Impact of Credit Crunch - Essay Example

IMPACT OF CREDIT CRUNCH ON BRITISH DIVISION OF GENERAL MOTORS INTRODUCTION Over a number of decades in the past, there has been successful regeneration across England as many urban areas benefited from a buoyant national financial system and extensive public expenditure (Turner, 2008). This has not been the case in the last couple of years as certain changes have resulted from the international economic downturn and credit crunch that more so affected the United States of America (Nabudere, 2007). Given that General Motors’s Vauxhall is one of the United States’ preferred brands, the spread of the credit crunch across national boundaries has seen the company face tough times in both the local and international markets (Usborne, 2007). This paper seeks to analyze the impacts that the credit crunch has had on the British division of General Motors, Europe. More specifically, the paper will be biased towards the multinational company’s Vauxhall band. THE CREDIT CRUNCH The credit crunch began in the United States when the lenders’ exposure to billions of dollars of bad debts and mortgages started to spiral in 2007. The viability of engaging in sub-prime mortgage lending first spread across the whole financial system and later destabilized the efforts of banks to have access to sufficient resources. This turn of events eventually resulted in many international businesses facing credit crises in all or most of their firms (Cooper, 2008). Indeed according to Turner (2008), if the supply of loans in a state goes down significantly, the economic outlook quickly becomes depressed thus resulting in a credit crisis in the country. In many cases, credit crunches are associated with changes in lending characteristics; lenders and investors tend to opt for less risky investments. What this means is that the connection between credit availability and interest rates has implicitly changed in such a way that either credit turns out to be less accessible at any given official interest rate or there stops to be an obvious connection between interest rates and credit availability. In other words, credit rationing takes place. IMPACTS OF THE CREDIT CRUNCH ON INDUSTRIES The recent (or current) credit crunch has seen the abrupt tightening of conditions required to acquire loans from banks and other financial institutions. The crunch has also led to the reduction in the general availability of loans, inter-bank lending, credit cards and mortgages as banks worry about lack of liquidity. Apart from major economic players such as construction and financial industries, the motor vehicle industry has most been affected industries by the credit crunch across the world (Usborne, 2007). In the UK, the manufacturing industry has been affected most by the credit crunch. However, no other industry in the region has experienced its effects more than the motor vehicle industry. This industry has particularly been affected due to the reduction of market prices of previously over-inflated assets (Hj and Mohd, 2000). Of these, Vauxhall brand has been impacted to remarkable extents. Vauxhal, one of the General Motors’ brands, is sold in the United Kingdom but manufactured in the United States of America. The brand is known to be among the leading automotive products in the UK market, its plants situated in Ellesmere Port and Luton. According to records, sales of new cars have dropped by 28% in one year in United Kingdom and 40% in Europe where many of the brands manufactured in the United States such as Vauxhall are sold (Usborne, 2007).. In respect of this fact, it becomes disastrous when the profit margin of an organization falls below 5%. A drop in sales of this degree is a big challenge for any business General Motors being no exception. General Motors has experienced collapse of sales in the market. With the tightened conditions on availability of loans for their clients, many have opted to do without luxurious cars and would rather go for cheaper ones that they can afford easily such as Toyota’s brands (Usborne, 2007). This has led to decrease in sales and new registrations in General Motor’s Vauxhall. With the reduction in its turnover, many clients have lost confidence in the organisation as they are afraid of being pronounced bankrupt (Nabudere, 2007). In as much as the organisation continues to offer loans to its clients for the purpose of attracting them, only very few of them are willing to go for the loans. Ever since the credit crunch hit the market, Vauxhall has experienced low demand in the market. This led to the management of General Motors to layoff a large group of its employees in order to reduce the cost incurred in their production and thereby improve the company’s profit margins in the market (Usborne, 2007). Due to the state of bankruptcy of General Motors in Europe, it is anticipated that three out of its ten factories have to be closed down (Usborne, 2007). This has been a great fear to Vauxhall as it is the most productive plant that General Motors owns in Europe. The brand offers about 5000 jobs to British nationals and its closure may force the organisation to file for bankruptcy. Further, with the worldwide effect of the credit crisis, there have been some changes experienced in the market. Some of the best brands known to be in the market are no longer seen and this gives Vauxhall the tension of being faced off any time. CONCLUSION: As much as the motor vehicle industry in Britain may seem to be in a crisis, it is hoped that economic conditions will gradually ease up for the industry. It is thought that if the industry’s players focus more on the higher end of the car market, they will be able to attract clients some of who still trust their market brands. Also, they have to develop much greener cars that will be able to meet the standards of the present market. This will mean that the company will have to manufacture products that people can acquire without necessarily going for loans. Motor vehicle companies also have to invest more in training the next generation of designers and engineers who should be able to stand out in the current market. Further, it will be wise for them to maintain whatever they have now and wait for the demand to recover before bringing in any new product of their own. Thus, as much as Vauxhall faces challenges during this credit crunch season, it still has chances of being maintained in the car industry market. REFERENCES: Cooper, G. (2008) Origin of Financial Crises London, Harriman House, USA. Hj, M. A. & Mohd, A. (2000) Linkages and policy support, Nova Science Publishers, California. Nabudere, D.W. (2007) Crash of International Finance Capital and its Implications for the Third World, FAhamu Publishers. Turner, G. (2008) The Credit Crunch Housing Bubbles Globalisation & the worldwide economic Crisis London, Pluto Press. Usborne, D. (2007) Credit Crunch in Car Industry, McGraw-Hill Publishers. Read More