Strategy for Peugeot's Company to Manage Uncontrollable Macroeconomic Shocks - Case Study Example

Economic crisis in France Contents Introduction 3 Performance of the French economy 3 The vulnerability of Peugeot and its degree of exposure to macroeconomic shocks 8 Strategy for Peugeots company to manage uncontrollable macroeconomic shocks 9 Conclusion 11 References 12 Introduction There is a common misconception that developed countries like France or the members of the European Union remains unaffected by the economic crisis. Since the economic crisis has been termed as global it can be judged that countries like France had to undergo through economic downturn. The economies of the countries are interlinked and therefore a trauma in one nation will produce a domino effect on the economy of the other nation. The ills of lowdown are being experienced by the citizens of France. The citizens of the country are facing hard times in order to pay off their loans. The financial crisis led to loss of job opportunities and therefore the citizens did not have enough money on their hands to serve the basic requirements. The citizens are getting inclined to secure loans and debt to serve their finances. France has not been capable enough to direct foreign direct institutions into the country and financial crisis did not excluded France from shedding the ill effects. Performance of the French economy It is noted that the country of France suffered from low productivity as well as employment losses in the phase of 2008. But the impact of the crisis has been relatively less on France as compared to other advanced countries. The recovery phase has been sluggish for France. The country partly excluded itself from the asset price shocks. The above figure shows the loss and the recovery for France. The other panel shows the loss in employment and recovery. The country has been less open over the decade or so, therefore it experienced steady loss of export compared with the European partners. The current account balance deteriorated steadily while the reduction in openness ratio was 9 percentage points in the decade of 2000 to 2010 (European Commission, 2009). The lower degree of openness cats as the constraint in limiting the capability of the economy to rebound itself in the short run. It also limits the progress of the economy in the medium term. Experts opine cyclical effects of the recent decline as the share of the capital income for the residents of France is far behind from that of the European partners. The figure below will act as the evidence regarding the performance of the macroeconomic indicators for France. (International Monetary Fund, 2012, pp. 1-5). The economy of France is showing no progress for the fourth consecutive year. The early part of 2012 showed a sign towards returning towards the path of growth. The tensions in the financial markets were eased by the effective monetary policies of the European Union. Growth process may get hindered by the weak trade prospects and further austerity measures. The economy is expected to remain flat in the recent future and recovery process will take place from 2014. The lack of domestic demand can be accounted to be the reason. The consumption of household and residential investment is held back by rise in the level of unemployment and reduction in real disposable income. The exports are expected to grow in 2013 but the conditions of the Euro area are not too good for the cause. The authority has announced an injection of 30 billion Euros and the rate of tax has been raised for the high income earners. The aim is to reduce the fiscal deficit from 4.5 to 3% of GDP. The growth rate assumed for 2013 is 0.8%. The lending towards the private sector will still remain flat. The unfolding of the events in the neighbouring countries will have severe effects on the prospects of the economy of France (National Institute Economic Review, 2012, p. 5). The President of France has promised in a reduction in forecasts in budget deficits to 3% of GDP. The growth forecast for 2012 was 0.5% while that of 2013 is 1.7%. According to some experts the deficit will slip to 5% in 2012 while it will take the steep rising curve and be at 4.2% in 2013. The economic output is estimated t be close to 2 million Euros (Horobin and Parussini, 2012). The consumer’s spending contracted by 1% and 1.8% in the months of March and April, respectively of 2012. In April the trade deficit of France widened to reach 7.14 billion Euros with the rise in exports and fall in imports. The forecast of GDP growth was at 2.25% while it was 2% in 2011 (Horobin, 2011). The following diagram will provide the movements of the interest rates prevailing in France for the years under consideration. The following graph provides information regarding the historical exchange rates that prevailed between Euro and dollar. The vulnerability of Peugeot and its degree of exposure to macroeconomic shocks The company named Peugeot is the second largest car manufacturer in Europe. The company came into existence under the hands of Emile Peugeot. After the French government supported the company with huge funds it took over Citroen in 1975 which was under financial turbulence as it went on to develop radical models for serve its resources. The fortune of the company turned around in 1983 after it launched the popular Peugeot 205. Sudden macroeconomic shocks can affect the car manufacturing industry as well like all other industries. In financial crisis people do not have much money on their hands. With the very little amount of money they tend to serve the necessary goods. Since buying of cars is considered luxury they tend to offset buying the car for sometimes in future and opt for the necessary