US Automobile: On Brink - Article Example

The United States government is committed to offering economic incentives to its people; the intent of such incentives is in the form of taxation policies, subsidies and credit policies. The government at all levels i.e. state and municipal governments have struggled to induce job creation. The United States reign supreme in technological and financial avenue, however for the sake of profit-making all such units were outsourced, bringing more revenue to the country but lesser to its people. This specific case has been true for automotive industry, GM and Chrysler were once considered to be the global automotive brand, but soon these industries realised that their global share was on the verge of decline due to the increased prices therefore the production of these industries was solely confined within the boundaries of North American countries, the profitability of these industries was function of the purchasing power of the people in the region. Government and Automobile Sector: Edging James (2003) suggested that in order to avert the collapse of the automotive industry, the government is left with limited options i.e. either to provide financing to these industries, improve the purchasing power of the people, restrict imports of European and Japanese automotive brands, impose taxes on the people for revenue generation of these industries etc. The economists are of the opinion that, “economic incentives such as tax credit and exemptions, cash grants, gap financing, and in-kind services could only be justified if companies receiving the incentives provided new jobs and earnings in exchange". This validates the fact that economy works in chain, in exchange of all the listed incentives the government shall plan to offer to these industries, the recipients shall in return offer more jobs and opportunities to the local population for earning i.e. exchange of rewards. Steve (2004) argues that "global competition facing U.S. companies accelerated as lower-cost foreign labour became more accessible", this is specific reference to low-cost and qualified labour of China and India. Unfortunately, it is not only America which is suffered due to this factor, rather European-based automotive giants have suffered huge losses, and therefore were prompt enough to settle in India and China, to ensure gain and profitability with reasonable efforts. Domestic Supplies and International Race: Misaligned Patches With reference to domestic companies settled in States, these units had two primary options to ensure their participation in the competitive market i.e. "to remain competitive: shift operations to lower-labour cost regions offshore or invest in technologies that reduced the need for more expensive labour in this country". Tom (2001) suggested that these options required necessary approval from the government, if the units intend to settle off-shore, the local job market will get affected and employment opportunities will shrink, the government has definitely no approved plan to manage such vast number of unemployed, especially when thousands of qualified and meritorious employees have been sacked due to the ongoing economic turmoil. The investment in technological avenue is wise though, but it requires lot of investment with reasonable risk factor. Steve (2004) reported that "both alternatives brought widespread reductions in jobs and earning within states and municipalities, and these jurisdictions found themselves competing for fewer incremental job opportunities". The government on its behalf has undertaken serious measure in states and communities which have been affected by the job-cuts and closure of industrial facilities. The government has plans to introduce structure economics incentives, intend of such scheme is to retain automotive operations and their associated jobs and payroll. In one of the studies it was concluded that if an automotive component supplier requires urgent upgrading of technologies at its unit, this will cause reasonable reduction of jobs to ensure that the unit is internationally competitive. As per analysis, on an average 30 percent of the employees might be sacked if technological reforms were introduced to improve unit operation. The government is trapped in an unfortunate circumstances, where technological advancement at one end will protect the interests of the local automobile industry, but will adversely affect the job market, such situation can be controlled if more additional technological automotive units were established, which shall inculcate the affected employees, but then the question rises that will the increase production be absorbed in the local and international market, and if not then definitely the prices of automobile units will slash, and this will again hit the economy strength of the industrial units, and will lead to the borrowing from the government, which will lead to another turmoil. The government is left with two simple choices i.e. to reduce taxes on the people; this will increase their savings and consequently lead to rise in purchasing power. Government and Manufactures: What to do Tom (2001) finds that government can focus upon "state and local financial incentives to help offset the significant new capital expenditures that the firm was proposing in order to make the facilities more viable over the long term"; such strategy will