Credit Crunch UK Automobile Industry


1. Proposed Working Title

The 'Credit Crunch' and the automobile industry in the UK: an in depth study.

2. Research Background / Context

The phrase 'Credit Crunch' is defined as "a severe shortage of money or credit", the credit crunch started when French Bank PNB Paribas was affected a sharp rise in the cost of credit, and made the financial world realize how the situation was.

Lehman Brothers was the first major bank to collapse in the credit crunch followed by insurance giant AIG, JP Morgan, and Meryl Lynch etc. The main problem for the credit crunch is predicted to be the sub-prime mortgage problem. Between 2004 and 2006 US interest rates rose from 1% to 5.5% affecting a slowdown in the US housing market.

The impact of these increased interest rates has affected the entire financial systems as many of the mortgages had been sold on to banks and investors.

The fall of American financial system has affected the whole Europe and other developing economies of the world. It has effected a great negative change in UK's economy. The credit crunch has widely affected the Europe's financial systems too. It has led the insurance giant Fortis to partly nationalize to ensure its survival. In Britain, the mortgage lender Bradford and Bingley is nationalized. The Financial Service Authority (FSA) has raised the limit of amount of deposits that are guaranteed. The government has announced a rescue package for the banking system followed by the short-term lending support. The Bank of England cuts interest rates to 1.5%, the lowest level in the history, as it continues efforts to aid an economic recovery in the UK. As a rescue program the government has announced a package to guarantee of loans to (SMO's) small medium sized organizations to help them to survive in the economic downturn.
The UK's economic condition started going worse day by day. Finally on 23rd January 2009, the UK has officially entered into recession as fourth quarter GDP falls by 1.5%.
World economic growth is set to fall to just 0.5% this year(2009).It now projects the UK will see its economy shrink by 2.8% next year, the worst contraction among developed nations.
The International Labor Organization (ILO) said " many as 51 million jobs worldwide could be lost this year because of the global economic crisis"

"The recession will last longer in the UK than any of the world's other major economies", the International monetary fund (IMF) predicted.
( The credit crunch all over the world has directly affected the UK's automobile industries. The next victim of credit crunch after the financial institutions is regarded to be the automobile industry.

After the serious decline of 21% in the car sales, the UK's car industry started glooming deeper. The car makers were already warned by the government before the shake affected the industry. It is regarded as one of the most worst economical downturn faced the industry. There was a great drop in the market at the time of downturn. This drop is regarded as the fifth drop in the sales. Thus, the manufactures are trying their best to recover their losses with the continuous decline. Around 23% has been noticed in the sale of super mini cars like Corsa and Golf. On the other hand, BMW 3 to 5 series have witnessed a fall of 19%.

Sales of vehicles like Land Rover, Freelander and Mercedes have been drastically down by more than 40%. On the other hand, the production of Land rover, Ford, Jaguar and Toyota has already suffered a production loss.

The drastic decline in the car industry has led to job cuts. The jobs slowly started disappearing as the industry declined. The Ryton was not cost effective and closed the whole firm two years ago cutting 2300 jobs. Nissan lay off nearly a quarter of their workers at its plant in the north of England. The credit crunch has made a serious decline in the car industry. As the industry continues to fall the Volkswagen has reported a positive change in their sales i.e., 5% rise in sales revenue and 3% rise in operating profits. But the case of GM (General Motors) is different; the company has announced a full year net loss of $30.9 billion in 2008. The British motor industry has always been export oriented. UK is the 12th largest automobile producer in the world. The fast decline in the UK's automobile export has made the international competitiveness to decline consistently.

3. Rationale for The Chosen Topic

In this research it is decided to research on the topic 'Credit Crunch' and the automobile industry in the UK. I have selected this topic with the intension of exploring more ideas. This topic helps to understand the reason for the global downturn. From the research I understood, how the Credit Crunch has affected the whole world. It's clear that the Credit Crunch has made the UK's economy to gloom deeper. From the research I noticed that sub-prime mortgage loan problem is the main reason for the Credit Crunch.

The research also indicates the decline of automobile industry in the UK. In the 1970's and 80's, the British government had thrown money at the auto industry to try to keep it afloat. The UK car industry is completely transformed from 30 years ago.

It's clear that the short term help from the government that is short-term lending help does not solve the liquidity crisis. Banks should be cautious about lending to each other.

