Reflective Thinker Artifact

For my Financial Markets & Institutions class I had to report on a financial related situation that
occurred in the last decade. What made this paper unique was that I had to use research I
obtained to form a personal opinion as to why this financial event happened. For this project I
went into detail about how the 3 American automobile companies consisting of General Motors,
Ford Motor, and Chrysler Group LLC suffered from a substantial decrease in market share, went
bankrupt, and had to drastically reinvent themselves in order to better compete against foreign
competitors here in the United States and globally. Here I was able to be a reflective thinker and
draw conclusions from research along with forming my own thesis as to why the American
automakers suffered financially. My knowledge of business transactions obtained from Loras
College and my ability to analyze information regarding to why and how events happened made
me better prepared to complete this paper thanks to a liberal arts education.








Tim Weber
Financial Markets & Institutions
Professor Upstrom

Automobiles have always been seen as a symbol of American pride and accomplishment.
From the iconic Ford Model-T that made the assembly line effective and immortal, along with
the rugged Jeep SUV that helped transport American soldiers across the battle fields in WWII, to
the stylish Chevys of the 1950s that made Americans branch out from the cities and move into
the suburbs. Also, one cant forget about the aggressive, powerful, and cunning American
muscle cars that roamed our roads and pop culture road ways for decades. Yet, to survive and
thrive in an extremely competitive capitalistic market like the United States economy, companies
must be able to adjust to existing competition with quality products that are approved by
consumers. Increased competition from Asian and European automakers began to make their
competitive impact felt in the late 70s and into the 80s. The Japanese could build better,
smaller, and more fuel efficient cars during any major oil crisis which helped start the downward
spiral of the Detroit 3 automakers. Fast-forward to 2008, when the perfect storm of economic
industry meltdowns began in the U.S. and the Detroit 3 were no exception. The once proud
American automakers had their CEOs in front of congress asking for financial emergency loans
just to keep their doors open. The darkest days would continue; massive lay-offs along with
dismal financial reports made the Detroit 3 outlook grim and many were ready to say good-bye
for good. Yet, in 2013 all 3 Detroit automakers are profitable again and producing vehicles that
are finally comparable to their counterparts across the globe. What led to the financial downfall
for the Detroit 3? What happened to each automaker during the darkest days of the financial
crisis? Finally, how does the future and current situation look for our American automakers?
Detroit 3 Background
Chrysler has always been considered the little vulnerable brother of the Detroit 3.
Founded by Walter Chrysler on June 6, 1925; the Auburn Hills automaker has always been far
behind in sales compared to General Motors and Ford Motor, yet competitive in agility,
innovation, and main stream popularity compared to Ford and General Motors. Go back to the
mid-1970s when the oil crisis impacted the way Americans drove and shopped for cars. High
gasoline prices helped usher out the big American muscle cars and paved the way for fuel
efficient Japanese and European automakers to land state side. Chrysler in the 1970s could not
keep up the other major automakers and began to lose market share and money. Chryslers
situation became so dire that in 1979 the United States government handed Chrysler an
emergency 1.5 billion dollar loan just to keep the doors open; Chrysler would go on to lose 1.1
billion in 1979. By 1980, legendary auto executive Lee Iacocca takes reign of Chrysler and
begins to mount a comeback thanks to its fuel efficient front wheel drive K-car line which
became an instant main stream success. By 1983 Chrysler was profitable again and became the
Detroit darling throughout the 1980s and 1990s. 1998 was the last year of Chrysler
Corporation, and Chrysler ended with record auto sales and a 5.7 billion operating profit in the
U.S.
Chrysler by 1998 had caught the attention of German automaker Daimler-Benz, and then
Chrysler CEO Robert Eaton felt that in order for future financial success and stability Chrysler
needed to merge with the European automaker Daimler-Benz. On November 17, 1998 the
merger was official and DaimerChrysler was created. Fast-forward to 2007, and the
DaimlerChrysler experiment has been a complete failure. It was obvious from the beginning that
the merger was instead a hostile takeover by Daimler. Daimler used Chryslers cash reserves to
satisfy its own wishes and left Chrysler to its own devices. During this period quality,
innovation, and customer satisfaction all took a nose dive and on May 14, 2007 a private equity
firm named Cerberus Capital Management buys 80% of Chrysler from Daimler for 7.4 billion
and places disgraced former Home Depot CEO Robert Nardelli as CEO of the newly formed
Chrysler LLC. Summer of 2008 once again brings extreme oil prices for which Chrysler LLC
was not prepared for. Chrysler LLC like the other Detroit automakers had their sales heavily
