Implications of the GM Situation in the US Economy - Case Study Example

Name Tutor Course Date General Motors General Motors is among the largest motor vehicle manufacturers in the whole world, only challenged by Toyota. With over a quarter a million employees in each key region spread over thirty five nations across the globe, General Motors boast of a wide network in all the continents. The company has business ventures in over one hundred and forty countries. Head offices are located in Renaissance centre in Detroit city of Michigan in the United States of America. It should be noted that the company traces its origin in Michigan at a place known as Flint. William C. Durant is credited to have come with the idea that gave birth to this noble company that has spread across the world. Currently, the company has major centers in the United States of America, England, Peoples’ Republic of China, Germany, Italy, Canada and Brazil. Models being manufactured include Chevrolet, Buick, Cadillac, GMC, Daewoo, Pontiac, Holden, Wuling, Vauxhall and Opel. Since its inception, General Motors has had twenty one presidents. The company underwent a serious financial crisis between 2006 and 2008 which had far reaching effects to the economy and led to restructuring to realize profits once again. (Hitt 96) General Motor’s mission is to exceed every expectation set for it. Its financing arm is known as General Motors Acceptance Corporation (GMAC). It can be imperatively noted that General Motors Corporation recorded over eight million sales of cars and trucks. The company has put structures in place to maintain its competitiveness at affordable costs. ORGANIZATION STRUCTURE OF GENERAL MOTORS The effects of the world economic downturn were felt in all corners and major companies and financial institutions were not an exception. Among the worst hit companies was General Motors which was already having its own internal financial issues. GM is embedded into the very core of America’s economy. It forms part of the backbone of United States manufacturing sector, plays a pivotal role in extended research and development, and greatly aids various communities across the country. General Motors today remains a key force of the United States economy, taking in a tenth of American employees, and is a great consumer of U.S. iron, steel, copper, plastics, rubber aluminum, and electronic components. As it is the case with most motor vehicle companies, has continual faced many hurdles due to the ever increasing competition from other players which offer little heath care support and give minimal wages. General Motors on its part has spent over one hundred billion dollars on its employees’ welfare against a biting strain on its revenue and need to cost cut in order to favorably compete in the current volatile market that has been flooded by cheaper alternatives. Given these circumstances, the company faces a heavy challenge to meet its business objectives. (Hitt 112) It is also important to note that General Motors has a greatly philanthropic corporate responsibility that considers the environment, safety, diversity, community, and partnership. Concerning the environment, the company seeks to adhere to laid down environmental policies at all costs, producing greener vehicles which are economic on fuels and some to use bio-fuels, recycling to give a new lease of life to used vehicles and ensuring sustainable manufacturing for renewable energy, reduced emissions and waste. The company is also keen on ensuring safety in manufactured vehicles thus minimizing all possible risks. Diversity, community outreach programs and partnership are important pillars that cannot be ignored the General, Motors budget. These responsibilities have cost implications on GM. The financial crisis that bedeviled General Motors can be traced back to the last decade of the twentieth century. During such a given moment, General Motors Company recorded a substantial decline in sales leading to a huge loss. A sample case is in 1991 when the company made a record loss of over four billion U.S Dollars due to low sales. This loss almost made the company insolvent and drastic measures that included cutting on cost and streamlined management to restore gains for the next ten years. In 2005, the company yet again recorded a whooping loss amounting to over ten billion U.S dollars. An attempt to get financial support to cater for pension flopped and the company recorded a further loss of thirty eight billion U.S dollars, the highest loss in its history. A heavy decline in sales was recorded and by November 2008, the company raised an alarm of a likely running bankrupt by June on 2009. By this time, the company started making frantic efforts to obtain government funding. This bid was jointly done with Ford and Chrysler and was unfortunately rejected and instead requested to draft an elaborate plan to sustain the company in these difficult financial times. (Hitt 112) Following substantial deliberations on this weighty matter, the management on General Motors Company drafted and submitted a working plan on “Restructuring Plan for Long-Term Viability" to the Banking committee of the senate. Again this initial proposal was not favored by the congress, plunging the company into further crisis. The continued string of losses eventually compelled the then Chief Executive Officer, Sir Rick Wagoner to step aside from his position. The advent of President Barrack Obama’s administration required that the company makes radical decisions to salvage its precarious financial situation. Eventually, the company filled in a Chapter eleven bankruptcy to avoid being placed under receivership. Bernstein financial analyst linked the unfortunate turn of events to the company’s plan on cutting prices rather than the product line such that more vehicle had to be sold at rate that do not meet even the marginal cost. The financial crisis This financial crisis had far