Impact of Recession on Global Business and Trade - Essay Example

Impact of Recession on Global Business and Trade, Especially the Automotive Industry Introduction and Thesis The global financial downturn during 2008 and 2009 fiscal years affected a number of multinational ventures, including the automobile industry worldwide. The Asian market received major setbacks as the GDP of many countries showed trends of unprecedented decrease. The per capita income in many of those countries, barring China and Japan, also fell below par, accentuating the adverse effects of a massive economic crisis. America, too, suffered enormously and struggled to meet the competitive requirements of car production. Albeit the EU has recently inked a deal assuring to provide a colossal package to combat the impact of global recession on the automobile industry (EUbusiness Ltd 2010), it still remains to be complex phenomena as to why the recession took such a heavy toll on trade and commerce worldwide. Critically speaking, a set of entropy predicted the probable outcome of a sweeping downward surge in various cross-country economies, eventually leading to discrepancy in the ratio of production and consumption. These factors lay hidden both in the functional as well as the structural aspects of the car industry. The editor of the Dog Lemon Guide Clive Matthew-Wilson notes that the international automobile sector can produce approximately 90 million new units every year, which is well over the estimated 60 million buyers. Drawing on from this statistics, he concludes that in the aftermaths of global recession, the potential consumer market was mobilized independently by respective states – a deal which is not very likely to last forever. Hence, it is notable that the affordability factor in terms of owning personal automobiles will continue to weaken furthermore as the world starts adjusting to the ongoing slump (Dog and Lemon Guide 2010). In the light of this evidence, this paper is going to critically assess the impact of recession on international trade and commerce, particularly the automotive arena. The study will incorporate discussion of the relevant literature duly backed up by empirical evidences, followed by detailed analysis of the methodologies. Lastly, a questionnaire attached at the end of the document will reflect the research findings and provide assistance to conducting interviews for further elaboration of the methodologies. Background Study Before elaborating furthermore on the thesis question, it is worth investigating into the period that led up to the recent financial crises around the globe. It may be noted, however, that bulk of the study in this regard will focus on the US trade infrastructures and how they came to grips with the altering scenarios shaping in other countries. An Imported Economy Allen (1999) argues that the US car manufacturing has laid emphasis on using indigenous resources to help minimize import expenses. But in an age of globalised economic mobilisation, this policy of prioritising domestic interests has proven to be a futile attempt. Utilising the productive resources for manufacturing goods such as cars that have an international market is not an effective measure for safeguarding the nation’s economic front. This is because in the last few decades or so, reallocation of human resources and across-the-border capital inflow have increased more than it ever happened in the history of trade and commerce. Growth of the car industry in particular depended heavily on imported automobiles from Asian countries like Japan, which showed remarkable progress in sustaining the environmental requirements of the new age cars, yet retaining the cost-effectiveness of such productions. During the 1970s, the hike in OPEC oil price coincided with the increased number of imported vehicles from Japan, resulting in a 20 percent increment of the import share. The Japanese car manufacturers began to dominate over their US counterparts in terms of keeping the momentum of profit in their favour. As empirical data would reveal, the import share of the Japanese vehicles increased from 14.5 percent in 1978 to 21 percent in 1980. It not only questioned the acceptability of the US-made cars in its own market, but also led to massive downsizing of the indigenous workforce (45). Now if this bit of information is placed alongside the fact that overseas migration to the United States has reached a culminating point in recent years, it would be quite easier to justify the growing discontent of the US citizens over their right to employment in their own firms. As more and more people are being sidelined by the authorities, the state-controlled industries seem to be peppering with a grungy disavowal to routine and normative business proceedings. Shift in Variables Law (1991) argues that market studies deserve as much primacy in industrial research as does the other factors. He substantiates his argument by bringing our attention to a number of areas that directly affect market performances and preferences. Along with the growing concerns over sustainable and fuel-economic production, another factor also contributed to the shift of business epicentre from American and European markets to the Asian markets. It involved passenger comfort and segregation of a one-dimensional car market into multifaceted ones. As early as the 1960s, the US market used to be monopolised by spacious cars that required significantly heavier maintenance and other costs. On the other hand, smaller and more fuel-efficient vehicles enjoyed the privilege of smooth and inexpensive market statistics worldwide. The market approach to luxury cars in the US underwent a sea of change from the 1960s to the 1980s. Increasing fuel prices, general cost inflation, operating expenses, and several government regulations were among the most prominent reasons behind this changing scenario. Statistics show that the luxury car market expanded in volume by 4.4 percent from the mid-1970s to the mid-1980s. Quite