"OTTAWA TELLS GM: CUT MORE", National Post, Tuesday, March 31, 2009
This article talks about how the car companies, GM and Chrysler, have one last chance to fix the mess that they are in. Otherwise, they will have to face bankruptcy. The two car companies pleaded for as much as US $32 billion in new loans to keep them alive in this auto industry crisis, but the Canadian and U.S. governments refused. Instead, they promised to back them up with temporary aid and demanded that they make more drastic changes or else be pushed into bankruptcy court. U.S. president, Mr. Obama, says the government cannot let the auto industry vanish, but it cannot continue to excuse poor decisions. GM now has 60 days to develop a more aggressive plan. The article further talks about how the governments are coming up with ways to try to save the auto industry.
In the chapters of the textbook, we learned about how a business tries to maximize revenue and minimize expenses to get the maximum profit. We also learned about how cash flow is crucial for a company to do well. Without cash, a business would not be able to run. This article relates to the chapters of the textbook by showing how the two companies are failing without enough cash. Furthermore, we learned about analyzing financial statements to see how well a company is doing. In that chapter, we learned about the debt ratio and leveraging. The two car companies are depending on leveraging to keep their businesses running; therefore their debt ratio is poor.
In my opinion, I think it is correct that the government is adding some pressure to the two car companies. The governments do not want the auto industry to fail, but they must make the car companies understand that they cannot always depend on the government for money. If the car companies kept on making bad decisions and not come up with a good plan, they would just keep coming back to the governments to borrow new loans. Moreover, it is very important that the companies come up with better plans because it involves a lot of people and their jobs. If GM and Chrysler went bankrupt, it would cause many people to lose their jobs and affect their families. It would drag the economy down ever more.
http://www.nationalpost.com/news/story.html?id=1445830
1 comment:
Beginning with the positive aspect of your blog, I think you made a really good point regarding the government’s financial dilemma. They do not want them to fail, but will not and cannot do much to “save the economy.” In other words, it is unlikely that they are able to continuously support the car companies in order to prevent them from increasing the severity of the economical recession. For one thing, I really doubt that the government will have enough cash to save a large corporation, such as GM and Chrysler. For another, it is absolutely a foolish way of spending money on a company who fails to thrive in the world of business simply to “save the economy.” After learning about ratios, the company should be well aware of the fact that they should not operate on leverage over 33% (or one-third). Increasing the amount on leverage is similar to jeopardizing the entire corporation. On the negative side, I do not think that those car companies would ask the government for new loans, understanding that it is already in an economical recession and will not get many additional loans from the government. A more reasonable approach, other than bankruptcy, would be to shrink the side of the corporation. By reducing production line and laying off workers, they still might be able to function under a less profitable scale. Now, it becomes quite clear that automobile companies will have to rely on no one but themselves to continue to thrive in the economy, regardless of the presence of the recession or not.
- A. Tao
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