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The Automotive Ice Age

During the past year, the three major American automakers, Ford, GM and Chrysler have witnessed a ghastly drop in sales with estimates reaching levels not scene in 27 years.  Ford reported sales decreases of 30 percent, while Chrysler’s sales are down 35 percent for this month, leaving GM the biggest loser with its sales declining approximately 45 percent from last year’s.  Robert Shultz, S&P’s lead automotive analyst, has warned that without the help of federal aid, the big three may be endanger of filing for bankruptcy.  Renee Rashid-Merem, a spokeswoman for GM, has denied these claims saying, “Bankruptcy is not an option GM is considering.” 

Investors don’t seem convinced of a speedy recover as stock prices continue to fall in recent months.  According to a report published by Global Insight in early October, auto sales are forecasted to reach recession levels by the end of 2008 and fall even lower in 2009.  It is no surprise that top executives from all three motor companies find themselves before Congress asking for 25 billion in government loans to provide relief in times of economic hardships.  Many critics believe there should be no relief for these automakers, allowing the free market to decide their fate.  If conditions persist, there is a strong possibility that the big three may cease to exist in the near future.  Right now may be the beginning of an automotive ice age.

What factors led up to the rapid decline of auto sales throughout the American auto industry?  In the beginning of the year, high gas prices pushed consumers out of trucks and sport utility vehicles into cars and crossovers.  Automakers saw a small portion of their profits decline as consumer preference changed from vehicles yielding higher margins to less pricy alternatives.  U.S. automakers were especially hit as many consumers switched to foreign automakers like Honda and Toyota because of the smaller vehicles they were offering.  The credit crunch would be another factor attributing to a portion of declining sales.  Because new automobile price tags are a high percentage of the averages consumer’s yearly income, it is no wonder that failure to obtain adequate financing by the average consumer would constitute such a result.  Even with financing, consumers are hesitant to spend money as economic conditions continue to worsen.  The unsettling change in consumer taste is perhaps the biggest factor contributing to the decline of sales throughout the auto industry.  Simply put, people just aren’t buying cars anymore.

Declining sales volume is a big problem for automakers like Ford and GM considering that both motor companies are highly leveraged.  In other words, they exhibit high operating leverage.  Without getting into the technicalities, operating leverage is simply the ratio of a company’s contribution margin to its profits.  Low operating leverage exhibits low fixed costs and high unit variable costs, while high operating leverage exhibits high fixed costs and low unit variable costs.  A higher operating leverage indicates that a change in sales volume will have a relatively greater impact on profits.  This is desirable for a company who is operating above the breakeven point, or where revenues exceed costs.  As sales volumes increase, fixed costs remain the same and variable costs are low so increasing sales volume does not drastically impact costs.  Both Ford and GM are operating below the breakeven point and because they exhibit high operating leverage their profits have suffered by a larger degree due the burden of high fixed costs.  High operating leverage is the reason why sales volume is such a crucial factor for the survival of these U.S. automakers.  Revenues must exceed costs so profits remain respectively less effected by higher fixed costs. 

A large factor contributing to Ford and GM’s fixed costs is their labor force.  United Auto Workers’ union has set up negotiations for job banks in which workers are paid while there is no work at the plant.  If Ford and GM aren’t selling high volumes of motor vehicles and workers are still receiving pay checks, than these automakers won’t be able to cover their fixed salary expenses with such low sales volume.  To try and alleviate a great portion of their fixed costs, Ford, GM, and Chrysler are offering buyout programs or early retirement offers to employees on salary.  Chrysler says they are attempting to reduce their salaried staff by 25 percent by the end of the year.  GM has already eliminated about 5,100 salaried employees and cut benefits for current employees and retirees.  At the same time, all three automakers are cutting prices and starting their year-end sales early in attempt to boost sales volume.  If the big three can decrease their fixed expenses and increase their sales volume enough to cover costs and exceed the breakeven point, they will have a chance of survival.  It is hard to reach any conclusion about what the future holds for Ford, GM and Chrysler. It is possible that the world may be witnessing the first ever automotive ice age. 

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which of these People WILL BE MORE SUCCESSFUL?

which of these people will MOST LIKELY have greater success in their life??

PERSON B:
has only a high school education, BUT, has a great deal of street smarts and has great leadership skills.

You can't teach street smart or leadership skills.

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