Impact of Financial Crisis on General Motors and Actions Taken by the Company - Case Study Example

Name: University: Instructor: Date: Table of Contents Table of Contents 1 Global Financial Crisis – Research Paper 2 1.0 Introduction 2 2.0 Impact of Financial Crisis on GM 3 2.1 Problems Faced by GM during the Crisis 4 3.0 Actions Taken 6 3.1 Change of Ownership 7 4.0 Conclusion 8 5.0 Work Cited 9 Global Financial Crisis – Research Paper 1.0 Introduction The global financial crisis of 2008 is considered to be the most perilous crisis since the Great Depression that happened in the 1930s. The crisis started in 2007 when exorbitant home prices in the U.S. begun dropping rapidly, first affecting the whole U.S. financial sector before spreading to the overseas’ financial markets. It resulted in numerous causalities such as the whole investment banking industry, mortgage lenders, insurance companies, and financial institutions. The crisis did not only affect the financial sector, but also companies that relied on credit. For instance, the automakers in the U.S, especially those that were asking for a bailout for the federal government such as General Motors, were caught in the mess (Havemann). The situation was exacerbated when banks stopped providing loans, which businesses needed so as to regulate their cash flows. Currently, General Motors (GM) is one of the largest and most successful automakers in the world, but the global financial crisis affected the company enormously. The financial crisis resulted in a major banking crisis, which ensued after financial institutions implemented tough guidelines for lenders, both personal consumers and business. In consequence, this largely affected General Motors since the company together with other automakers depended heavily on short-term returns so as to fund its complex value chain as well as large brands portfolio. The essay focuses on the actions taken by General Motor’s in the face of global financial crisis since 2007. 2.0 Impact of Financial Crisis on GM According to Crotty (563), the 2007 financial crisis is the worst since the Great Depression. The crisis happened during the latest evolution phase of the financial markets under the deregulation process which was initiated in the 1970s. The evolution according to Crotty (563) took the form of cycles wherein powerful financial booms are stimulated by deregulation together with rapid financial innovation, which normally end in crises. Crises are normally responded by governments’ bailouts bailout, which normally facilitate the start of new expansions. This has consequently made financial markets larger and the society is continually being threatened by financial crises; therefore, governments have been forced to enact larger bailouts. Before the bailouts, the Big Three automakers in the US (General Motors, Ford, and Chrysler) were performing poorly. The companies were making big losses; for instance, General Motors has made a loss of $40 billion in 2007 and additional $31 billion the following year. The global financial crisis has a catastrophic impact on General Motors as cited by Goolsbee and Krueger (4). The company’s sales started plummeting in 2007 and this was attributed mainly to the enduring market share decline and the decrease in aggregate demand. The crisis impact on the automotive industry was exceedingly severe as compared to other industry except for finance and housing. This was attributed to the fact that the automakers’ value chains led was in a calamitous state, and companies like General Motors were already in a life-support. The situation was worsened when the credit markets were frozen since orders and supplier invoices were cancelled. This was further exacerbated by high labor costs and fixed-capital costs, enormous debt loads as well as immense health care and pension commitments to the retirees (Bai 59). Furthermore, the sales of vehicle plunged; therefore, General motors and the automotive industry were pushed into a severe crisis (Sturgeon and Biesebroeck 6). The figure below shows the drop in sales during the crisis and the progressive increase after the bailout. Fig 1: US light Vehicle Sales (source: fool.com) 2.1 Problems Faced by GM during the Crisis Scores of the problems that General Motors faced during the global financial crisis were attributed to declining confidence amongst the consumers, inadequate credit accessible for purchases, and oil price’ volatility (Antonopoulou 3). The crisis derailed GM’s long-term restructuring plans, which was considered by scores of experts as a successful game plan. The crisis led to the loss of sales and this placed GM in a crisis situation in terms of liquidity. According to Rick Wagoner, GM’s CEO, the financial crisis pushed the company to the brink of collapsing. The global banking system was falling and this had led to the decline in the consumer confidence. Furthermore, the oil prices sky-rocketed in 2008, and this impacted the sale of GM’s main brands, trucks, and SUVs. Although crisis affected the entire automotive industry, General Motors was under pressure to cut costs so as to conserve cash. The General Motors was, unfortunately, carrying out restructuring process, which required a minimum of one year of a decent market in order to be stable; therefore, this was cut short by the financial crisis. The company leadership led by Rick Wagoner took a number of actions during the crisis to prevent the company from experiencing a business failure. The company decided to reduce to eliminate the healthcare insurance that it was offering to over 100,000 retirees and also reduced its U.S. hourly employment to 38,000 employees in 2011 from approximately 61,000 workers in 2008. The company leadership deemed that if the company alleviates most of its retiree healthcare liabilities and pension, it will largely improve the company’s chance of surviving. The figure below shows