As early as 1979, Chrysler was on the brink of bankruptcy and urgently needed a $1.5 billion loan from the federal government.However, Chrysler’s troubles began in the 1960s, when the company tried to expand in the United States and globally to catch up with its main competitors. In hindsight, this is unwise because there will be three economic recessions, two energy crises, and new government environmental and fuel efficiency standards in the 1970s. Concerns about the loss of millions of jobs, as well as the recovery of the German and Japanese auto industries, have caused many people to worry that the already weak economy may fall into depression. All these factors eventually led to Chrysler being rescued by the federal government in 1979.
How did American car idols get into such a dangerous situation? Why does the government want to bail out the company instead of letting it go bankrupt? In order to answer these questions, let us explore some of the factors that led to the company’s decline, as well as the motivation for the government’s bailout.
- The American automaker Chrysler has received bailouts twice in its history, receiving 1.5 billion U.S. dollars in bailouts from the federal government in 1979 and 2008.
- Over the years, the combined effect of the company’s attempts to expand in the United States and globally—combined with the economic recession, high oil prices, declining car sales, and fierce international competition—has pushed Chrysler to the brink of bankruptcy. In 1979.
- The rescue of Chrysler in 1979 was at an important juncture; the federal government intervened to protect Chrysler’s contract-manufactured tanks during the height of the Cold War, save jobs and suppliers, and improve the competitiveness of American cars.
What caused Chrysler’s rescue?
Looking back, Chrysler is on the verge of bankruptcy more than one factor. But when you put all the factors together, it becomes clear how the company has fallen into such a desperate situation over time. The key factors that brought the company on the verge of bankruptcy include:
High oil prices
In the 1970s, Chrysler was affected by two sharp increases in oil and gasoline prices.This caused a chain reaction, as many consumers reduced their purchases of large items such as cars, while those who bought new cars on the market simply turned to Chrysler’s Japanese and German competitors, which offered more fuel-efficient cars. They can adapt to their already tight budget in a major energy crisis. This has led to a decline in the sales of automakers.
High interest rate
High energy prices have contributed to high inflation, forcing the Fed to raise interest rates in response to rising costs. The more interest rates rise, the slower the economy and the higher the cost of obtaining financing to buy new cars. High interest rates and a slow economy have caused many consumers to simply postpone car purchases.
Decline in car sales
With high oil prices and high interest rates, Chrysler inevitably began to happen: sales fell. Although rivals Ford (F) and General Motors (GM) are also affected, they are much larger than Chrysler and can better withstand sales declines.
Types of vehicles sold
In 1979, Chrysler specialized in manufacturing large cars, trucks and recreational vehicles. As the prices of oil and natural gas have soared, many consumers have bought more fuel-efficient cars made by competitors.The second problem that Chrysler encounters in this regard is that, unlike its competitors, Chrysler produces cars on speculative production, rather than manufacturing cars after dealers receive orders. As Chrysler dealers encountered difficulties in selling the company’s inefficient cars, this resulted in a backlog of Chrysler lots.
Due to the large number of unsold cars and the decline in sales, many credit rating agencies downgraded the company’s debt rating. This means that in order for them to raise funds, they must either pay more interest on any debt to maintain the company’s operations, or they simply cannot raise more funds in the market. Chrysler chose not to raise funds on the open market, which means that they must use the small amount of working capital on hand to work for them. This caused a huge loss for the company. In just six months, the company’s working capital increased from 1.1 billion U.S. dollars to just over 800 million U.S. dollars.Analysts worry that the company’s working capital may fall to $600 million, breaching credit agreements with 180 banks, and causing the company to default.
Blockbuster international competition
After the end of World War II, American automakers became the world’s leading automakers. However, in the late 1960s, Germany and Japan began to sell cars heavily in the United States. The types of cars they make are generally considered to be of better quality and fuel efficiency than American cars. As the cost of oil and gasoline has risen sharply, many consumers have decided that they would rather own a more fuel-efficient car than a gas-guzzling American car. Chrysler found that its sales fell because many buyers turned to foreign competitors to buy the cars they were looking for. This means that Chrysler has left unsold cars that consumers no longer want to buy.
Why was Chrysler’s rescue plan spared?
Looking back, the rescue of Chrysler was an important milestone in American history. It happened when the Cold War reached its peak and the US economic recession broke out. For many people, the downfall of an American idol will put the country on a path to an unbreakable economic dilemma. However, there are many reasons why Washington refuses to let this giant disappear:
National security impact
In 1977, Chrysler was awarded the contract to build the M-1 Abrams tank.Since the 1960s, NATO has been looking for a tank that can replace its old model. People worry that if Chrysler goes bankrupt, the country’s national security will be compromised by the loss of a manufacturer of tanks, trucks and other vehicles. At the height of the Cold War, it was thought that the country must be prepared for anything.
If Chrysler were allowed to fail, it would immediately lose 360,000 jobs. According to the Congressional Budget Office (CBO) in 1979, this would have a ripple effect across the country, and another 360,000 jobs would be lost as dealers and many communities that depend on automakers were forced to cut their expenses drastically. Bankrupt. People worry that as the economy plunges into recession, the number of unemployed will continue to increase. Second, the company’s bankruptcy will force the automaker’s employees to assume an unreserved pension obligation of $800 million to the federal government.
Rescue the supplier
If Chrysler goes bankrupt, many of its suppliers will also find it difficult to survive. They could have continued to work with Ford and GM, but the impact of Chrysler’s bankruptcy will at least force them to increase layoffs, which will affect many communities across the country.
Improving American cars
Throughout the 1960s, the quality of American cars declined sharply. Many consumers believe that the quality of cars produced by the Japanese and Germans is better. This is one of the reasons why many people stop buying American cars. Chrysler’s potential bankruptcy has sounded the alarm for the auto industry. Either it must start producing more reliable and better quality cars, or it will continue to face a sharp decline in sales.
The problems facing Chrysler surfaced in 1979. There are many factors at the same time that make the company on the verge of bankruptcy. All these factors forced the company to vigorously lobby Congress and the White House for a loan of $1.5 billion to maintain its business and protect millions of jobs.
Although many critics doubt whether Chrysler’s 1979 rescue plan really worked, facts show that the company can get rid of its financial difficulties and develop cars that the public will buy again, such as K-car, Avery, and minivans. . Nearly 30 years later, that is, in 2008, after the financial crisis, Chrysler will receive billions of dollars in new bailouts from the US government. The financial crisis has led to a sharp decline in car sales in the next few years.Chrysler filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Law in April 2009.It was fully acquired by Fiat in 2014.