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Posted on August 2nd, 2012, by

The development of the modern automotive industries is accompanied by numerous problems which force automobile manufacturers change the marketing strategies and pricing policies. In fact, galloping oil prices and the economic recession in the US put local leading car manufacturers, including Ford and GM into a very difficult position, in which they can hardly compete with world’s leaders. As a result, the modern automotive industry in the US is in a profound crisis and national car manufacturers are forced to introduce changes which could improve their position on the market consistently. In such a context, the assistance of the state and Fed is essential because the fiscal policy produces a significant impact on the development of the automotive industry. In this respect, it is important to underline the fact that the fiscal policy can stimulate the development of the automotive industry, while the lack of changes in the existing tax system can lead to the ruin of leading car manufacturers of the US, including Ford and GM, because, they tend to lose the competitive struggle to their major competitors from Japan and Europe.

At the same time, the overcoming the current crisis in the automotive industry is possible only on the condition of the united efforts of the state, Fed and car manufacturers.

On analyzing the current situation in the automotive industry, it is necessary to point out the consistent deterioration compared to the period prior to the start of the economic recession in the US. In fact, the position of American car manufacturers was far from perfect even before the crisis but the problems in the housing market, which were followed by the economic recession, had uncovered major problems of the modern automotive industry in the US and the weakness of the position of American car manufacturers compared to their foreign competitors as well as the strength of the competition between major car manufacturers within the US.

To put it more precisely, today, one of the largest car manufacturers of the world, GM tends to give in its leading position to Toyota, a Japan car manufacturer, which steadily increases its presence on the world market. In this respect, it is worth mentioning the fact that American car manufacturing companies, such as Ford and GM face aĀ  strong competition from the part of Japan companies and since the 1980s, they have lost a considerable part of the American market which has been taken by Japan car manufacturers.

In addition, the galloping oil prices put American companies into a disadvantageous position compared to Japan and European car manufacturers. In fact, the low competitiveness of American companies, such as Ford and GM, is determined by their traditional orientation on the production of cars consuming a large amount of gasoline.

Moreover, trucks and pick-ups produced by Ford or GM have become national symbols and constitute a considerable part of the general amount of cars produced by both manufacturers. In fact, the orientation of American companies on the production of cars consuming a large amount of gasoline became one of the major strategic flaws of both Ford and GM in face of its overseas competitors. To put it more precisely, the exorbitant oil price discourage American consumers to buy cars which need a larger amount of fuel. Consequently, American consumers become more concerned on the amount of fuel consumed by cars than on other technical characteristics of cars or brands. Hence, American companies are gradually weakening their position, while foreign companies, especially Japanese ones, grow stronger. In this respect, it is worth mentioning the fact that Ford, one of leading producers of pickups and trucks in the US, has started to lose its leading position with its F-series pickup truck. Instead, Honda Civic displaced F-series line which became the country’s top-selling model in May, 2008 (Bunkley and Vlasic, 2008). This is a very disturbing sign which uncovers the depth of the crisis of the American automotive industry because the loss of the leadership by Ford indicates to the fact that the American company loses its position even in those niches of the market where it used to be undisputable leader. The same trend could be traced in relation to GM. The company’s also faces serious problems in the competitive struggle and, what is more the company attempts to change its production line.

At this point, it is possible to observe certain similarities in strategies used by American car manufacturers, Ford and GM, to overcome the current crisis. In fact, both companies attempt to re-orient their production from large cars, such as pickups and trucks, to smaller cars, which naturally need less fuel and, therefore, which can be more competitive on the national and international market. However, such a transition and transformation of the production is quite difficult not only from technical but mainly from financial point of view. Obviously, the change of the production line of Ford and GM will need considerable investments. First of all, the development of smaller cars and their production will naturally need investments into the development of new projects and promotion of new cars. In addition, Ford and GM will compete with foreign companies, especially Japanese ones, whose position are traditionally strong in this niche of the market.

In such a context, the inelasticity of prices may be one of the major challenges and problems which Ford and GM may face. In this respect, it is important to underline the fact that car prices are inelastic and they cannot be changed consistently. Moreover, the costs of the production of cars and materials used in the process of the production are constantly growing and this poses new problems for Ford and GM. As a result, both companies are just forced to increase the price of their cars, even though it does not really strengthen their competitive position on the market.