focused on large trucks and sport utility vehicles. Cerberus Capital Management was in no shape
qualification wise or experienced enough to run a major automaker in an ever changing market
and Chrysler was once again in serious financial trouble that it could not handle on its own.
Ford Motor Company has always had the richest and proudest history of the Detroit 3.
Incorporated in 1903, Henry Ford forever changed not only the way products business produce,
but the way products are produced. To this day the modern assembly line was an ingenious
strategy that was founded upon efficiency and effectiveness. Ford however did run into trouble
with quality issues thanks to the infamous Ford Pinto of the 1970s, and by the 1980s Ford
Motor began to run into serious financial issues. Ford needed a spark that could revolutionize the
auto industry and found it in the 1986 Ford Taurus. With its then revolutionary styling,
performance, and quality it became an instant sales success along with becoming the 1986 Motor
Trend Car of the Year. Ford continued to ride high throughout the later part of the twentieth
century thanks to a strong economic expansion and the sport utility vehicle boom of the 1990s.
However by 2000s competition from the Japanese and the Europeans have become so
competitive the Detroit 3 begin to lose the battle. Competition along with soaring gasoline prices,
poor product placement, and soaring costs to health care and pension causes Ford Motor to have
its corporate bonds downgraded to junk status by 2005.
In 2005 a serious sense of change was urgent and needed. Ford began to cut factory jobs
and franticly produced new vehicles for the public. The year of 2006 arrives and Ford announces
a 12.7 billion dollar loss; largest ever for Ford. In September of that year Alan Mulally from
Boeing is hired as Ford CEO and Ford raises its borrowing capacity to 25 billion, mortgaging
and placing all corporate assets as collateral even the famous blue oval in order to raise funds for
new products and developments. To cut costs and raise cash Ford also sold the following
subsidiaries: Jaguar, Volvo, and Land Rover. Fear was present and alive during these days;
however Alan Mulally remained calm and collective and continued to reinforce the idea that his
plan would work and Ford would once again rise to the top.
General Motors was founded in 1908 in Flint Michigan and soon became the dominant
power house of automobile makers worldwide. G.M. being composed of Chevrolet, Buick,
Pontiac, Cadillac, GMC, and Oldsmobile raced to the top of sales chart and soon became the
largest of the Detroit 3. GM was the proud American symbol of freedom thanks to its part in
WWII manufacturing and became a symbol of financial success with the rise of the suburbs after
WWII. Profits were always present for GM., even during the recessions of the early 80s and
early 2000s. GM always seemed to be invincible with their massive army of products and
brands. Yet, looking at how GM failed, it was mostly self-inflicted wounds and the fact the
General Motors Corporation was too big for its own good. Constant fighting with the United
Auto Workers Union and failure to satisfy their pension obligation created massive liabilities that
needed to be addressed. GM simply was doing too much: it owned too many brands; it was
buying and selling far too many subsidiaries, and it had too many dealerships. All of these
internal issues plus that drastic rise in gasoline finally caught up with largest automaker in the
world: GM was losing billions upon billions of dollars by 2008.
The Recession and the Federal Bailouts
You didnt need to be a financial analyst to see that by 2008, things had gone from bad to
worse for the Detroit 3. The Detroit 3 market share had slid from 70% in 1998, to just 53% in
2008. By September 2008, a recession was hitting the U.S. economy; the Dow jones industrial
average was losing hundreds of points weekly, massive job layoffs were common, and the
mortgage bubble had finally burst. Oil prices still had not come down, and new car sales
plummeted by 37% in December 2008 from a year earlier. One must also remember that the
United Autoworkers Union had members making $70 an hour and created one of the most
inefficient cost savings strategies one could imagine. By December 2008, the unthinkable
happened: all 3 American automaker came in front of congress to announce they needed
financial aid immediately or they would be forced to declare bankruptcy and close their doors for
good. The Detroit 3 stated that they needed at the time $ 34 billion dollars or else face a possible
scenario involving bankruptcy that would end up with 3 million people losing their jobs and
3.6% of the U.S. GDP gone. In January 2009, the U.S. government agreed and General Motors
received a $49.5 billion loan from the Trouble Asset Relief Program (T.A.R.P.), and Chrysler
received $10.5 billion in T.A.R.P. funds. Ford Motor thanks in part to their financial
restructuring efforts in 2006 did not take any federal emergency bailout money from T.A.R.P.
Yet, with the federal bailouts, the federal government wanted to make sure they were just
not temporarily extinguishing the fire. The U.S. government wanted to make sure the both
companies could be financially dependent and successful so major changes were in store for
