Fall of Big-Three

It is really hard to start blogging abt auto industry(my favorite) at a time when the industry is at an all time low. Detroit once considered the capital of auto industry is now under nasty debris. The filing of bankruptcy by Chrysler(30th April) and General Motors(1st June) only show how bad things are. Not long ago GM was the world`s largest automaker. Now it has become the largest industrial company to file bankruptcy in the U.S history.

G.M was founded in 1908 by William C. Durant, who brought several car companies under one roof and developed a strategy of "a car for every purse and purpose." Longtime leader Alfred P. Sloan built the global automaker into a corporate icon. G.M was the global sales leader for 77 consecutive calendar years from 1931 to 2007. It manufactures cars and trucks in 34 countries and sold and serviced vehicles in some 140 countries under the brands Buick, Cadillac, Chevrolet, GMC(General Motor Truck company), GM Daewoo, Holden, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling. G.M employs 244,500 people around the world.

With the bankruptcy filing, GM is said to become leaner and greener company with fewer plants and trimmed down work force. GM will move forward with four North American based core brands — Chevrolet, Cadillac, Buick and GMC and will cut or sell its other brands. It has already announced plans to sell major stakes in Opel and Vauxhall brands to a consortium of Magna International of Canada and Russian-owned Sberbank. Under the deal, Magna will take a 20 per cent stake and Sberbank will take a 35 per cent stake, giving their consortium a majority. GM will retain a 35 per cent holding, while the remaining 10 per cent will go to Opel employees. G.M also announced plans to sell the Hummer brand to Chinese based Sichuan Tengzhong Heavy Industrial Machinery Company. G.M has also put the Saab and Saturn brand for sell and has announced that it would phase out the Pontiac brand by the end of 2010.

Earlier this month President Obama forced Chrysler into federal bankruptcy protection so it could pursue a lifesaving alliance with the Italian automaker Fiat. With this move the United Automobile Workers (UAW) will hold 55% in Chrysler, Fiat will take 20% initially( but can grow its stake up to 35%). [The UAW was founded in 1935 and is one of the largest unions in North America, claiming over 500,000 active members in sectors extending far beyond the auto industry.] The U.S and Canadian govt will hold 8% and 2% stake respectively. Currently Cerberus Capital Management holds 80% stake and Daimler of Germany holds the remaining 20% in Chrysler.It was a humbling moment for the nation’s third-largest automaker, which recovered strongly after a near bankruptcy in 1979 with help from the (then president) Jimmy Carter administration.

The third of the one-time Big Three, Ford Motor Co., has also been stung hard by plunging sales of cars and trucks, but it avoided bankruptcy by mortgaging all of its assets in 2006 to borrow roughly $25 billion, giving it a financial cushion GM and Chrysler lacked.

The downfall of these Big-Three is mainly due to their manufacturing idea which remained less relevant to the rapidly changing world. While the Big Three are known for their bulky and less efficient vehicles, its competitors (the European and especially the Japanese companies) are better known for compact, highly efficient cars. As a result the Big three could not adjust to a new consumers who preferred Eco-friendly cars. This can be seen from the fact that Toyota displaced Ford from its second position(according to world wide sales) which Ford held for last 56 years. Last year Toyota became the largest auto maker displacing GM.

With President Obama bringing stricter laws in auto emission and efficiency standards things are said to change. The new rules will require a fleet fuel efficiency standard of 35.5 miles per gallon(mpg) by model year 2016, a big jump from the 2009 model year requirement of 25 mpg. The changes (when compared to current pollution and vehicle use totals) will have the effect of removing 900 million metric tons of carbon dioxide from the air, taking 177 million cars off the road, and shutting down 194 coal-fired power plants. The standards are expected to increase the cost of a vehicle, on average, by $1,300 by 2016. But the initial cost is said to much less compared to the savings in gasoline expenses over the life of the vehicle.

For 2016 -- the final year new the rules will apply -- the fleet fuel efficiency standard for all domestically sold passenger cars will be 39 mpg. It will be 30 mpg for all domestically sold light trucks and sport utility vehicles. The average of these two equals a passenger car and light truck fuel efficiency standard of 35.5 mpg. The current requirements are 27.5 mpg for cars and 23.1 mpg or trucks. The new rule will incorporate tougher Californian standards and a uniform standards are expected to be followed throughout the U.S, a move that allows Detroit's big three to walk into the future carrying one anvil instead of two(currently the companies have have to meet 2 standards in U.S: the federal standards and the Californian standards).California ordered a fleet average of 35.5 mpg by 2016. The old federal standard sought that efficiency by 2020. The new federal standards will match California's -- but do so in a way that protects Detroit from having to produce one fleet of cars to meet the tougher California standard (embraced by 13 other states) while simultaneously producing another fleet that met the more lax federal standards.

It is hard to enforce such tough laws when everything is going fine. If President Obama can take advantage of this depression to enforce such path-breaking laws which can change the image of Big-Three as a more-efficient,smaller and greener car manufacturers, it will be great achievement on his part and this Great depression II can very well turn out to be a blessing in disguise.