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Posted on October 8th, 2012, by

Today, the US automobile industry suffers from a profound crisis which has struck the leading car manufacturers of the USA, such as GM and Chrysler. In such a situation, the companies can hardly survive without the external assistance and support from the part of the state. At the same time, the state support of large American car manufacturers cannot be unlimited since the state spends money of taxpayers and, therefore, the state is responsible for the use of these funds. Hence, the US government and American car manufactures face a serious dilemma: on the one hand, the bankruptcy of large car manufacturers, such as GM and Chrysler, will lead to enormous job cuts and undermine the position of many Americans who will slip to poverty and unemployment, while, on the other hand, the state cannot fund car manufacturers uncontrollably. As a result, the current policies of the US President Barak Obama are justified since companies which count for the state support need to undertake steps in response to the financial support of the state in order to maintain social stability and help the automobile industry to overcome the current crisis. However, it is important to remember about the risk that constantly accompanies the state interference in the economic life of the country and specific industries and companies ”“ this is the risk of ineffective use of funds and inability of companies’ management to solve their problems even if they get the wider state support.

On analyzing the current situation, the decision of Barak Obama to limit the state support of GM and Chrysler until they fulfill the demands of the President administration seems to be quite logical. In actuality, it is obvious that the funds the government directed to support GM and Chrysler have not brought positive effects. Moreover, instead of overcoming crisis, GM and Chrysler ask for more and they insist on the additional funding from the part of the state. In such a situation, the question naturally arises: whether companies are truly able to solve their problems and whether they are able to use state funds effectively or probably they are simply using the state financial support to close the gaps in their finances and to use state funds to cover unnecessary expanses resulting from their poor management and errors made by top executives of GM and Chrysler.

In actuality, the situation keeps deteriorating, in spite of the substantial financial support the government has already provided for GM and Chrysler. Naturally, the demand of Barak Obama to avert bankruptcy in 60 days for GM and in 30 days for Chrysler seems to be logical. It is obvious that the state funds cannot be wasted on companies which are doomed to bankruptcy and which have poor and ineffective management. In such a situation, it is necessary to define whether the state should keep supporting Chrysler and GM or probably it would be better to let them run bankrupt.

In fact, it is quite difficult to take a definite decision since both state support and the lack of state support have their own advantages and disadvantages. In this respect, it is important to understand that the demands of Barak Obama go beyond the consistent improvement of management of GM and Chrysler to avert bankruptcy. In fact, Barak Obama demands GM to dismiss its chief executive, Rick Wagoner, and to strengthen the position of unions and social protection of employees of the company. The President also insists on the enforcement of social protection of employees in Chrysler as well, but, in addition, Obama demands Chrysler to prepare the merger with Fiat within 30-days term.

Obviously, what the President does is the direct interference in the policies and functioning of GM and Chrysler. This interference can be justified by the natural desire of the President to make companies responsible for money of taxpayers spent on the support of GM and Chrysler. At first glance, such a policy of Barak Obama can bring positive effects since the change of the chief executive can stimulate the radical changes in the management of GM that may lead to the overall recovery of the company. As for Chrysler, the merger with Fiat can improve the position of the company since it can count for the support of Fiat, including additional financing, managerial help, etc.

On the other hand, the demands of Barak Obama can deteriorate the position of both companies even more, making their bankruptcy inevitable. In this respect, it should be said that the demands of Barak Obama lay emphasis on the social protection of employees and strengthens the position of unions. In actuality, this means that expenses of both companies are likely to grow to ensure the fulfillment of such demands. However, at the moment companies suffer from shortage of financial resources and the growth of expenses will lead them to the dead end. In addition, the change of the chief executive of GM can destabilize the situation in the company. In fact, if GM meets this demand of Barak Obama the company will be “beheaded”¯, while the change of the chief executive does not necessarily mean a consistent improvement of the management effectiveness. What is meant here is the fact that no one can guarantee that a new chief executive will be better than Rick Wagoner. Moreover, the change of the chief executive can provoke internal conflicts within the company and a strong opposition to a new chief executive. In addition, it is important to remember that executives will feel insecure in the company, where they can be substituted or simply loss their position because the President of the USA demands it.

As for the merger of Chrysler and Fiat, it is also quite difficult to predict outcomes of such a step. In fact, it is impossible to foresee the policy of a new company after the merger. This means that the company can decide to cut jobs substantially or move the production to other countries closing production facilities of Chrysler in the USA. In other words, the policy of the new company is unpredictable. Moreover, the position of Fiat is uncertain and the merger cannot be a panacea for Chrysler. In stark contrast, Chrysler can become an unbearable burden for Fiat and the latter will attempt to get rid of the company as soon as Italian car manufacturer understands that Chrysler fails to improve its position on international markets. Anyway, after the merger the President will hardly be able to influence the policy of the new company as he can do it at the moment when Chrysler remains the American company, even if it is dependent on the state support. Finally, the merger cannot occur in a hurry. The merger is a very complex process and it extremely important to avoid errors in the merger, which may be fatal to the new company. Instead, Barak Obama attempts to accelerate the merger, which may be not beneficial to the US car manufacturer to the extent that Chrysler could be forced to agree on any conditions Fiat will pose in the course of negotiations. Hence, Chrysler, its employees and American taxpayers will lose.

Potentially, such policies of the US President can lead to the consistent deterioration of the current marketing position of GM and Chrysler as well as position of people working at these companies. In actuality, there is a high risk of both companies running bankrupt if they agree on the demands of Barak Obama. Obviously, the demands of Barak Obama are justified from political point of view since they aim at the protection of employees and interests of American taxpayers, who need to be sure that their money are not wasted for nothing. However, the risk of bankruptcy is still very high and, from the economic point of view, the position of Barak Obama is not really good for GM and Chrysler since it can destabilize GM and forces Chrysler to agree on the merger with Fiat, regardless of whether conditions of the merger are good or bad for Chrysler.

Consequently, economic effects can be disastrous since they may lead to bankruptcy of both companies and the state will be unable to maintain or save both companies. Hence, today, Barak Obama has a choice either to keep supporting GM and Chrysler, than he needs to avoid radical demands and ultimatums, or he should refuse from the financial support of both companies by the state. In actuality, both of the aforementioned options have their strengths and weaknesses, but there is nothing in-between these two options. In other words, the current policies of Barak Obama are politically motivated and justified but economically unreasonable or, at least, risky.

On analyzing possible alternatives, it should be said that the maintenance of both companies with the state financial support will allow maintaining companies in the nearest future, but, in a long-run the state will be unable to support both companies. In actuality, the long-run support of both companies will misbalance the national economy because some companies will get the state support to overcome, while others will be doomed to bankruptcy simply because they do not have a political lobby and they are smaller and less significant than GM and Chrysler.

In such a context, the decision to stop the state support of GM and Chrysler seems to be the most effective, but radical solution of the problem. Obviously, this decision will lead to bankruptcy of both companies and consistent growth of unemployment nationwide. The latter will deteriorate the socioeconomic situation in the country. However, the bankruptcy of both companies will allow the state to redirect funds, which it has spent on their support so far, on the development of new social programs and projects which can solve the problem of unemployment, which can create new job places. These programs will solve social problems of many unemployed which have already lost their job and these programs will not be as selective as the support of GM and Chrysler.

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