ensure that the jobs are kept safe. It is important to realise that in such situation where government and industrial units fail to prioritise and settle, the community can intervene and initiate on good-will. Alan (2003) reported that the community has "accepted the legitimacy of the company’s request for support, these communities recognized the logic in addressing the company’s long-term needs to remain competitive well in advance of a future critical juncture where the company could be faced with no alternative but to relocate or close its operations entirely". The automotive industrial units were offered "partial incremental property tax incentives from these municipalities, generated by the new capital expenditures", such reforms, which primarily offered taxation dividend, supported the units "in offsetting its technology upgrade costs, while enabling the community to offset its loss of individual municipal income taxes- with the portion of the incremental property taxes not returned to the company in the form of tax incentives". Edward (2002) has estimated the extent of the corrective plans and initiatives, undertaken after necessary feedback from the units and communities which will supposedly benefit the economic configuration of the units and community, thus the benefits are not just confined within the limits of plans. As per recent survey, "the economic impacts of automotive manufacturing operations and their suppliers are among the highest in the U.S. economy". The automobile industry has contributed significantly towards the American job market, "each automotive job typically creates between 2.5 and 6 other jobs within the economy, the higher compensations of automotive employees drive additional indirect and induced earnings within the state or community". The automotive operations have contributed towards strengthening dollar, and have been fundamental towards extensive secondary economic output. James (2003) realised fact that that rising competition on global front has been responsible for cut in employment and revenue generation. It is important that the local economic development officials, legislators, and administrators should continue to struggle towards the application of the economic development tools, which shall supposedly address "retention needs of the highly valuable automotive industry along with corporations within all competitive industries well in advance of events that necessitate corporate decisions resulting in unfavourable jobs consequences". The general understanding among the economists is that the problems being experienced by the automotive industries are easy to diagnose, but it is difficult task to cure it. An interesting comparison between sales of American based GM and Japanese based Toyota within U.S showed that on an average GM lost $2331 per vehicle manufactured against Toyota which was making profit of &1488 per vehicle. This simple mathematical relation expressed that greater the production of GM, greater was their loss. Another interesting comparison between these two manufacturing giants showed that GM took 34.3 hours to produce a vehicle, where Toyota on an average required 27.9 hours for production of single unit. An interesting comparison between the remuneration of the employees working at two different manufacturing giants showed that the employee of GM was on an average earning $31.35 per hour against an employee of Toyota who was making $27.9 per hour. This probably reveals that the role and contribution of the work force within American automobile units is greater than Japanese based units, "Toyota is paying less in payroll but getting greater production from what is ostensibly the same American workforce", such variations along with difference of technological and marketing launch, have been responsible for the default of American automobile industry. Another interesting comparison is of the health care benefit offered by these two giants, GM offers $1525 health care benefit on single vehicle is produces, whereas Toyota offers merely $201, this shows by purchasing GM motor, the purchaser is actually "subsidizing their corporate health care system". As per recent analysis, the American automobile industries are severely affected and influenced by United Auto Workers Union, "they undeniably are a large part of the problem. The wages and benefits the union demands from American auto makers are coming to border on extortion. They are completely out of line with the economic reality of the 21st century. The new wave of auto manufacturing taking place in Europe is increasingly replacing career workers on the line with out-sourced temporary workers and more importantly robots, Europeans will be able to flood the international market with quality cars at low prices". The objectives of American automotive industry is captured as follows, 1. The competition among the global industry has intensified, and has reached natured stage where quest is for survival. Presently, there are many larger auto manufacturers hunting for market shares internationally, such industries are in hunt for countries and regions offering large economies of scale and large suppliers. 2. The established major markets are already saturated i.e. United States, Europe, Japan and Canada; however the struggle between these units to about reaching the emerging markets convincingly. 