Economic Crisis And Its Impact On The Trade In The U.S - Research Paper Example

Economic Crisis And Its Impact On The Trade In The U.S.) Contents Contents 1 Background: 1 Pro Side: 2 Con Side: 4 In support: 5 References: 7 Background: The US and the world are going through an economic recession. This economic downturn started from the summer of 2007 with the subprime crisis. Soon like an avalanche this crisis rolled onto other parts of the financial sector. Huge organizations in the world of financial services and banking either went bankrupt or had to be saved through Government bailout. Bear Stearns, one of the biggest American banks, was bought by JP Morgan Chase with federal assistance. Other respected financial institutions like Lehman brothers declared bankruptcy in 2008. US insurance giant AIG was bailed out by the Government (Blackburn R., n.d.).The subprime crisis led the US economy towards credit crunch. The banks were weary of lending to the public and this went onto manifest itself in the form of credit crisis. Lack of credit, profusion of bad economic news led to the fall in consumer confidence. By March 2008, US saw the worst job loss in the last five years (Isidore C., March 2008). Coinciding with this crisis, between June 2007 and June 2008 average crude oil price jumped 92% from $ 61 per barrel to $117 per barrel (Jackson J. K., November 2008). All these started taking its toll on the economic climate and car sales declined drastically in the US. In September 2008, for the first time in 15 years, monthly car sales fell below 1 million units (Strott E., October 2008). Moreover experts in the field of automobile point out that the Japanese auto manufacturers like Honda, Toyota have been making better, often cheaper and greener cars than their US counterparts (McKenzie B.R., n.d.).Especially Toyota has been beating its US rivals in quality, productivity, cost reduction and other key parameters (Toyota as number one: continuous improvement key to success, 2006). This is shown in its sales performance for the year 2008, when for the very first time in history Toyota sold more automobiles than General Motors (Toyota Beats GM for First Time, January 2009). In this scenario the ‘Big Three’ of US automobiles, General Motors (GM), Chrysler and Ford pleaded for a bailout package from the federal Government. The CEO of the ‘United Auto Workers’ (UAW) also joined the company bosses (U.S. auto execs plead for Congress to fund bailout, November 2008). These three companies requested for $34 billion at first, then $25 billion and finally requested for $15 billion. But the Government only provided them $13.4 billion and pushed on any farther help to 2009 February (Sint K., Lu A., january2009). Pro Side: (Breaking up the UAW): The UAW or the United Auto Workers supported the bailout instead of bankruptcy filing by the three companies because under bankruptcy laws, the courts could order UAW’s restructuring and specially restructuring of the contracts between them and the companies. The UAW never wanted this because they would not have favored these highly lucrative contracts to be reconstructed into anything less lucrative. But for these companies to survive in face of high competition from Japanese auto majors like Toyota or Honda, they will have to cut cost. But cost cutting is not possible because a major chunk of the car’s production cost actually comprises of the cost of wages and other contractual current and future benefits paid to the auto workers. These three companies pay much more to the workers in comparison to what is being paid by the Japanese firms. On an average UAW workers are paid $75 an hour while a Honda worker gets paid $43 an hour (Sherk J., December 2008). Where all other private sector employees on an average earn $25.36 per hour, the ‘Big Three’ auto workers earn $ 73 per hour. Within this $73, there is a substantial amount which is paid in terms of ‘benefits’. Some of these are, ‘benefits for surgical, hospital, medicine’,’ ENT benefits, group life insurance, disability and supplemental unemployment benefits, pay roll taxes and unemployment money. These benefits have to be paid to current as well as retired workers. Since these auto companies are old ones, they have more retired workers than current ones. But Chrysler clearly mentioned in one of its reports that the average hourly wage figure put up by them is for the current employees only and not for the retired ones. Therefore it