The traditional U.S. auto industry (the Big Three) has struggled for many years
ID: 1168602 • Letter: T
Question
The traditional U.S. auto industry (the Big Three) has struggled for many years against competition from foreign-owned automobile companies. Their struggle was dramatically heightened in 2008 with the world-wide credit crunch and economic slowdown.
Automakers came to Washington in late 2008 asking for Federal financial aid to avoid bankruptcy and possible liquidation. Their reception was chilly, but after heated debate, General Motors and Chrysler were granted government loans and loan guarantees. Ford Motor Company decided to rescind its request for government aid in order to avoid the conditions placed upon the proffered loans. At present, Ford and General Motors are profitable again; Chrysler continues to struggle but is making some economic headway. As part of the conditions placed upon the economic assistance, Chrysler is now controlled by Fiat.
Should the U.S. Government (which means, the U.S. taxpayers) have aided the automobile industry? Why or why not? As part of your discussion, keep in mind that the U.S. already has another successful automobile manufacturing industry, but it is not centered in the north of the country. Toyota, Honda, Daimler-Benz, and others have manufacturing plants in the South that, although impacted by credit crunches and recessions, have done well while the Big Three struggled.
What policy towards the automakers should we pursue? Should government leaders have provided outright grants to struggling automakers; what about more loans or loan guarantees? Should we have stood back and let the market determine which companies stood or fell? Should we have encouraged mergers, and, if so, based on what criteria?
Concentrate on using your managerial economics knowledge, tools, and concepts to weigh the pros and cons of the alternative paths the government could follow regarding domestic automakers. Make your arguments as a trained economist able to rationally analyze a vexing problem. Support your positions with the wealth of material in this week's assigned reading.
Explanation / Answer
The U.S. government should aid the automobile industry as it offers huge number of employment to people. Also, it contributes to output of US economy. Though, these aids should come with certain terms and conditions helps to achieve a controlled growth of the industry. Also, US automobile industry consists of many reputed companies. The falling down of these companies will give the wrong message to world economy and create panic in the overall US economy. Thus, not offering support to the industry will create much harm to the economy.
It is true that companies like Toyota, Honda are well established in south of the USA and other struggling companies should learn lessons from their lean operation and quality management practices. The onus falls back to US government to devise a plan that protects companies from recessionary effects.
Policy of financial support in a phased manner with defined goals and objectives should be adopted by the government. It will not be an outright grant, but a loan assistance with certain terms that will help in control and monitoring process. We should not let market to decide everything because the government has to consider the overall health of the economy, employment and output. Mergers can be encouraged if it brings those companies together who complement each other. It will help consolidation and reduction of losses. Though, the government has to take care of market concentration. It can be identified through the HHI index.
Government can categorize ailing companies into different categories and offer different bailout packages on a case to case basis. Here, the government should not be biased in favor or against any company in grating assistance. Besides offering financial aid, the government can also invite other private players to contribute in bailout packages. Banks can also be encouraged to offer support through consortium banking or syndicate banking.
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