predictably, it allowed importers to cash in on the congenial market trends. The import share grew from 7.2 percent in 1966 to 27.8 percent in 1986. Once again the Japanese manufacturers scored heavily over their American and European counterparts (32). The impact it had on the general car market in the US cannot be undermined in the long run. The paradigmatic shift in consumer preferences ensured that the European manufacturers had to raise their stakes higher so that they could target specific markets. What it also meant was that they had to give up on the generic market which belonged to the middle-class consumers. Needless to mention, such adjustments had lasting impressions on the very future of the US domestic car market. Honda, one of the pioneering car manufacturers in the US market, stabilised the internal state of turmoil through production of consumer-friendly automobiles that had focused on recruiting labours from the US soil. In essence, the company’s mantra while working in the US has been to deploy Japanese technological assistance coupled with US labour, so that prices do not overshoot the buying capabilities of common consumers. Additionally, the recession was marked by a steady increase of fuel price following the big crunch in the energy sector in 2008. This proved to be major cause for concern for the international vendors, as they were compelled to retool processes and modify their operational expenditures as well as service charges to balance the extra tariffs generated from the shortage in fuel supply. Moreover, additional revenues imposed on the car industry in the wake of the recession also had a detrimental impact on the business. Most companies had to offer discounts in order to bring the customers back to the market. Toyota Case Study All these aspects collaboratively led to a distinct decrease in growth of the market. US car manufacturers like Toyota had to curtail its cost of production per unit to gain competitive edge over the importers. In the beginning of the 1990s, Toyota produced each unit at a cost which was $500 lesser than its original manufacturing cost. This augured well for the company as it hit the third position in the global automotive market, followed by GM and Ford. But this favourable disposition did not last very long as Toyota had to reconsider its policies to “prevent further profit and market share deterioration” (King and Cushman 1997:204). The irony of the entire situation, which is inescapably linked to a vicious cycle of financial regression and rejuvenation throughout the twentieth century, manifested itself through the most unlikely event of Japanese recession between 1991 and 1995. As the comparative ratio of Japanese yen and US dollar increased, the cost of car production in Japan increased drastically. Toyota became the worst sufferer as it invested bulk of its capital into the Japanese market. Toyota had three alternatives to resolve this issue: it could go a notch higher in setting its price range, but at the cost of further compressing its drooping market in the US; it could initiate an expense curtailment to retain its preexisting market share; it could adopt a middle-of-the-road strategy by shutting down a few plants in Japan and shifting some of its production units to the United States (King and Cushman 1997:204). Hangover Effect of Recession: A Broader Purview Speaking on the hangover effect on automotive industries after the global recession, Clive Matthew-Wilson observes that this damage control measure has already begun to unleash a wave of tremors around the globe. While the US government’s sincere attempt to revitalise the car industry by introducing sales generating methodologies has yielded rich dividend in the initial phase, the disconcerting fact still remains that such assistance is restricted as far as longevity is concerned. State governments cannot possibly keep feeding car and truck producers with routine subsidies. Matthew-Wilson cites the Australian context to substantiate his position. The recent situation in Australia bears testimony to the fact that despite government initiatives to infuse life to the deteriorating sales market, the market cannot grow on the basis of subsidies and temporary allowances. A decline of 27 percent in sales within a year underpins this conjecture and predicts a rather grim scenario most likely to occur this year (Dog and Lemon Guide 2010). Cutting Down on Expenses As discussed earlier in the paper, various car manufacturers have strived to reduce expenses that can be done away with. The economic downturn has foreclosed German automobile producers and suppliers alike to enter new motor shows as often as they would have liked to do for conducting promotional campaigns for their latest products (Schröder 2009:8). It shows that the recession has affected the car market from multiple corners. While the increasing oil prices in the Middle East have had its impact on operational costs of vehicles, the marketing aspects too have suffered equally, if not more. It is worth noting that marketing principles for any goods revolve around the four basic components: product, price, promotion, and physical distribution (Research and Education Association and Finch 1992:2). Each of these components is correlated to the other in that the extent of any given one is determined by the rest. The decision of German car manufacturers to withdraw from road shows goes to reveal their willful denial of promotions to augment the other three mixes. It is clear that factors such as product, price and physical distribution refer to variables that are influenced by the market. In other words, consumers regulate these variables whereas promotion is entirely related to how the producers and the suppliers intend to go about their business. Examining China China enjoys a special position in global trade and commerce. On one hand, this developing nation is equipped with the prerequisite technology and manpower to produce and sell sophisticated gazettes and gizmos