reaching effects not only to the company management but the entire workforce as well. Perhaps the worst hit by the situation are the employees of the company. The crisis has greatly led to a decline in sales made by the company and its instability in seriously damaging investor confidence. Most business partners are uncertain about engaging further deals with the company whose future hangs in balance. The condition is further complicated by the government unwillingness to bail out the company, given that even financial institutions are faced by similar crises. The impacts have been felt right from the top management where the Chief Executive Officer had to bow to the pressure and relinquish his position due to a recurrent string of losses. The transport sector is equally entangled in the crisis. Given the immense contribution on General Motors to the transport sector, a downward spiral of the company directly impacts the transport and allied industry. For instance, most transport businesses dependant on the company face similar challenges. On the other hand, the supply chain market for material such as iron, steel, rubber, plastic and electronic components is hampered. Thus the industries supplying these materials equally feel the trickling effect of a financially crippled institution. (Barabba 87) As earlier indicated, the employees are the most vulnerable victims of this financial quagmire. Being direct beneficiaries of the company in terms on salaries, allowances healthcare and retirement benefits, an imminent collapse of the company spells doom to this committed workforce whose numbers are way beyond three million. All their families which are indeed dependant on the company are thus affected by the downward trend of the company. The effects on families can be quantified in the senses that close to a hundred billion U.S dollars on health care and pension for its staff. The expenses go a long way in catering for the staff welfare in various ways to their satisfaction. Given the debt situation that has caused government reluctance in bailing out the company, the company’s future is uncertain. As by February 2009, the company was not in a position to service its current debts and thus it was not eligible for bigger loans. Shareholders are thus equally recording losses since dividends are not tenable in the current financial situation. Most financial institutions are very wary in their dealings with General Motors lest they get entangled in a similar predicament. The delicate financial situation has put the company’s top management on the spot concerning its unprofitable strategies. Restructuring thus is inevitable. Since research points out that most losses were incurred due to cutting prices with a view of improving the sales, there is need to review this strategy and consider checking the product line to meet the demand at the given moment. Other companies that offer various service services are also affected by the financial crisis bedeviling the company. For instance, electronic suppliers, plastic and rubber industries, iron and steel manufacturing industries which supply General Motors with the specific raw materials feel the crunch when General Motors goes through tough economic moments since their market is affected. (Leslie 76) Likewise, other business entities such as retail firms and brokers are equally drawn in the impacts on GM financial crisis. Further, being a recognized global manufacturing industry its financial problems ripple to other sectors of the world economy. Implications of the GM situation on US economy Effects of this financial crisis on the U.S economy are immense and far reaching. Perhaps the worst hit by the situation are the employees of the company. The crisis has greatly led to a decline in sales made by the company and its instability in seriously damaging investor confidence. Most business partners are uncertain about engaging further deals with the company whose future hangs in balance. The condition is further complicated by the government unwillingness to bail out the company, given that even financial institutions are faced by similar crises. The impacts have been felt right from the top management where the Chief Executive Officer had to bow to the pressure and relinquish his position due to a recurrent string of losses. The supply chain market for material such as iron, steel, rubber, plastic and electronic components is hampered. Thus the industries supplying these materials equally feel the trickling effect of a financially crippled institution. The transport sector is equally entangled in the crisis. Given the immense contribution on General Motors to the transport sector, a downward spiral of the company directly impacts the transport and allied industry. For instance, most transport businesses dependant on the company face similar challenges. (Leslie 74) General Motors is a major employer in the US economy, taking in at least one of every ten employees. Being direct beneficiaries of the company in terms on salaries, allowances healthcare and retirement benefits, an imminent collapse of the company spells doom to this committed workforce whose numbers are way beyond three million. All their families which are indeed dependant on the company are thus affected by the downward trend of the company. The effects on families can be quantified given that close to a hundred and three billion U.S dollars on health care and pension was spent on its staff. Returns from this industry are very essential in other sectors of the economy. Taxes drawn from General Motors make an immense contribution to the US economy. A fall in the company’s returns thus greatly affects government revenue drawn from the company and its allied and associated companies. Being a leading exporter of vehicle form the United States market, the decline in sales and profits of the company greatly reduces its favorable competitiveness on the global arena, giving new