Auto Industry Bailout

Auto Industry Bailout
A report by:
BBUS 461: Winter 2011
March 15, 2011

The automobile industry of the United States produces millions of cars each year, also a big player for the U.S. economy. The industry is led by Detroit, Michigan’s “Big Three”, Ford Motors, General Motors (GM), and Daimler Chrysler. The aforementioned automobile makers have specialized in developing trucks and sport utility vehicles such as the Ford Explorer, Chevy Suburban, and Dodge Ram. During the 90’s and early 2000’s, these specific vehicles were very popular and the big three were fortunate enough to receive very high margin from them compared to smaller vehicles. Ford, GM and Chrysler relied heavily on truck and SUV sales in order to gain substantial profits. However despite big gains from consumers purchasing millions of these types of vehicles, manufacturers did not slow down production on these trucks and SUVs during the shift in demand due to global warming and rising petroleum rates.
Cost structures of these organizations are also a key role into why the big three have been facing economic hardship. For example, GM’s extremely high employee compensation, healthcare, and other benefits programs have led to difficulty overcoming costs in order to make profits. “GM, for instance, at one time picked up the entire cost of funding health insurance premiums of its employees, their survivors and GM retirees, as the US did not have a universal health care system” (fill in later). Most of these plans were chronically underfunded and GM made arrangements with the United Auto Workers union (UAW) to transfer pension obligations to an independent trust. Not to mention the ridiculous amount of the executive bonus payouts. Nonetheless, non-unionized Japanese automakers, with their younger American workforces (and far fewer American retirees) will continue to enjoy a cost advantage.
So why do we care? Why should we as American citizens be concerned of such a poorly managed automobile...