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Effect of the 2009 US Auto Industry Bailout on Foreign Manufacturers

June 09, 2012 | Comments: 0 | Views: 220

In 2009, both Ford and Chrysler were bailed out by the American government after each company went bankrupt. The world was suffering through a global recession at that point in time, and there were a multitude of factors that helped cause the bankruptcy of these auto manufacturers. There was an overall lack of demand for long-term, durable products worldwide, but there was also a huge drop in demand for American cars due to Ford, GM and Chrysler failing to produce cars that were appealing to the American public.

There was also a problem with the financials of these companies. Ford and GM had high Operating Leverage and Financial Leverage, which increased the danger they would face if there was a decline in revenues. Of course this happened, and Ford and GM had large amounts of debt as well as high fixed costs that crushed their profit margins and working capital once revenues plummeted.

Since then, Ford and GM have been able to improve their Financial and Operational Leverage, making them less susceptible to declines in demand for their products. They shrunk their fixed costs (lowering their breakeven point) and their debt ratio (increasing their working capital).

With all the turmoil that resulted from the 2009 bailout, it is interesting to see if any changes have occurred in some of the other large auto manufacturers. Will they have learned from the mistakes of the American car companies?

Toyota Motor Company is the largest car manufacturer in the world. In 2009 their Debt Ratio was 65.38%, but has subsequently increased to 65.57% in 2012. This is a very small increase, and is probably inconsequential. However, Toyota has had a fairly significant increase in its ratio of Cost of Goods Sold to Revenue (COGS/Revenue). This ratio increased from 82.61% in 2009 to 88.18% in 2012. This could be an indicator of an increase in Fixed Costs or Variable Costs for Toyota. Neither is good for a business, but a rise in Fixed Costs (an increase in Operating Leverage) is very dangerous in unstable economic times. Toyota Motor Company has increased its risk if there were to be another global recession that greatly reduces demand for automobiles.

Volkswagen Group, the world's second-largest car manufacturer, has improved its Financial Leverage. In 2009, VW had a Debt ratio of 78.87%. That number has decreased and in 2011 VW's Debt Ratio was 75.01%. VM has decreased its risk and improved its chances of surviving a large recession in which demand decreases a large amount. VW's ratio of COGS to Revenue has increased marginally, by.47, from 2009 to 2011.

Honda Motor Company, the seventh-largest auto manufacturer in world, had increases in its Debt Ratio, but a very small decrease in its ratio of COGS to Revenue. Honda's Debt Ratio increased by almost 4 percent, while its ratio of COGS to Revenue decreased by.07%.

The largest auto manufacturers in the world must have taken notice when Chrysler, Ford and GM were in serious trouble. If for nothing else, they must have seen the momentary demise of their foes as an opportunity to increase market share for their products in America. But, they seem to be ignoring two aspects that helped to destroy Chrysler, Ford and GM.

It is possible that these foreign automakers did not have the same problems with employee compensation that their American counterparts had. They were also able to create products that were more fuel-efficient, and therefore more desirable, in an economy where people were looking for any way to save money. But, the risk that the American companies had remains in the foreigners. Since 2009, there has been little improvement of the Financial Leverage of these firms. Large amounts of debt can still be a killer to Working Capital and the longevity of the firm. As for Operating Leverage, it is hard to evaluate as little can be found on these companies Fixed Costs. Their Cost of Goods Sold has hovered over the past 2 - 3 years, with the exception being Toyota. It will certainly be in the best interest of all these companies to improve both Financial and Operating Leverage in an economy that is at the best of times, still volatile.

Source: EzineArticles
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Debt Ratio


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Operating Leverage


Financial Leverage


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Auto Industry

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