General Motors and Chrysler and they would began with the U.S. and Canadian governments
each taking stakes in the new companies after bankruptcy reorganization. In April 2009, Chrysler
LLC filed for Chapter 11 bankruptcy reorganization and in June 2009 Chrysler emerged from
bankruptcy as the new Chrysler Group LLC. The new Chrysler had received all the good assets
from the old Chrysler (now called Old Carco LLC) and had new ownership. Cerberus Capital
Management who ran Chrysler LLC was kicked out by the federal government and Italian
automaker Fiat was given a 20% stake in exchange for helping Chrysler with designing smaller
more fuel efficient vehicles and giving Chrysler access to foreign markets internationally.
Chrysler Group LLC ownership stakes was split into 20% for Fiat, around 70% for the
Voluntary Employee Beneficiary Association ( basically a United Auto Workers Union retiree
fund), 8% for the U.S. government, and 2% for the Canadian government.
General Motors Corporation went through a similar process. On June 1, 2009 General
Motors Corporation filed for the fourth largest Chapter 11 bankruptcy reorganization in U.S.
history and one week later G.M. was removed from the Dow Jones Industrial Average. Once
again good assets from General Motors Corporation (Now called Motors Liquidation Company)
would be transferred to a new company called General Motors Company LLC, and in exchange
new G.M. would lose the Pontiac, Hummer, Saturn, and Saab brands; along with 900 dealerships
13 U.S. plants, $77 billion dollars in debt and 23,000 U.S. employees. Ownership in the new
General Motors Company would be split amongst the U.S. government (60%), the Canadian
government (12%), the United and Canadian Auto Workers Union (17.5%), and unsecured
bondholders of old G.M. (10%).
A New Dawn
Fast forward to 2013, and there have been amazing turnarounds from the dark days of
2008 and 2009. The Detroit 3 are hiring again and not only investing in American plants, but
bringing back jobs from overseas. G.M., Ford and Chrysler have all simultaneously increased
their market share in the U.S., something that hasnt been done since 1994. General Motors
Company had their IPO in November 2010 and raised an estimated 20.1 billion dollars. G.M.
today is still king of the U.S. auto sales with Ford in second, Toyota in third and Chrysler in
fourth. The federal government has sold all but 7% of its shares in G.M. and is set to lose 9.7
billion unless individual G.M. shares hit $148. Yet, there is plenty of good news: G.M. has been
once again producing quality attractive vehicles to customers and finally has a smash hit small
car in the Chevy Cruze. Cadillac has made a dramatic sales rebound as well. G.M. recorded a net
profit of $9.1 billion in 2011; a record profit for the company and recorded $ 6.1 billion profit for
2012 as well.
Ford Motor continues to be the role model of the American auto industry. By not taking
any money from the federal government, Ford Motors reputation and approval rating
skyrocketed amongst the American people. Ford has gone on to produce smash hits such as the
Ford Fusion and the fuel efficient Ford fiesta and Ford Focus. Financially Ford has been sound
as well, producing a $5.6 billion net profit for 2012 and a $20 billion net profit for 2011 (Thanks
to an accounting trick). For 2013, Ford is on track to sell the most cars since 2006 in the U.S.
Chrysler Group LLC has slowly but surely risen from the ashes of 2008. The experiment
with Fiat has been an outstanding success thanks in part to new CEO Sergio Marchionne vision
for both companies cooperating in a global scale. As of November 2013, Chrysler has posted 43
consecutive months of year-over-year growth and is on track to sell the most amount of vehicles
since 2007. Chryslers 2013 Quarter 3 results include a 22% rise in net income of $464 million
compared to $381 million in Q3 of 2012. Chrysler through 9 months of 2013 has a net income of
more than $1.1 billion.
In conclusion, the auto bailouts in my opinion were the right move. Just look at the
Detroit 3 today and compare them now to 10 years ago and the change is astronomical. Not only
are the Detroit 3 better off financially, but many lessons have been learned and the Detroit 3 are
finally taking the fight to the Japanese and the Europeans in terms of quality and reliability. Yet,
with all this success the auto bailouts have been quite a controversial issue. Should the U.S., the
pioneer and leader of the modern day capitalistic economy have its government rescue private
companies? Normally I would be against such an action, but by rescuing G.M. and Chrysler
countless jobs have been saved and the U.S. may have avoided a complete economic depression.
We have the right people making the right decisions at the Detroit 3 now and the pride and
accomplishment of an entire industry that represents the can do spirit of this country has been
saved, and given another chance at revival. The Detroit 3 have their engines roaring again.







Works Cited

http://finance.yahoo.com/
http://allpar.com
http://news.investors.com/102913-677083-gm-bailout-could-cost-taxpayers-10-
bil.htm?ven=yahoocp&src=aurlled&ven=yahoo
http://money.cnn.com/2012/09/06/autos/auto-bailout/
http://www.uaw.org/story/2008-2009-auto-industry-crisis
http://corporate.ford.com/our-company/heritage
http://www.gm.com/company/history-heritage