This thesis proposal outlines my thesis paper and describes the research that is to be conducted in the next coming months.
The target audience for this study is the supervisor and the appointed supervisory committee and any interested colleagues, and its intended to get feedback on the work so far presented as well as a discussion of the research plan.
It’s hoped that there is an adequate and open minded audience that will provide a rich, constructive and valuable feedback.
I would also like to thank my supervisor and colleagues for their worthy contribution and advise this far.
The US auto industry had been, up to and until the start of the financial crisis, a very robust industry contributing significantly to the country’s GDP and also offering thousands if not millions of the much needed jobs for the country. The global financial crisis then struck in 2008, leading to declining sales in this industry.
Following this dramatic drop in the industry sales though out the year 2008, each of the big three auto makers in the United States i.e. General Motor, Chrysler and the Ford Motor group requested for emergency financing in order to address the almost impending cash flow shortages. The common thinking was that this crisis would end soon, but nothing was further from the truth. By around April 2009, the situation had gotten from bad to worse, to the extent that Chrysler and General Motors were faced with the threat of sure bankruptcy and liquidation.
The graphs below illustrate the drastic reduction in car sales in 2008.
In order to prevent massive unemployment as a result of the imminent job losses, and also the destabilization of the manufacturing industry, the Canadian and United States governments provided a substantial financial bailout, amounting to $85 billion in order to allow these companies to restructure and jettison legacy debts as provided by chapter 11 on bankruptcy (Canis & Webel,2013).
There was a considerable an animated debate on the merits of providing this much needed funding to these companies. Statistics by economists intimated that bankruptcy of the big three companies would result to almost 3 million job losses all across the United States and Canada. Estimations from government departments showed that closing these three companies would lead to a loss of personal income amounting to $151 billion, and almost $398 billion in three years. This means that the government would also spent in the excess of $ 156 billion over the three years in welfare programs.
After this bailout, General Motors emerged out of bankruptcy as a completely new company majorly owned by the treasury while Chrysler was primarily owned by the united autoworkers union as well as a significant option by Italian auto maker, fiat. The Ford Company managed to service the crisis without going to debt primarily because of a larger line of credit acquired in 2007.
It is important to note that the US automakers were more harshly affected by this crisis more than any of her counterparts in other continents such as the Toyota. As of the year 2012, the industry has recovered significantly and in fact GM had more sales than Toyota in 2011, raking in more than 9 million vehicles in sales more than Toyota. The US government, however, may have to write off about $14 billion of the original $80 billion in loans.
Statement of the problem
The action of the US government with regard to bailing out of the US automakers has been criticized from various quarters as being unlawful. Other critics argued that bailing out these companies was not necessary as bankruptcy would not lead to any significant effects on the economy of the United States, nor the labor and employment trends. The impacts of this debt restructuring as well cannot be ignored.
Significance of the study
This study underpins the importance of federal interventions when the economy is faced with such a crisis. It goes back to the Keynesian times of the 30’s when a similar global financial crisis led to subsequent studies on the roles of governments in stabilizing the economy (Ikenson, 2011). These studies will also open doors to more research on this subject, and specifically on the issue of debt restructuring in the United States automotive industry.
Objectives of the study
The study seeks to meet the following objectives
In 2008 and 2009, a slowing global economy coupled with a collapsed credit markets combined, creating the worst market for the production and sale of automotives in decades in both the US and beyond (International labor organization, 2010). Growing concerns about the possible collapse of the US auto industry led to the members of the congress as well as the bush administration to seek legislative measures to save the automakers from imminent demise. The results was the receipt by General motors’ corporation of more than $50 billion of federal assistance from the united states government through the troubled asserts relief program (TARP), in exchange for 60.8% stake in the company with the rest of the company stakes going to the united auto workers union, government of Canada and Ontario as well as holder of GM bonds. This resulted to restructuring of general motors’ in terms of reduction of workers salaried and hourly, shedding of some brands and introduction of new vehicle. The US government has however been selling her stake in the company over the years and now owns just above 17% of stake in the company (Klier et al, 2012). The table below shows the government assistance as well as its ownership in the companies.
George W bush was the first to offer assistance to the automobile industry in late 2008 and January 2009. About $24 billion has been issued in what would be part of $80billion assistance, through the troubled assets relief program, with authority from the emergence economic stabilization act that had been enacted in mid 2008 to address the emerging issues of the global financial crisis (United Nations Industrial Development Organization, 2009). A specific objective of the emergency economic stabilization act was to restore liquidity as well as the stability of the United States financial systems in a way that is beneficial to the tax payers of the United States. Please refer to the table above for the government assistance to these companies.