3. New business model has evolved which has predicated localized vehicle assembly; this requires essentially very short supply lines and increased supplier responsibilities and expenses. The suppliers are hopeful that proactive approach of the government will improve their competitive position relative to other countries. According to Alan (2003) the suppliers expects "front-loaded investment tax incentives; more effective education and training programs; lower healthcare expenses; more vigorous enforcement of international fair trade practices; a rebalancing of union/employer rights", this will nullify the risk, the suppliers are exposed to in the global market of automobiles. Sunil (2004) believes that the government shall take serious measures to "assure that they provide the lowest-cost business environment, consistent with their obligations to the public welfare". It is however warned that even if the American government acts as per the aspirations of the automobile industry, the suppliers still face risk associated with the significant cost gap versus most of our major Asian trading partners. The limitation on the part of the American government is that it cannot solve the problems experienced by the industry, rather it can play role of a facilitator. It is important that the industrial units should implement appropriate adjustments in their business plans and operating procedures, which will reduce their costs and "their standing on the value chain higher", it is important for the suppliers to interact with their customers abroad which shall be responsible for pervasive in the assembly of vehicles, the success of this plan to will prevent lose of international business. John (2003) emphasised that the American automobile industries shall focus upon "development and production of innovative products with proprietary technologies that help insulate them from price competition, or by restructuring their U.S. operations, completing low-tech high-labour manufacturing stages abroad, while maintaining higher value-added operations in their domestic plants". It is important for these units to improve their business operations and manufacturing processes. The government has already developed Manufacturing Extension Partnership program, this program will develop more effective production practices through simulation of development of new technologies and industries. Way Forward Sunil (2004) has signified that the Automobile manufacturers shall invest their thoughts towards establishment of global corporate purchasing offices, the intent of such offices shall not be to improve immediate sales, and rather the focus shall be the development of strong affiliation and establishment of credentials and to seek opportunities for future business. It is important for American automobile industry to realise that "firms that possess proprietary technologies, or superior manufacturing processes and are prepared to compete on price, can expect to succeed with offers to supply these prospective customers via long-distance supply lines". The American government shall support these manufacturers for the development of "corporate-wide economies of scale that will help maintain the competitiveness of their existing U.S. plants". John (2003) strongly recommended that the government shall support the suppliers for rising "the capital needed for such investments, because of the relentlessly competitive global environment in which they operate". The American government shall develop WTO-compliant programs for the improvement of "supplier access to venture capital". The government shall facilitate the automobile manufacturers in the development of new manufacturing processes, and for adoption and adaption of global best manufacturing practices. The strategy shall be applied without development of primary focus on international competitiveness, trade promotion assistance, because this will not yield significant success. The government shall intervene and assist the local manufacturers during award of contracts, proving period for the prospective supplier, and non-scheduled items and delivery for production for several years. References 1. Michael J. Brown. Odyssey of the Auto Industry: Suppliers Changing Manufacturing Footprint. Original Equipment Suppliers Association and Roland Berger Strategy Consultants, before the SAE World Congress, Detroit. March 2004 2. Tom Ryan. OEM Parts Purchasing: Shifting Strategies, Office for the Study of Automotive Transportation. Univ. of Michigan. January 2001 3. Steve Knight. OE Industry Review 2003. Original Equipment Suppliers Association. June 2003 4. James Edward. Global Auto Industry: Stepping Onto a New Stage, 2003 Q4 Executive Briefing; and Autofacts Monthly Executive Perspectives. Price Waterhouse Cooper. January 2004 5. Alan Merck. Destroying Boundaries: Integration and Collaboration in the Automotive Value Chain. Office for the Study of Automotive Transportation, Univ. of Michigan, and Oracle Corporation. Automotive Industry Practice. July 2003 6. John Imad. Automotive Supply Chain: Global Trends and Asian Perspectives. Economics and Research Department, Asian Development Bank, and the International Motor. April 2003 7. Edward Michael. Vehicle Program. Massachusetts Institute of Technology. January 2002 8. Sunil Chopra. Supply Chain Management. Northwestern University and Peter Meindl. Stanford University. Prentice Hall. 2004. Read More