goods. In this case what happens is that the car manufacturers are facing a sudden drop in demand. The market is under the scenario of excess supply and in line with the Law of Demand, price falls. This brings a loss of revenue for the car manufacturers. Companies like Peugeot are engaged in manufacturing luxury cars and therefore they tend to feel the heat most. Therefore it can be stated that the car manufacturers are extremely vulnerable to the macroeconomic shocks. The discussion below with further clarify this point. In the third quarter of 2011 the worldwide unit sales were at 477625 while at the same quarter of 2012 the sales volume was at 347497 units. The total units sold in the first quarter of 2011 were at 921400 while the sales at the same quarter for 2012 were at 790180 units (PSA PEUGEOT CITROEN, 2012). The following diagram shows the GDP of France from 2006 to 2012. The above diagram shows the per capita GDP of France for the years of 2006 to 2012. Peugeot earned a loss of 744000 Euros in 2009, a profit of 522000 Euros, 1745000 Euros and 1121000 Euros in 2008, 2007 and 2006 respectively (Yahoo Finance, 2012). The profit of the company increased in between the period of 2007 to 2008 while the GDP per capita increased as well. It can be seen from the diagram and the data gathered that the rise in GDP and the profit of the company were or less in line. Strategy for Peugeots company to manage uncontrollable macroeconomic shocks It is a common scenario that companies will not be able to generate the expected level of profits under macroeconomic shocks. To deal with the situation Peugeot must not take the path of sacrificing talent in order to cut cost. This may solve the immediate problem of the budget but will not be beneficial in the long run. The company must emerge with some “out of the box” strategies which will contribute in generating high productivity as well as will keep the entrepreneurial culture intact. If Peugeot becomes excessively risk averse the company will put itself into some kind of disadvantage. Taking calculating risks is the need during that time. Peugeot can take the initiative to cut down the spending on advertising which can have a dicey effect in losing the consumer base. The brand image may get eroded away from the minds of the consumers but that risk will have to be taken by the company in order to cut spending. Reduction of prices is the easiest way to increase sales but it may have negative long run effects. After the effects of the shocks if the company takes on to increase the prices of the products it will have negative effects of the consumers and there is the risk of consumers getting attracted to other lower priced products. Peugeot can carry out the business activities with the already existing suppliers and should not change suppliers only for mere revenue gains. The suppliers play a key role in the business transcends but unfortunately the value is intangible and therefore cannot be supported through paper. The company can take the decision of changing suppliers if and only id\f they are able to get a reliable and equally supportive supplier as the aim should be to provide quality products to the consumers. If the customer do not do not have the reputation of being a defaulter he should be entertained even if he wishes to make purchases with cards. It is understandable that payment through cash is likely for the company even then all customers should be managed effectively despite their modes of payments. The most important thing for the companies during sudden shocks is planning. A leak proof planning can act as the saviour during the tremor period. The managers must not wait for the period to end but will have to take the initiative to end it as soon as possible. The capability of the company to cope up with various business environments will play a major part. Focus and time must be lent to analyze the weaknesses of the company. In times of recessions the progress of the company gradually stagnates the weaknesses of the company comes in the forefront. The investors become more aware with the current situation of the company and take some stringent decisions which in most cases are not beneficial for the company as a whole. Therefore a backup plan should always be there which will take hold of the company in times of need. Conclusion Conclusively it can be stated that the economic crisis had severe effects on France as in many other advanced countries. The effects have been shown diagrammatically taking into account the various macroeconomic indicators. The next part dealt with the recommendation for the company under consideration to deal with the economic crisis and how the appropriate measures will help the company to deal with sudden macroeconomic shocks. References International Monetary Fund, 2012. France. [pdf]. Available at: http://www.imf.org/external/pubs/ft/scr/2012/cr12342.pdf. [Accessed:31st December, 2012]. National Institute Economic Review, 2012. Prospects for individual economies. [pdf]. Available at: http://0-ner.sagepub.com.pugwash.lib.warwick.ac.uk/content/222/1/F2.1.full.pdf+html . [Accessed:31st December, 2012]. Horobin W. and Parussini, G. 2012. France to revise Economic forecast. [online]. Available at: http://online.wsj.com/article/SB10001424052702303901504577462213766227358.html. [Accessed:31st December, 2012]. Horobin, W. 2011. France Cuts GDP forecast. [online]. Available at: http://online.wsj.com/article/SB10001424052702304259304576374973510876808.html. [Accessed:31st December, 2012]. 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Financial Crash, Commodity Prices and Global Imbalances. [Pdf]. Available at: http://economics.mit.edu/files/3635. [Accessed:31st December, 2012]. Read More