means that if the retired employee benefits were added to it, then the figure would have been even larger. For example, GM paid $4.9 billion to 291,000 retired employees or surviving spouses in the year 2006. For each active worker in GM, there were 3.8 retired workers. In Chrysler the number was 2, where as in case of FORD it is 1.6. Therefore in all the three companies the number of retired workers is more than the number of current employees. So the amount of benefits being paid to these retired employees is far greater than what is paid to the current ones. This could be termed as ‘legacy cost’ for the ‘Big Three’ the comparatively new Japanese auto units don’t have to bear, because they have set up factories much late and do not have the burden of huge number of retired employees. The average $73 per hour which is being paid to these workers would surely have been much higher had it included the benefits paid to this abysmally huge number of retired personnel. Even at $73 per hour, these workers are earning more than other American workers and it is difficult for these companies to carry on like these and be competitive in face of Japanese competition. Some of the benefits the ‘Big Three’ workers get: 7 week paid vacation / holiday. If they retire before they are in their 60s, and therefore do not get social security benefits, then they are paid special bonus payments by the company. If a plant is closed, the company can not lay off the workers, these workers have to be put into ‘JOBs Banks’, where they receive almost full wages. It has been calculated that just these health benefits and Jobs bank costs add around $1400 to the cost of a GM car. It is not unusual that Toyota is able to produce the same quality car at a lower price. The consumer would naturally choose Toyota over GM. (Sherk J., December 2008). All these make a perfect case for disbanding of the UAW, if at all GM, Chrysler and Ford have to survive in this competitive era. Con Side: (Breaking up the UAW): The average $73 per hour labor cost which is being paid by the ‘Big Three’ forms only a part of the production cost of the vehicles, therefore this is not the only reason behind ‘Big Three’s downfall. The management should be held guilty for many faulty decisions over the years which have made these companies and their products uncompetitive. The management of these companies has been focusing on building big SUVs which consume too much gasoline, when the Japanese were focusing on new hybrid vehicles. Moreover at around $73 per hour it is not at all viable to produce small sized cars which are in vogue while competing with $43 per hour wages. The rising oil prices, which went up to $140 per barrel, made sure that people preferred hybrid or smaller cars, those that could save gasoline (Sherk J., December 2008). Experts say that GM has been going downhill in terms of quality for long and it was only a matter of time before Toyota became the number 1 or the world’s biggest car maker (Welch D., January 2009). Experts also point out that the problem started in 1970s, when the oil crisis and subsequent new oil regulations pushed the company to produce smaller cars which were not it forte. Instead they came out with ‘71 Chevy Vega’ which had a small aluminum engine. But the quality was not good as to increase production Gm looked over quality issues. Since it has had a good market share in the US at that time and Japanese competitors were not so powerful, GM overlooked the issue. But the consumers were not keen to buy GM cars once they got the taste of better quality, lower priced Japanese cars from Toyota or Honda. Toyota on the other hand has been focusing on green cars/ hybrid vehicles which give greater mileage to the consumer (Gentlemen, Start Your Hybrids, April 2004). Though GM has been concentrating on a new electric car called ‘Volt’, yet a recent government report says that by focusing on the Volt GM is doing wrong as it will cost more than the petrol cars (Evans S., March 2009). The report has also mentioned that in terms of green technology GM is far behind to Toyota and it would be long before it catches up. It is also know from the report that Gm still is relying heavily upon SUVs and other big cars while its Japanese competitors have shifted focus to hybrids and other smaller, lighter fuel efficient vehicles. So it can be argued that it is not the case that due to the high labor costs of the ‘Big Three’ the companies are having dwindling