On the contrary, the growth of car prices discourages customers to buy new cars. In this regard, it is worth mentioning the fact that GM plans to raise prices on 2009 models by an average of 3.5 % and Ford is likely to make the same step to improve its current marketing performance (Bunkley and Vlasic, 2008).

Along with the lack of the price elasticity and the crisis, it is necessary to take consideration the effect of the crisis, namely a considerable decrease in sales volume. Obviously, this is a natural effect of the decrease of the buying power of American customers and their unwillingness to buy cars which are more expensive while being in use because of the higher fuel consumption. Moreover, the amount of competitive cars, i.e. smaller cars which need lower amount of fuel, is insufficient to replace the revenues Ford and GM used to get from sales of trucks and pickups. Naturally, in such a situation, Ford and GM need a transitional period to benefit or compensate possible losses from the re-orientation on the production of small cars and decrease of the production of pickups and trucks.

In such a context, the increase of prices is just one of possible tools to improve the financial position of GM and Ford.

Another possible way of the improvement of the financial situation for Ford and GM is the reduction of costs. In this respect, both companies to use all possible means to reduce costs, including the decrease of wages. In fact, the decrease of wages in Ford and GM does not occur through the wage cuts, but, instead, companies do not increase wages, though car prices are steadily growing. Moreover, both companies tend to use such a radical tool of the reduction of costs as job cuts which also lead to the general decrease of expenses of both companies on wages to its employees. As a result, employees are affected consistently by the current crisis in the automotive industry. On the other hand, the reduction of costs is a natural step from the part of both companies in the situation when the actual supply exceeds the demand on the market that decreases sales rates and revenues of Ford and GM. Hence, companies tend to decrease the production. For instance, GM said it expected to produce 950,000 vehicles from January through March, down 11 % from the same period in 2007, while Ford said it planned to produce 685,000 vehicles in the first quarter that is a 7 % decline (Bunkley, 2007).

At the same time, both companies can benefit from the popularity of their brands which are renowned in the US and are very popular. However, in the context of the economic recession the popularity of brands often becomes secondary compared to the oil prices and the amount of fuels consumed by cars.

In such a situation, the role of the government and Fed can hardly be underestimated because the fiscal policy can be an effective tool with the help of which American car manufacturers, Ford and GM, can improve their financial position, invest into the production of new cars and change their production line to improve their competitive position on both national and international markets. In this respect, the state attempts to facilitate the current position of American car manufacturers and it offers tax breaks as an effective tool which help consistently car manufacturers to improve their position and increase their competiveness. At this point, it is important to underline that tax breaks implies the decrease of the fiscal pressure on American car manufacturers that will naturally stimulate American companies, including Ford and GM, to develop their production, increase investments into new products and slow down the increase of prices. However, the idea of tax breaks is a provision which has not come into effect yet, but this idea is positively perceived by representatives of both Ford and GM. For instance, a Ford spokesman, Mike Moran, said he was “aware that Ford would benefit from the tax credit in the bill passed by the Senate”¯, while a spokesman for GM, Greg Martin noticed that “the auto companies would only be able to use tax credits to re-invest in their American operations, not their plants overseas.”¯ (Labaton and Herszenhorn, 2008).

Consequently, the decrease of the fiscal pressure can really improve the position of American car manufacturers, but, this improvement will refer to their American units only, while today they operate worldwide and, being multinational corporations, Ford and GM located their production in different parts of the world. Thus, the improvement of the situation in the US will not necessarily mean that both companies will totally overcome the crisis they are currently facing and that the further downfall of sales will be stopped.

In fact, both companies are extremely concerned about the deterioration of their market positions and the crisis leading to the deterioration of their performance is so significant that some specialists (Dessler, 2004) even admit the possibility of the merger of both companies to improve their financial position and increase their competitive position on both national and international markets. However, today, Ford and GM remain competitors operating worldwide.

Thus, taking into account all above mentioned, it is possible to conclude that the American automotive industry and its leading companies, Ford and GM, face a profound crisis. The current situation on the domestic and foreign market is unfavorable and companies need to undergo consistent changes to improve their competitive position in the US as well as on foreign markets. The external pressure from the part of major competitors from abroad, as well as the competition between Ford and GM, deteriorates the position of both companies even more. In such a situation, both companies are forced to change their production and marketing strategies, but they also need the support from the part of the state which can reduce the fiscal pressure on both companies.

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