My research methodology requires the gathering of relevant data from the various sources and compilation of this data in order to analyze it and arrive at a more complete understanding of the debt restructuring in the United States auto industry after the 2008 global financial crisis. The researcher hopes to shed more light to the following questions through the research a) what was the impact of the global financial crisis on the United States automotive industry? (b) What was the impact of the government intervention in the industry? (c) Has the government intervention been successful? (d) Has the debt restructuring guaranteed future stability in the industry?
In order to be able to adequately address these questions, this process will utilize both qualitative and qualitative data collection tools but will generally be rooted in the epistemological position that will be able to locate the research within a particular social, historical as well as an economic context.
Data will be collected from a variety of sources. Secondary data will be collected from government departments such as department of commerce, annual reports of the big three auto makers i.e. Ford motor company, General Motors and Chrysler motors. Various existing literature will also be explored in bid to gather information on the subject of this study.
Primary data will be collected through an online questionnaire that will be sent to these companies and the various government bodies that have had a direct contact with this restructuring arrangement. The government officials as well as the management or staff of these companies participating in this study will be required to explain their understanding of the various aspects of this subject and their opinions on the success or otherwise of the restructuring program.
Data analysis and presentation
Data collected will be analyzed by the use of simple analysis tools such simple regression analysis will be utilized. Advanced analysis tools such as SPSS may also be considered depending on need. Data analyzed will be presented using graphs, tables as well s pie charts which will enable the researcher to derive comparisons and differences between the companies with regard to their debt restructuring.
Limitations and issues
This study is mainly about the automotive industry, and specifically the United States, and therefore, it may be difficult and even not logical to generalize the findings of the study to other parts of the world
Notably too, the subject of this study is motor vehicles and therefore, motorcycles are omitted in this study and therefore the findings of this study cannot relate to their subsector
The global financial crisis was a periodic happening, and not much study has actually gone into the aspect of debt restructuring in the United States auto industry, and therefore, the literature reviewed is limited to the general studies that have been conducted on the subject, with little emphasis on debt restructuring.
The Resurgence of the American Automotive Industry (2011) Adapted from: http://www.whitehouse.gov/sites/default/files/uploads/auto_report_06_01_11.pdf
Klier et al (2012) ‘‘Detroit Back from the Brink? Auto Industry Crisis and Restructuring, 2008-11’’.Economic perspectives. Adapted from http://www.questia.com/library/journal/1G1-308434835/detroit-back-from-the-brink-auto-industry-crisis
Canis,B & Webel, B (2013) The Role of TARP Assistance in the Restructuring of General Motors . Congressional research service. Adapted from http://www.fas.org/sgp/crs/misc/R41978.pdf
United Nations Industrial Development Organization (2009) Impact of the Global Economic and Financial Crisis over the Automotive Industry in Developing Countries. Adapted from: http://www.unido.org/fileadmin/user_media/Publications/Research_and_statistics/Branch_publications/Research_and_Policy/Files/Working_Papers/2009/WP%2016%20Impact%20of%20the%20Global%20Economic%20and%20Financial%20Crisis%20over%20the%20Automotive%20Industry%20in%20Developing%20Countries.pdf
Ikenson, D.J (2011) ‘‘Lasting Implications of the General Motors Bailout’’ Cato institute. Adapted from: http://www.cato.org/publications/congressional-testimony/lasting-implications-general-motors-bailout
International labor organization (2010). The global financial crisis, sectoral coverage: The automotive industry, trends and reflections. Adapted from: http://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/---sector/documents/publication/wcms_161519.pdf
Ingrassia, P (2009) ‘‘How Ford Restructured Without Federal Help’’. Wall street Journal. Stoll, J.D. et al (2008) ‘‘Big Three Seek $34 Billion Aid’’.Wall street journal
Bhai, X (2012). The Effects of the 2007-2009 Economic Crisis on Global Automobile Industry. Applied Economics Theses.
KPMG international (2008) A rough road: Effects of today’s global financial crisis on the global automotive industry.
Paletta, D & Bennett (2013) ‘‘U.S. to Sell Rest of GM Stake by Year-End’’ Wall street Journal. Adapted from: http://online.wsj.com/news/articles/SB10001424052702303653004579211753302703562
International labor organization (2009) the crisis and the future of the automobile industry: Putting the spark back into the automobile industry.
Pavlinek,P (2010) ‘‘The impact of the 2008–2009 crisis on the automotive industry: global trends and firm-level effects in Central Europe’’.Sage journals. Adapted from http://eur.sagepub.com/content/early/2012/10/23/0969776412460534.abstract