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Impact of global economic crisis on automotive industry

Impact of global economic crisis on automotive industry

The global financial crisis of 2008-2009 commenced in July 2007 when a loss of confidence by investors in the value of mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets (Felton & Reinhart, 2008). On August 9 2007, the world financial capitals were shocked when the European Central Bank injected €95bn worth of funds into the money markets to prevent borrowing costs from spiralling sharply (Tett, 2008). In September 2008, the crisis worsened, as stock markets worldwide crashed and entered a period of high volatility, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks (Felton & Reinhart, 2008).

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A year later, there is still no sign of these problems letting up. Instead, the burden of pressure on banks has risen so sharply, that by some measures this is now the worst financial crisis in 70 years (Tett, 2008).


The cause of the financial was due to cheap money that encouraged rapid growth: between 2004 and 2007, the world economy expanded at its fastest rate in 30 years (Giles, 2008). Over the past year, meanwhile, brisk global economic growth finally hit capacity constraints. Demand for commodities and food continued to exceed supply, forcing prices harshly higher, raising inflation and further undermining spending capacity in advanced economies (Tett, 2008).

Jehoma (2008) cites that sub-prime mortgage lending in US, reversal of the housing boom in other industrialised economies and poor regulation of financial markets as the cause for the global financial crisis. These factors were further compounded by the high food prices and oil prices Jehoma (2008).

This crisis in real estate, banking and credit in the United States had a global reach, influencing a wide range of financial and economic activities and institutions, including the tightening of credit with financial institutions; financial markets that experienced steep declines; liquidity problems in equity funds and the depreciation and devaluation of the assets underpinning insurance contracts and pension and provident funds leading to concerns about the ability of these devices to meet future obligations (Felton & Reinhart, 2008).

The impact of the crisis was not confined only to financial markets, but overflowed to all sectors of the global economy, with some industrialised countries experiencing deep recessions (Jehoma, 2008). The effect on the wider economy has been profound and several organisations have gone bankrupt, or have had to be bailed out, and thousands of jobs have been cut (Giles, 2008).


The dramatic downward revision of the United States of America’s growth prospects led to a similar trend all over the world.

South Africa has joined the long list of economies in recession – the country’s first recession in 17 years. The market had expected a decline, but the result was far worse than most forecasts (France24, 2009).

Statistics South Africa reported that South Africa’s gross domestic product (GDP) growth rate for the first quarter of 2009 stood at -6.4 percent quarter-on-quarter, seasonally adjusted and annualized; compared with a -1.8 percent contraction in the fourth quarter of 2008 (South, 2009). Two successive quarters of negative growth denotes that an economy is theoretically in recession.

The contraction in growth has been blamed on a fall in export demand that has led to an obligatory cut in production by both manufacturers and miners (South, 2009). South Africa’s economy relies heavily on commodities exports, especially from its mines, where thousands of jobs have already been lost this year (France24, 2009).

Further to above, according to Jehoma (2008) the global economic crisis also impacts the South Africa economy:

Due to slowdown in global economy, a source for South African exports, there was decline in exports and hence fall in prices of export commodities;

Job losses in many sectors are on the increase as firms adjust their workforce to changed demand for commodities;

Plummet of shares in Johannesburg Stock Exchange is leading to wealth erosion for many;

Negative growth in value private pension funds which holds most of their investment portfolio in equities.

While the dramatic decline in the prices of most commodities is good news for South Africa’s inflation expectation, it also comes with a wave of planned and already implemented retrenchments sweeping over South Africa (Solidarity Research Institute, 2008). The South African economy can lose close to 700 000 jobs; this figure is substantially higher than initially projected (Sake24, 2009).

Since the start of the economic downswing in the third quarter of 2008, more than 770,000 employees in South Africa have lost their jobs in the past 12 months (Solidarity cited in, 2009). According to the Labour Force Survey, about 267,000 net jobs were lost in the period between the first and second quarter of 2009 while about 484,000 net jobs were lost in the following quarter (Statistics South Africa cited in, 2009).

The official unemployment rate had increased from 23.6 % to 24.5 % in the third quarter of 2009 (Statistics South Africa cited in, 2009). The survey showed that the manufacturing and retail sectors were particularly hard hit in the third quarter as nearly 150,000 job losses were recorded in the manufacturing sector in the third quarter (, 2009).

The list below comprises some automotive companies where retrenchments have been formally announced or where job losses have been reported in the fourth quarter of 2008 and the first quarter of 2009.


At present, the automotive industry is marked by profound and widespread uncertainty, but one thing is clear – the situation is bleak, and the outlook is even bleaker (, 2008).

