Academic journal article Economic Perspectives

Detroit Back from the Brink? Auto Industry Crisis and Restructuring, 2008-11

Academic journal article Economic Perspectives

Detroit Back from the Brink? Auto Industry Crisis and Restructuring, 2008-11

Article excerpt

Introduction and summary

The Great Recession of 2008-09 took a severe toll on the U.S. auto industry. Faced with a combination of declining sales, high structural costs, and high levels of debt, Chrysler LLC and General Motors Corporation (GM)--two of the three Detroit-based carmakers-approached the federal government for help. The third Detroit-based carmaker, Ford Motor Company, did not seek government assistance. In late December 2008 and early January 2009, Chrysler and GM, as well as their former financing captives, (1) received a first wave of financial support from the U.S. government. After several attempts to restructure their operations failed, the two companies filed for bankruptcy in the spring of 2009, an action that only a few months earlier GM chief executive officer (CEO) Rick Wagoner had declared to a U.S. Senate Committee was "not an option" (Economist, 2009).

In this article, we review the crisis experienced by the U.S. auto industry during 2008 and 2009, as well as the unprecedented government intervention prompted by a constellation of events that might be called a "perfect storm." We then analyze how the auto industry has changed in some very significant ways as a result of the crisis. This article continues a narrative begun in an earlier article (Klier, 2009), which documented the challenges facing the Detroit Three carmakers through 2007, first from foreign imports and then from North American-based production by foreign-headquartered producers.

Declining fortunes of the Detroit Three

As part of the severe recession of 2008-09, the United States experienced its sharpest decline in production and sales of motor vehicles since World War II. Sales of light vehicles (cars and light trucks) in the United States dropped from 16.2 million in 2007 to 13.5 million in 2008, and then to 10.1 million in 2009 (figure 1). In addition to rising unemployment, tightening credit markets contributed significantly to the sales decline, as 90 percent of consumers finance automobile purchases through loans, either directly from the financing arms of the vehicle manufacturers or through third-party financial institutions. Both types of lenders experienced difficulty in raising capital to finance loans at the time. (2) "By midsummer of 2008, the nightmare scenario was coming to life--soaring fuel prices, a miserable economy, no credit for consumers." As the market was deteriorating by the day, "[m]ore than fifteen Big Three assembly plants were either idling or operating on reduced shifts. Twenty-five thousand UAW workers went on indefinite layoff, as Detroit frantically tried to cut production faster than sales fell.... The American auto industry was collapsing like a tent in a hurricane" (Vlasic, 2011, p. 284).The steep decline in sales during 2008 and 2009 was particularly disruptive for carmakers because it ended nearly a decade of stable sales at record-high levels of 16-17 million units per year. During the second half of the twentieth century, sales had soared from 6 million units in 1950 to 17 million in 2000, yet short-term cyclical changes with double-digit annual percentage changes were typical until 1991, with sales fluctuating by more than 10 percent during ten of the previous 24 years. In contrast, between 1992 and 2007 annual sales figures rarely fluctuated by more than 3 percent per year. (3) After two decades of remarkable stability, carmakers had come to rely on high volumes of vehicle sales and had made their investment decisions accordingly.

[FIGURE 1 OMITTED]

The sales decline was more severe for the Detroit Three carmakers than for their foreign-headquartered competitors. Combined U.S. sales for Chrysler, Ford, and GM fell from 8.1 million in 2007 to 4.6 million in 2009. Their combined market share declined from 50 percent to 44 percent during these two years. (4) The Detroit Three carmakers were vulnerable during the severe recession in part because their viability depended critically on selling large volumes of light trucks--minivans, sport utility vehicles (SUVs), and pickups--a segment of the market that declined relatively rapidly during the recession. …

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