players on edge over its premier dominance in the automobile and export on the same. (Barabba 57) Other companies that offer various service services are also affected by the financial crisis bedeviling the company. For instance, electronic suppliers, plastic and rubber industries, iron and steel manufacturing industries which supply General Motors with the specific raw materials feel the crunch when General Motors goes through tough economic moments since their market is affected. Likewise, other business entities such as retail firms and brokers are equally drawn in the impacts on GM financial crisis. Further, being a recognized global manufacturing industry its financial problems ripple to other sectors of the world economy. Research and development is no doubt a key aspect in the US economy. General Motors acknowledges this fact and have an elaborate centre for the same. GM financial issues adversely affect research and jeopardize the nations’ global position in car and truck manufacture. Given the important role the General Motors play in research and development of vehicles, a financial crisis in the company greatly destabilizes the country.( Barabba 66) In general, the company forms part of the United States economic backbone and shifts in the financial status of the company greatly affect the economy in almost all the related areas and a quick solution is required to avoid an economic slump. Strategies adopted to alleviate the situation Recurrence of financial crises in the company and government concerns has necessited an inevitable to overhaul redundant systems and structure in order to restore the company’s profit making trend. The key objectives of the restructuring program are to create self-sustenance, improve competitiveness in terms of cost, and foster economic fuel use and sustained profitability in the company. Further, the strategy focuses on four major areas which are; reducing the number of vehicle brands and retails points for the company. This is to ensure full utilization of the available resources for efficiency which in turn ensures maximum gain from the sales. The costs involved in making many brands can be channeled to other sectors in the company to stretch the profit margin further. (Hitt 212) Restructuring the salaries, wages and allowances for the company’s employees has been advanced to give packages that truly reflect the position of the company. Attractive pays that gives employees a value for their input are instituted while keeping watch on the available finances so as the budget is not strained. Federal assistance has been enlisted to bail out the company from an imminent insolvency. The balance sheet in this case has been modified and liquidity supplemented for by the Federal Reserve. The action plan elaborately outlines the ways in which the company seeks to come out from the current economic situation. (Hitt 216) General Motors seeks to comply fully with the 2007 Energy Independent and Security Act and plans to reduce production cost as much as it is practically possible. In addition, the company seeks to manufacture vehicles that are cost and fuel economic both to the company and the consumer. Current situation In as much as the company is yet to fully mitigate the effects of the financial crisis that peaked in 2008, a number of stride have been made since it signed in for chapter eleven bankruptcy. This chapter of bankruptcy has indeed given General Motors an opportunity to reorganize and position itself back to profitability. After being bailed out the second time, General motors have aggressively engaged in streamlining its operations by shedding of some brands and closing a number of factories alongside laying off some workers in a rigorous cost cutting venture. Some brands such as Pontiac, Hummer and Saturn stand chances of being phased out due to production costs. The company has also ventured into new technologies for hybrid and electric vehicles. This is in line with the company’s resolve to manufacture vehicles that are economic on fuel and friendly to the environment. (GM website) A lot of debate is going on concerning the financial situation of General Motors Company and its position alongside Ford and Chrysler companies in the United States of America. A number of economists suggest that the company is squarely to blame for the mess it has found itself in. some American rare for the idea that the government should not necessary bail the company out fully but let it sort its problems internally. Those who hold this opinion have it that by fully bailing GM out, the government is rewarding them when they are not performing as required. Interesting arguments have been put across with divergent views in the event that General Motors Company winds up business. Whereas many hold the feeling that a collapse of the company will have far reaching effects to the country’s economy, there are still those who hold that its insolvency may not harm the country’s economy as implied. In conclusion, the company is slowly picking up having learnt lessons in the difficult economic times. General Motors is set to ensure that it remains in business and makes profit at the same time taking care of the need of both its employees and clients. It is putting in place strategies that will by all means prevent recurrence of the difficult financial situations that it has so far gone through. General Motors Company has put in place various means to sustain its business. Reducing the brands and venturing into cost cutting measures as well as trying out vehicles that are economic on fuel and friendly to the environment. Works Cited Michael A. Hitt. Strategic management: Competitiveness and Globalization: concepts & cases, 2008 Barabba, Vincent P. Surviving Transformation: Lessons from GM's Surprising Turnaround, 2004 Leslie, Stuart W. Boss Kettering: Wizard of General Motors. Columbia University Press 1983. General Motors Official website Read More