2007 Economic Crisis on American Thesis

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One of the main factors which incremented this crisis even more was the expensive cost of automobile fuel, this was linked to the global oil crisis which occurred before the automobile crisis. The rise in fuel prices caused the general consumer to shift in their demand and they now opted to buy except for the large vehicles such as pickup trucks or SUV's as compared to the other vehicles available in the market since the larger vehicles tend to use more fuel.

Another major factor which aggravated the crisis was the considerably high cost of labor which was greater as compared to the labor's counterparts in non-unions, this included salaries, healthcare benefits, pensions and other related job benefits. The management while demanding labor peace granted many concessions to their unions which resulted in significant legacy costs as well as uncompetitive cost structures.

Moreover, the total amount of cars being sold in the United States market were being significantly tied with the credit of home equity lines, with some twenty four percent of total sales being financed through this way in the year 2006. When these loans' availability dried up due to the 2008 mortgage crisis, sales of vehicles declined drastically, from over fifteen million in 2006 to just above ten million in 2009.

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According to many consumer reports being published in the year of 2006, the best cars preferred by critics as well as the consumers were of Asian origins, in some reports the favor to Asian firms was so immense that they considered all of their top ten cars to be from Asian manufacturers especially giving credit to the Japanese companies. At the same time the Big Three American firms were making job cuts, an example of this is Michigan which lost eighty three thousand auto manufacturing jobs between the fifteen year timeline of 1993-2008, much of this cut was associated with the Big Three firms.

TOPIC: Thesis on 2007 Economic Crisis on American Assignment

At the time of the mentioned job cut period, many auto manufacturing jobs were created elsewhere especially by the foreign firms in cities such as Tennessee, Alabama, Kentucky, North and South Carolina, Texas, Mississippi and Virginia. The total number of new jobs here was more than 90000. This also pressured the local American car manufacturing firms in competitive terms.

Source: GoodCarBadCar.net

The above char shows the slump in U.S. new vehicle market size during the 2008 automobile crisis, it also points towards a recovery taking effect after 2009.

As we can see from above, the sales of the Big Three firms are significantly lower as compared to their rival firms in the United States even before the start of the automobile crisis.

II b). Industry data and related facts

During the first half of 2008, the total employees in the Big Three firms including car-dealers and parts suppliers totaled at more than one and a half million. When looking at the entire employment figures related to automobile industry including the Big Three then the total personnel this industry employed numbered at around 3.1 million in U.S. which also included after-market service businesses.

According to the United States bureau of labor statistics the proper break down of workers in the automobile sector was as follows, until September 2008: repair operations involved eight hundred and sixty four thousand personnel, parts manufacturing involved five hundred and four thousand personnel, wholesale operations involved three hundred and forty thousand personnel, manufacturing involved one hundred and fourteen thousand personnel and dealer operations had 1.2 million personnel.

Also, some estimated 2 million personnel were relying on the healthcare offered by the automobile industry and seven hundred and seventy five thousand retired personnel collected their pensions from this industry. Here, General Motors was a leading employer which directly employed more than one hundred and twenty thousand employees in the United States.

The hourly wages being given to workers was relatively same when comparing the offerings by the Big Three firms and the rest of the automobile industries. For example the basic hourly wage earned by any UAW (United auto workers, which is an important workers union in the United States) worker working for any of the Big Three was close to what was earned by any Honda or Toyota worker at their U.S. plants. The average wage for an experienced UAW worker was close to $28 for an hour in early 2008.

For any new worker the rate of hourly wage was close to $14 for an hour therefore experience was counted significantly here as the senior workers were offered better pay. A huge cost difference between the employees working for any firm with foreign origin in U.S. And the UAW members came in fringe benefits. Here, it should also be noted that UAW has been regarded as one of the most successful unions in America in terms of fighting for health benefits as well as generous pensions for its members.

The total compensation is often defined as the total cost of labor afforded by the firms, for General Motors it was close to $70 per hour, for Toyota it was about $45. In this sense the average cost difference that existed between foreign nameplate firms and the Big Three was about $25 per hour. This difference was considered to be enormous and impacted all the departments in the firm especially wages, pension and healthcare. "Pay rate should be according to experience of the employee" (Yeager 1998).

Looking at the average annual wages for Big Three's production workers then it was estimated to be around $67,500 in the year 2007, and about $80,000 for more skilled personnel. The overall ratio of retirees with workers varied in the Big Three, here for every active worker at General Motors there were some 4 retirees calculated until the year 2006, at Chrysler the retirees or dependents numbered around 2 for a worker and at Ford this was somewhere close to 1.5per worker. This data translated as the cost burden of legacy labor being much higher for General Motors as compared to any of its competitors.

According to many critics and business analysts, the huge labor and other costs such as product development kept the Big Three firms away from developing any high quality product which is essential for profits as well as for survival in a competitive environment.

Source: Bloomberg

The above figure summarizes a brief picture of the slum in sales in automobiles in the U.S. market.

The employees of foreign nameplate firms working in the United States were mainly non-unionized, comparing them to the Big Three firms then the later was binding its workforce through contracts with UAW. According to data provided by UAW, the total labor costs represented about eight percent of the entire cost of manufacturing as well as selling an automobile in the year 2006.

Here the great majority of costs came at creating a vehicle and transferring it to its dealership authority, preparing it for sales which include engineering, marketing, design, executive compensation and besides these any other related costs are not considered as direct or indirect form of manufacturing labor.

In 2005 a story was uncovered by some of the leading news outlets claiming that the Big Three have paid more than ten thousand idled workers their complete salary and benefits in a program named "Jobs bank." This program was created during the UAW's labor contracts in 1984 with the Big Three, the purpose of this was to provide protection to the salaries of employees and discourage any sort of layoffs which might be expected later on, this was a significant point in the contracts between the automakers and UAW.

Here, the main interest of the union was to save jobs through a plan which guarantees pay and other related benefits for the union members especially those whose jobs were laid down due to any sort of technological progress or any new restructuring in the plant. In many of the cases the employees were being paid through the jobs bank only if they have exhausted company's and government's unemployment benefits. Many of those employees were later placed in retraining.

Due to the process of Jobs Banks, the American automakers were obligated through contract to pay some ninety percent of the benefits and union wages to the members of UAW which are not working, even though their manufacturing plants have been closed. According to this agreement, General Motors would give more than two billion dollars as Jobs Bank payment over a period of four years, Chrysler would allocate some $450 million for its own program alongside another $50 million which are reserved for salaried union employees, for similar purposes Ford had also set aside some $950 million.

According to many analysts, this Jobs Bank scheme was one of the biggest problems which the Big Three firms faced during the automobile crisis and even before it. This gave enormous amount of benefits to workers which resulted in great deal of financial being transferred irregularly, this capital could… [END OF PREVIEW] . . . READ MORE

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