American consumers to shift priorities, opting to buy smaller vehicles rather than large SUVs. Labor-related statistics were also examined, showing how many personnel were employed by the auto industry in the United States, especially by the Big Three, alongside hourly wages and benefits.