how the stock prices of GM declined. Fig 2; Decline of GM’s Stock prices (source; marketoracle.co.uk) 3.0 Actions Taken Owing to the financial crisis, GM’s failed strategy, as well as other threats, the company’s leadership, decided to do a major restructuring so as to make the future success more viable. In 2008, the U.S. government decided to take part in company’s restructuring after Chrysler and GM were given $17.4 billion loan so as to facilitate the restructuring plans. When Obama took the office, his administration asked for a restructuring program that is more feasible and stricter; therefore, all funding were cut off all until the automakers produced the desired results. For instance, General Motors was required to cut its costs by 1st June 2009 and initiate a plan to espouse the green technology. For this reason, restructuring became the main priority at GM. Therefore, the company leadership decided to trim 47,000 jobs globally and closed more than 10 plants in U.S. alone. Furthermore, the company eliminated four brands and closed over 2,600 dealerships. After the restricting process, the company was left with 34 plants, which is 20% the total number of facilities it had before the recession. Furthermore, the company decided to focus on its strongest brands, mainly Buick Cadillac, Chevrolet, as well as GMC. Brands that were considered weak in the market such as Hummer, Saab, and Saturn were eliminated. Besides the attempt to reduce the size of the company, General Motors’ ownership, and leadership structure was changed. The company CEO, Rick Wagoner was asked to step down from the company because the amount he requested for bailout plans was very high and because the made the company focuses more on the SUVs and trucks rather than the fuel efficient and hybrids cars. The sales after bailout are shown in the figure below. Fig 3: Sales after Bailout 3.1 Change of Ownership The company ownership was also overhauled since the U.S. Government took a 55 per cent majority stake in exchange for the $10 billion, the federal loan that the company was yet to pay. According to More, GM’s new leadership ensured that all levels of the corporate portfolio have been supported and the market share and customer choice for all its brands have been sustained. When any level of the portfolio fails to support the car choice made by the customer, More points out that a fast action has been taken so as to change the strategy, redistribute the resources utilized to pursue the strategy, before exiting the situation. Therefore, all cars have to create a high market share since the company cannot afford to sustain cars performing poorly in their specialized market segments. Furthermore, the company has ensured that all its brands generate as well as grow long-run net cash flow by ensuring the strategic goals of the company focus on the market. Basically, GM’s market focus meant that all the brands had to produce high market share, especially in the segments wherein they competed. As mentioned above, the company decided to focus on the brands that had significant market share and customer choice such as Chevrolet, and not those that were losing cash such as Hummer. According to Buss, Croteau, and Davidson (9), General Motor’s leadership realized that for the company to become profitable, they must ensure there is a continued success in China and the United States markets since they are the company’s main markets. Therefore, GM decided to leverage its leadership position in these markets with the goal of capturing the anticipated growth opportunities. Furthermore, Nanto (1) suggested that the new actions taken by the company has enabled GM to surface from bankruptcy protection and now has a 60.8% government ownership. 4.0 Conclusion In conclusion, the essay has focused on the actions taken by General Motor’s in the face of global financial crisis since 2007. As mentioned in the essay, the global financial crisis affected GM and other automakers enormously; to an extent that the company was forced to restructure so as to gain the confidence of its shareholders, the government, and entire world that it can actually succeed. For this reason, GM started downsizing, and decided to focus on the core brands as well as eliminated the surplus costs. The company changed its leadership and has continued to focus on its new strategy. The new strategy focuses on customers’ choices and the market in addition to manufacturing cars capable of meeting the needs of the environment and users. The company dramatically shifted to a market-focused strategy and has since then become successful. 5.0 Work Cited Antonopoulou, Sophia N. "The Global Financial Crisis." The International Journal of Inclusive Democracy 6.1 (2010): 1-28. Bai, Xue. "The Effects of the 2007-2009 Economic Crisis on Global Automobile Industry." Applied Economics Theses 2 (2012): 1-151. BankingMyWay. GM Unveils Debt-For-Stock Swap Plan. 2009. 27 May 2016. . Buss, Rose, et al. The Sustainability Business Case for General Motors. Research Paper. Detroit, Michigan: General Motors, 2014. Crotty, James. "Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’." Cambridge Journal of Economics 33 (2009): 563–580. Goolsbee, Austan D. and Alan B. Krueger. A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler. Discussion Paper. Bonn, Germany: Institute for the Study of Labor, 2015. Havemann, Joel. The Financial Crisis of 2008: Year In Review 2008. 2008. 27 May 2016. . More, Roger. HOW GENERAL MOTORS LOST ITS FOCUS – AND ITS WAY. May 2009. 27 May 2016. . Nanto, Dick K. The Global Financial Crisis: Analysis and Policy Implications. Research Paper. Washigton DC: Congressional Research Service, 2009. Sturgeon, Timothy J. and Johannes Van Biesebroeck. Effects of the Crisis on the Automotive Industry in Developing Countries: A Global Value Chain Perspective. Working Paper. Washington DC: The World Bank, 2010. Read More