sales, rather some major decisions by the management have also been hugely responsible for this scenario along with the credit crunch and recession. Therefore to disband the UAW won’t be a logical step and also such a step would break the moral of the existing employee who might feel threatened and obviously their focus and productivity would come down. In support: (Of breaking up the UAW): From data mentioned above it is clear that for the ‘Big Three’ auto companies to survive in the 21st century competitive world of business, they would need a level playing field. Therefore, they should also incur the same cost which their competitors are incurring in terms of cost for different resources; raw materials or labor. If their Japanese competitors are paying les due to not having the burden of ‘legacy costs’ on them, then it is almost impossible for the US auto companies to produce a vehicle of same quality at a lower price because the cost of the vehicle would always account for the extra burden of ‘legacy costs’ which the ‘Big Three’ have to pay. While Toyota would be free to put in billions of dollars in R&D, Gm would be burdened by the benefit costs for the retired employees, which in fact is a far larger number than the number of current employees, in its case. In other words, ‘Big Three’ would be forced to take care of the past while the Japanese auto giants would be free to invest in the future. So once in for all, the government should take the firm step of breaking the UAW and bring legislation which will force them to agree to new terms in the context of health care and other benefits. Otherwise the winners would be companies like Toyota; GM, Ford, Chrysler can ill afford anymore whims of the UAW. It is high time that the Government bails them out and the management is able to focus on important area s like R&D, Hybrid cars, fuel efficiency rather than on older employee benefits, with the bailout money. If the UAW is not disbanded, it would make sure that the bailout fund is guzzled up for current and future employee benefits only and not for the benefit of the company or the US auto industry. ---o--- References: Blackburn R., (n.d.), The Subprime Crisis, retrieved on April 3rd 2009, from http://faculty.washington.edu/sparke/blackburn.pdf Isidore C., (March 2008), Job losses: Worst in 5 years, retrieved on April 3rd 2009, from http://money.cnn.com/2008/03/07/news/economy/jobs_february/index.htm?postversion=2008030713 Jackson J. K., (November 2008), U.S. Trade Deficit and the Impact of Rising Oil Prices, retrieved on April 3rd 2009, from http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-10646:1 Strott E., (October 2008), US auto sales plummet, retrieved on April 3rd 2009, from http://articles.moneycentral.msn.com/Investing/Dispatch/US-auto-sales-plunge.aspx McKenzie B.R., (no date), ‘Bailout Honda, Toyota, and Mercedes, Not GM, Ford, and Chrysler’, retrieved on April 3rd 2009, from http://web.gsm.uci.edu/~mckenzie/pdf_doc/bailout_010509.pdf Toyota as number one: continuous improvement key to success, (2006), retrieved on April 3rd 2009, from http://www.thefreelibrary.com/Toyota+as+number+one:+continuous+improvement+key+to+success-a0149012578 Toyota Beats GM For First Time, (January 2009), CBS News, retrieved on April 3rd 2009, from http://www.cbsnews.com/stories/2009/01/21/business/main4742933.shtml?source=RSSattr=Business_4742933 U.S. auto execs plead for Congress to fund bailout, Reuters, (November, 2008), retrieved on April 3rd 2009, from http://www.reuters.com/article/politicsNews/idUSTRE4AD08120081118?sp=true Sint K., Lu A., (January2009), Pro/Con: Bailing out the "Big Three", retrieved on April 3rd 2009, from http://silverchips.mbhs.edu/story/8861 Sherk J.,(December 2008),UAW Workers Actually Cost the Big Three Automakers $70 an Hour, retrieved on April 3rd 2009, from http://www.heritage.org/research/economy/wm2162.cfm Welch D., January 2009), How GM Lost Its Sales Crown to Toyota, retrieved on April 3rd 2009, from http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090121_417607.htm?campaign_id=rss_daily Gentlemen, Start Your Hybrids, (April2004), retrieved on April 3rd 2009, from http://www.businessweek.com/magazine/content/04_17/b3880057.htm Evans S., March 2009), Government Report: Chevy Volt is Wrong Focus, Won't Save GM, retrieved on April 3rd 2009, from http://wot.motortrend.com/6502019/government/government-report-chevy-volt-is-wrong-focus-wont-save-gm/index.html Read More