As global stock markets plunge and consumer confidence dips to extraordinary lows, vehicle sales in almost all regions continue to decline. As of the beginning of 2009, the automotive manufacturers of the world are being hit hard by the economic slowdown across boundaries, when many organisations are experiencing double digit percentage sales declines (KPMG International, 2008).


In the face of considerable financial losses, the automotive manufacturers in the United States of America have rendered many factories inactive and drastically reduced employment levels. Altogether the Original Equipment Manufacturers (OEM’s) employ 416,000 people in the U.S. and Canada (Felton & Reinhart, 2009).

The crisis has led to forecasts of massive unemployment and economic recession if not contained, and Democrats have called for a “bridge loan” to assist the American automotive manufacturers (KPMG International).

South Africa

“Thousands of motor industry jobs are hanging in the balance as a global economic downturn, ignited by the US sub-prime mortgage collapse, filters into South Africa’s economy” (Dispatch Online, 2008).

The global economic slowdown has already led to job losses in the form of retrenchments, and an increase in non-production days at original-equipment manufacturers (OEMs). If the market does not recover significantly within the next 12 months, further job losses can be expected (Gabru, 2009).

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South African vehicle and component manufacturers currently face extremely unstable conditions. The instability in global financial markets and the constant change in the Rand exchange rate render planning extremely difficult. At this stage, it is not possible to be precise about the outcome of current financial market turmoil and its impact on the South African automotive industry (National Association of Automobile Manufacturers of South Africa, 2008)

At this stage, it is difficult to be specific about new vehicle export numbers for 2009. South African vehicle manufacturers are in regular contact with their parent companies in reviewing export market requirements and current indications are that over-all new vehicle exports during 2009 could register a decline of between 10% and 15% on the 2008 figure (National Association of Automobile Manufacturers of South Africa, 2008).


On the domestic market front, new vehicle sales are likely to continue to experience pressure during the first half of 2009, however, there are clear signs that the inflation and interest rate cycle in South Africa has peaked and as inflationary pressures abate into 2009, interest rates will also start to come down (, 2009). The second half of 2009 is therefore likely to see an improvement in the financial position of consumers and stronger economic activity levels giving rise to optimism of a recovery in demand of new motor vehicles from about the middle of next year (Gabru, 2009). For 2009 as a whole, it is expected that new vehicles sales (cars and commercials), in aggregate terms, will probably record a decline of between 5% and 7% year on year (National Association of Automobile Manufacturers of South Africa, 2008).

According to Gabru (2009), it is unlikely that South Africa will be making any significant inroads into other markets in the next three to five years. While substantial manufacturing capacity is moving offshore from Europe and the US, these products are moving to more competitive regions like China, Turkey, Brazil and Thailand, which are also geographically better positioned than South Africa. South Africa, on the other hand, is better situated to capitalise on African markets, specifically the sub-Saharan region.

Company X

Company X’s third quarter financial report for 2008 takes place against the backdrop of the pressures the industry is facing following the global economic and financial crisis. This is reflected in total industry volumes down 10% in mature and emerging markets from 69 to 62 million units, further challenged by a strengthening yen, and low consumer confidence.

Sales results

Year to date global sales were down 3% to 2.63 million units while third quarter sales were down 19% to 731,000 from the same period in fiscal 2007. In response to lower third quarter sales in all regions (18.6% down), production volumes were lowered by 45% (NSA Management, 2009).

Financial results

The first nine months of 2008 reflected a decrease in net revenue of 14.7% from the same period in 2007 while operating profit was down 84%. Assuming that global sales will be down 10% and production volume down 16%, Company X’s revised financial forecast – operating loss to reach 180 billion yen (a fourth quarter drop of 17% – in line with other car manufacturers); and net loss of 265 billion yen (NSA Management, 2009).

Recovery plan

In light of the downturn, both at Company X and the automotive industry at large, a recovery plan has been drawn up to manage the company through the current crisis. Efforts will centre round two main themes:

Recovering profit: largely through cost reductions in labour and purchasing. Labour costs will decrease in line with revenues, especially in high cost countries. Other reductions include a reduction in salaries among board members, corporate officers, and managers. No bonuses will be awarded to the board of directors. Additional measures are a reduction in working hours and production days, as well as a work sharing scheme negotiation. Company X’s global headcount will continue to be streamlined – from 240,000 in March 2008 to 215,000 in March 2010, representing a 25,000 reduction.

Preserving cash: In line with declining market demand, operations are undergoing right-sizing to reduce global costs. Specific capital investments and new-model product introductions have been postponed, reduced or cancelled until the economic crisis eases (NSA Management, 2009).

It is fair to say that the current financial crisis has caught the automotive industry by surprise. Companies were prepared for a contraction, but they did not anticipate the speed and intensity of the downturn when it came.


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