Is Bailout plan for Auto Industry a bridge to prosperity?

Background
US market is one of the most aggressive markets of the world, as on one side this market enables you to generate high returns and while on the other side it is highly competitive. Ups and downs are part of any economic cycle but downfall which started in 2008 was not a common decline. From the middle of 2008, economies are experiencing recession and if conditions didn’t change then it will eventually grow to a depression. This downfall basically started with the mortgage crisis leading to collapse of insurance companies. This crisis was of such a huge scale that it massively damaged huge companies like Lehman Brothers, Citi Group and AIG Insurance. These companies were considered to be strongest in their business but downfall was much more powerful and it made these huge giants to bow on their knees and go bankrupt.

Important thing is that story does not end here, as this crisis kept on increasing. Economies of the whole world saw a set back, as both developing and developed economies experienced worst conditions. Basic reason behind this fall was mortgage crisis which caused decreased customer spending and eventually declined economic growth rate.

US Auto Sector
In USA, along with other sectors, one of the most important sectors which has been brutally struck by this recession is Auto Industry. About 10% of US employees are employed in auto and auto-associated industries. Three major players of US auto industry are; General Motors, Chrysler and Ford. These three manufacturers are also known as Big Three. Approximately 2.5 million people are employed by Big Three, which means that almost 2 percent of the nation’s working force is attached with these three market players. Of these three, Ford and General Motors are publically listed companies while Chrysler is still a privately held company.

Problems
Although Big Three have witnessed a wonderful past with increasing profits and rising share prices, but the final quarter of 2008 was one of the worst nightmares for them. US auto sales have gone down from 17 million in 2007 to just 11 million in 2008. This decline of about 38 percent in sales has viciously damaged profits of Big Three, as they are facing highest losses of the past three decades. Either it was only result of global recession or incompetency of domestic companies against foreign competitors, conditions brought Big Three near to be filed as bankrupt.

Even though these companies reacted with multiple layoffs and elimination of many production plants but they were still unable to assure survival. As a result of this they requested government to step in and help them by designing a special bailout plan for them as initially Big Three sought for a $34 billion loan. With this request multiple views and comments generated,  which were both in favor and against bailout plan for auto industry.

Big Three must be supported
Group which was in favor of bailout plan stated that auto industry is one of the major industries of USA which has millions of families associated with it. Fall of this industry or even fall of the Big Three will result in increased problems. They had view that at a time when economy is already suffering with mortgage crisis and record unemployment rate, bankruptcy of such huge employers will lead to further deteriorated conditions. Another view was that Big Three are not common organizations, they are actually Icons and if they would be ignored by the government then it will simply lead to decreased motivation and increased risk aversion of the whole economy. Along with this it was expected that if conditions are not dealt amicably then it will bring an end to US auto manufacturers as they will never be able to again compete with foreign companies.

They don’t deserve it anymore
On the other side, critics of bailout plan considered it to be an unnecessary thing. Their view was that Big Three are themselves responsible for their current conditions as they are not equally competitive to their foreign competitors; Honda and Toyota.

Furthermore they had view that providing funds to auto industry at this time will be like an act to save a ship which will eventually drown and bailout plan will just delay the day of reckoning. No matter what were the public and official comments, Big Three were provided financial support. Of them GM and Chrysler are already provided $17.4 billion loan. Ford has not taken any loan but it has requested to provide $9 billion credit line.

Are they back?
It was assumed that these loans and support program will never be able to help the auto companies. Although expected demand conditions supported the fact that it was an end of Big Three. But today figures are advocating the opposite side of picture. Ford is being able to massively decrease its cost and one of the reasons behind this is successful negotiation with the United Auto Workers (UAW). On the other hand there are positive signs seen from GM as well. Restructuring, shutdowns and layoffs are showing up positive results. In an announcement they told that for the time they don’t need the $2 billion dollars loan which they were going to receive in March. Chrysler has also taken multiple actions. Chrysler stated that its product plan includes 24 launches from 2009 to 2012 and of them all will be much more fuel-efficient and environment-friendly models.

In the long term, US Auto sector will rise up again due to being competitive; but it will not be the biggest one. In the past Big Three never performed at their best; a set-back that is bringing positive changes in all these companies. From these constructive transforms, it can be expected that without any government support Ford will successfully survive in this recession. While GM and Chrysler will surely make their returns and show positive results including payback of loan and regaining of lost market share.