4. Research Questions/ Objectives

Basically, this research aimed at finding out what are 'Credit Crunch' and its impact on UK's automobile industry? This research also raises additional questions such as: What are the main causes for the credit crunch? What all are the steps taken by the government during the decline of financial institutions? What made the automobile industry to cut jobs?
What should the government choose "a short-term lending help" or serious rescue package? Is there any future for UK's car industry?

5. Literature Review

The research regarding the 'Credit Crunch' and its impact on UK's automobile industry of this proposal has been conducted by reporters such as Falloon M (2008), Knight J (2008), Polard T, Pulman B and Whitworth B (2009).

From the report it's clear that main cause for the credit crunch is sub-prime mortgage problem. The reporters throw some important information on the mortgage problem. According to them interest rates have direct influences on this problem.

Some authors think that 'small life changes' can have major impact i.e. employer cutting overtime shifts. This really indicates that large number of people is living up to and beyond their incomes.
The credit crunch has followed misery in sub-prime mortgage sector which mainly specializes in loans to people with low incomes. This people can be grouped as people with poor credit histories. Some authors relate this very good information with rising interest rates. This has led to record level of default loans and homes repossessions. This can be the reason for slowing down of banks takeover deals or activities.
For a good business it's important to have a very strong capital position, good business model, a clear strategy and well positioned businesses. These factors are interrelated to each other. A change in any factor can make a negative impact on business. From the reports it's clear that weak financial position has led the car industry to decline. Lack of lending from the banks has made auto-industry to gloom deeper.
Many economists still believe that there is no end in sight for the downturn and the recovery may not appear until as late as 2011. Reports of Knight, j (2008) suggests that proper business dealings can help the banks for sudden recovery.

Chris Gentle (2008) (Deloitte & Touche LLP, London, UK) it's clear that financial institutions are still seeking to find the correct balance between risk and rewards amongst the swirling forces of financial innovation. Governance and control mechanism developed to identify and eradicate uneconomic investment decisions. The industry has been hit by a deluge of regulations this include Treating Customers Fairly (TCF), Markets in Financial Instruments Directive (MiFID).

6. Methodology

This research is done mainly through exploring different sources. The research is more exploratory. The information regarding the 'Credit Crunch' cannot be collected more primarily because the main cause for the 'Credit Crunch' has opined differently and the cause is one. Using secondary sources will help to get a wide variety of information. The primary data is more effective because it can be derived from the source but in the case of secondary data it is second hand data. But when we compare these two types of data collection secondary method can give wide variety of information.

The research includes a combination of exploring ideas from different reports and accessing local websites mainly related to NEWS and broadcasting. The research is done mainly through internet accessing and referring business magazines.

The method of accessing to journals will help to know the key areas where the crunch has affected. Reports suggests that UK will be the country which is going to hit more with the credit crunch includes job growth rate, retailing, real estate and financial service industries.

7. Data Collection

The research is done mainly on the basis of secondary sources. The data are gathered through continuous access to internet. Published books are not popular for this topic but updating business magazines and journals will help to get information. Information means 'processed data' so the gathered data is compared with different reports to form information.
The data are mainly gathered from different reports published in local websites. The so called websites are related with NEWS and Broadcasting. Opinions of different business economists are referred but not included in the proposal because they have opined the 'Credit Crunch' and impact on UK's automobile industry differently but their opinions connects to the real cause

8. Data Analysis

This research proposal comprises of both qualitative and quantitative data. The data are mainly secondary data. The data are analyzed with the help of internet accessing. The data are collected from different reports and the whole information is compared with the online reports. The use of internet for analyzing data can have a good comparison of the subject with different reports available online. This approach helps to conduct the data analysis in a less formalized and less complicated manner. Accessing online journals and magazines will also helps to find out the key areas where the credit crunch has affected.

9. References

1. Falloon, M (2008) Credit crunch hits UK economy as banks get tough
2. Knight, J (2008) Britain braced for credit crunch, online report:
3. Pollard, T Pulman, B and Whitworth, B (2009) Crunch watch Feb 09: the auto industry in crisis
4. Online Report Time line: Global Credit Crunch
5. Online Report
6. Gentle, C (Vol. 9 No. 2, 2008) (The Journal of Risk Finance)
7. Gibson, N (Jan 2008 Vol 32 No 1) (Economic Outlook) Credit crunch - what might the UK regional implications be?

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