Finance

Enterprise risk management includes every aspect of risks within the corporation. These includes labor negotiation risks, innovation risk, lack of foresight ignoring market conditions risks, management self-interest and greed risks and many more risks. Considering the cases of the three U.S. auto manufacturers which are GM, Chrysler and Ford, this paper examines the risk factors that contributed to the near-bankrupt condition of the  above U.S. auto makers. In this analysis, a discussion is also made of the potential pure and financial risks facing the auto industry in general.

The 2008 to 2010 automotive industry crisis was the major risk factor that contributed to the near-bankrupt condition of the U.S. auto makers. The automotive industry crisis resulted from financial downturn that was witnessed not only in the U.S. but worldwide. As a matter of fact, the Asian and European automobile manufactures were also affected by these crises, though the American auto makers were the most affected. Because of the Automotive Product Trade Agreement, countries like Canada were also negatively affected. The financial downturn also affected individual consumers due to financial and job market instability making them not want to buy a new car if the one they had was working and hence a decline in the sales made in the automobile industry in general (Enterprise Risk Management Committee, 2003).

The energy crisis of 2003 to 2008 that led to a substantial increase in the fuel prices is another risk factor that led to financial risk in the U.S. automobiles. This resulted into a drastic reduction in purchase of vehicles which were not efficient in fuel use like the pickup trucks and the sport utility vehicles. Unfortunately, U.S. big three automakers had made their primary focus on these vehicles because of their high profit margins and popularity. When these vehicles were on high demand the three U.S. auto makers could make a profit margin of 15 to 20 percent as compared to 3 percent profit margin for the other types of cars that were fuel efficient. Due to lack of foresight ignoring market conditions risks as a result of shift in buyer preference, the three U.S. auto makers found themselves having fewer fuel economical models to sell. The sales of these U.S. automakers dropped leading to near-bankrupt condition of these companies. This is because in 2008 the gasoline price increased reaching over 4 and forcing Americans to stop buying the less efficient fuel cars (Enterprise Risk Management Committee, 2003).

The unforeseen credit crunch in 2008 that placed pressure on the prices of raw materials used in the automobile industry was also another risk in automakers business. As it became difficult for people with poor credit and even those with average credit to obtain a loan to buy a car, the three companies car sales proceeds declined. This factor led to a stern financial risk as the automobile industry witnessed reduced profit margins and loss for most companies. The three auto makers in the U.S. were threatened by the financial risk and their stock prices declined due to shareholders worry that the companies could become bankrupt. In fact for GM their share level fell to the lowest level since 1946. Due to the decline in sales, the three U.S. auto makers and other auto makers in the world, offered substantial discounts to attract customers. The discounts were also other types of risks in light of increased cost of production and fuel prices (Enterprise Risk Management Committee, 2003).

External environmental pressures were also risk factors in U.S auto makers and the auto industry in general. Overtime concern had been expressed regarding reduction of carbon emission. The big three auto makers in U.S. had constantly been criticized for trying to sell larger, inefficient fuel guzzles which emitted large amounts of carbon gases. As a result, fewer people were willing to buy them because of their negative impact to the environment. The three U.S. auto makers were blamed for not making necessary efforts to increase the miles per US gallon for the autos that they manufactured
Chery reported very low sales and the government had to intervene in 2008 to reduce automotive taxes to save the industry from the financial risk it faced. Generally, the auto mobile industry still faces financial risk and automotive loans interest rate needed to be reduced in 2009 by such institutions such as the State Bank of India so as to safe the industry. Recently, in Japan, Toyota has had a double digit decline in sales mainly because of an innovation risk that led to few fuel efficient vehicles, which were the one in high demand. The Trundra pickup that Toyota was primary offering had low sales. Toyota Company reported a loss of 1.7 billion for the year 2008, which was the first time loss the company had made in the 70 years it has been in operation (Enterprise Risk Management Committee, 2003).

In conclusion enterprise risk management has a wide scope and this is the case even in the automobile industry. Any of the risks or a combination of them can be factors leading to potential pure and financial risks as was witnessed by U.S. three auto makers that faced near bankrupt condition. However, the potential pure and financial risks were not only experienced amongst the U.S. auto makers alone but were common in the automobile industry in general.