U.S. Auto Industry Nears Disaster

Closed auto factory
In November, the heads of the three biggest U.S. automakers—General Motors, Ford, and Chrysler—asked Congress for $25 billion in aid to bail them out of a crisis that they say could lead to the collapse of the U.S. auto industry. Without the bailout, the companies say, they face possible bankruptcy, leading to the loss of millions of American jobs. The auto industry is responsible for a full 4 percent of the country’s Gross Domestic Product.

As the 2008 lawmaking session ended in Congress in mid-November, it seemed unlikely that the bailout would be approved. Without that approval, automakers will have to wait for any help until President-elect Barack Obama’s term begins in January.

How did three of the biggest automakers in the world get into such a financial bind?

One major factor is the global financial crisis. A slow economy causes people to spend less money, especially on expensive items like cars. In October of 2008, General Motors sold 45 percent fewer cars than it sold in October of 2007. Ford and Chrysler sales were down about 30 percent in the same period.

Another factor that hurts the three companies is their past success. The companies have been so big for so long that they have to pay retirement pensions to hundreds of thousands of former employees. This means that the companies need to have a lot of money on hand. They’ve made that happen by making their cars more expensive than they would otherwise be.

A third factor causing the automakers’ problems is their own business strategies. As other companies like Toyota and Honda were developing new technology to increase fuel efficiency, U.S. automakers were producing big, gas-guzzling sport-utility vehicles (SUVs). As gas prices soared in 2008, the market for SUVs collapsed. Now the big three companies have to try to catch up to other companies with cars that use less gas.

Related Links

  • Q&A: Pondering Options for Detroit’s Future
    Story in question and answer format from NPR discussing the plight of the automakers.
    (Source: NPR, November 19, 2008)
  • Prospect for Auto Bailout Dims
    Report from Reuters about the proposed bailout legislation, its pros and cons, and the implications of the bailout passing or failing.
    (Source: Reuters, November 20, 2008)
  • Lack of Investment Clue to Detroit’s Demise
    Article covering the automakers’ crisis. Discusses the reasons for the problems of the big three U.S. auto companies.
    (Source: BBC, November 20, 2008)
  • Map of Michigan
    Detroit, Michigan has long been the center of the U.S. auto industry. The collapse of the industry would have grave effects on Michigan’s economy. This map shows Detroit, Michigan, and surrounding states.
    (Source: University of Texas, 2001)

Critical Thinking Questions

  1. Causes and Effects What are three causes that drove the big three U.S. automakers to the brink of bankruptcy?
  2. Compare and Contrast Compare and contrast the business strategies of the big three U.S. automakers and companies like Toyota and Honda.
  3. Evaluate Should the U.S. government help the struggling U.S. automakers? Why or why not?


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