to other countries. Now cutting edge technology entails hefty price tags. If this can be applied to situations conforming to a healthy global economy, its reverse may also be applied. In the aftermaths of the recession, Chinese enterprises have realigned their policies with remarkable flexibility and vision. The producers are now licensed to procure cheap goods without compromising too much with qualitative aspects. This small adjustment has ensured that no matter what the world goes through, China would be going to live up to the expectations of consumerism (Brown and MacBean 2005). However, the picture one gets from Brown and MacBean’s analysis does not comply with what Hahnel has to say about the Chinese economy. Hahnel (1999) classifies China as one of the “depressed East Asian economies” characterised by financial bankruptcy at top levels of transaction (72). But considering all assessment metrics related to the automobile industry and how it has carved a niche market in China and Japan over the years, the paper will nevertheless defend the point of view shared by Brown and MacBean. Questionnaire for Conducting Interviews (You have to tick the appropriate box(es) for all questions. Please note that answers given in negative do not need any further clarification.) 1. As an importer, what are the prospective ways to cope with the recession? Choose your originating country first. Developing country Developed country i. Decreasing import share i. Shifting plants ii. Increasing production cost ii. Combination of all 2. Should the government pay the stakeholders to weather the severe crisis? If yes, justify your answer. Yes No i. Because the EU has become involved ii. Because the Australian car market initially survived the impact iii. Because states have the responsibility to secure their respective economies 3. What can be held as a sign of overcoming the adverse effects of recession? i. Increase in GDP ii. Preference to domestic workforce over foreign labours iii. Reverting back to increased production of luxury cars 4. Why do buyers tend to opt out of purchase in times of economic crisis? i. They become cost-sensitive ii. They wait for better times to come iii. They avoid paying extra surcharges for fuel economy 5. Should the American and the European countries go for sustainable automobile production? If yes, why? Yes No i. Green packaging endorses an eco-friendly business outlook ii. It would be better off to do without the rising fuel prices iii. Excessive import expenditures can be used productively for strengthening infrastructures 6. Automobile manufacturers from the developing countries should pay attention to the dollar exchange rate. Do you agree? If yes, why? Yes No i. The global trade sphere is dictated by the US dollar ii. American cars have a widespread market spanning all parts of the globe 7. Japan is the chief regulator of automobile industries worldwide. Do you agree? If yes, why? Yes No i. Japan is the largest exporter of automobile spare parts and accessories ii. Japan shares a major portion of revenues both on the US and European soil iii. Japanese cars are built to meet the changing requirements of passenger comfort, safety, and cost-effectiveness 8. Developed countries face the worst consequences of the economic recession in the post 9/11 era. Do you agree? If yes, why? Yes No i. Developed countries have bigger resource pools than developing ones ii. The automotive sectors in developed countries are complex in nature iii. Due to strategic and bulk scale investments, developed countries do not have anything to fall back on when economies go down 9. Which area has borne the brunt of the economic downturn? i. Automotive industries ii. Manpower export and employment iii. Both iv. None of the above 10. When will the recession be over? i. By the end of 2010 ii. By the end of 2014 iii. Don’t know Review of the Questionnaire The above questionnaire is made from the cues given in the paper. The questionnaire has been purposefully kept opinionated for immaterialising the possibility of a neutral stance. However, following the peer review it has been brought to the author’s notice that 2nd, 5th, and 6th questions lack analytical insights into the depth of the thesis topic. It has been suggested that these three questions should be framed using direct evidences from the relevant portions of study, so that they pack a punch while underlining the exact area of focus that the researcher might wish to explore. Moreover, reference to 9/11 in question # 8 should have been elaborated in the paper itself, so that a seemingly non-contextual point could have been justified. Apart from these shortcomings, the questionnaire would come very handy for interviewing CEOs of reputed automobile companies, suppliers, owners, and prospective buyers. List of References Allen, R. E. (1999) Financial crises and recession in the global economy. Cheltenham, Gloucestershire: Edward Elgar Publishing Brown, D. H., and MacBean, A. I. (2005) Challenges for China’s development: an enterprise perspective. New York: Routledge Dog and Lemon Guide (2010) Car industry points to ongoing recession [online] available from < http://dogandlemon.com/site/2009/08/31/car-industry-points-to-ongoing-recession/> [12 March 2010] EUbusiness (2010) US car industry on brink as EU seals huge recession package [online] available from [12 March] Hahnel, R. (1999) Panic rules!: everything you need to know about the global economy. Cambridge, Massachusetts: South End Press King, S. S., and Cushman, D. P. (1997) Lessons from the recession: a management and communication perspective. Albany: SUNY Press Law, C. M. (1991) Restructuring the global automobile industry: national and regional impacts. New York: Routledge Research and Education Association, and Finch, J. E. (1992) The essentials of marketing principles. Piscataway, New Jersey: Research & Education Assoc. Schröder, D. (2009) Entering the Electric Car Market in Germany: Strategic Management. Munich, Germany: GRIN Verlag Read More