The impact of the current global financial crisis, which originated with U.S. subprime loans and was exacerbated by the collapse of Lehman Brothers last September, has gone far beyond the financial markets, as entire economies are now suffering from sharp declines in demand due to tighter reins on credit, which include stricter screening of loan applicants. Especially hard hit is the automobile industry.
New car sales in the United States in November fell 36.8 percent from a year earlier. The U.S. Senate rejected a request from the Big Three American automakers for injections of taxpayer money. They now must rely on funding under the Emergency Economic Stabilization Act approved by both houses of Congress in October. The share price of General Motors Corp., which had stood at $50 to $55 in December 2003, plummeted to less than $5 in December.
Also badly affected are Japanese car manufacturers, which have relied heavily on export markets. Toyota Motor Corp. has announced that it expects a net deficit of ¥150 billion in operating profit for the current fiscal year ending March 31, an incredible turnabout after it boasted an operating profit of ¥2,270.3 billion for the previous fiscal year. Honda Motor Co. also said the second half of the current fiscal year will show red ink.
To understand these drastic changes, it is important to understand circumstances peculiar to the auto industry. For an ordinary household, an automobile is the biggest purchase item next to a residence. Thus, the purchase cycle of cars has an important bearing on the industry. The average Japanese household, which used to buy a new car every six years, now waits much longer. A similar trend has occurred in the U.S. as well. Even if a consumer decides to keep an automobile for an extra few years, he or she is not likely to suffer a deterioration of convenience or comfort.
In countries like Japan and the U.S. where the auto market is saturated, sales of new cars drop sharply when the value of personal assets such as houses, stocks and investment trusts plummet.
In Japan, moreover, younger generations are not as interested in buying cars as in the past, when the dream was to save money to buy luxury automobiles. Many now think that driving a car and looking for places to park are too cumbersome. To make matters worse, the costs of car ownership have become prohibitively high, especially for irregularly employed young people.
Another conspicuous trend is that Japanese car buyers are moving toward smaller models that fetch much lower profits for automakers. The number of new autos sold in Japan last November showed a drop of 27.3 percent from the same month a year earlier. The American Big Three as well as car manufacturers the world over are faced with declining demand at home and abroad amid a devastating economic storm that nobody had anticipated.
If General Motors, Ford and Chrysler go under, an estimated 3 million jobs are projected to be lost. But since the production of each 1-ton-plus car consumes large amounts of raw materials like steel, nonferrous metals, glass and chemicals, a drop in car sales has a ripple effect on the industrial sectors supplying those materials. So, it is feared that the collapse of the Big Three would result in more than 5 million job losses.
What should be done to revitalize demand and create employment opportunities?
The options available to the governments of Japan, the U.S. and the European countries appear to be limited to increasing public expenditures. Even though a majority of economists today call for more government spending as a means of shoring up the economy, there is no guarantee that the promotion of public works projects and the like will create sustainable demand in the long term.
According to newspaper reports, the new U.S. administration under Barack Obama will seek to rebuild the American economy by promoting what is known as “Green New Deal,” under which the government will invest heavily in the research and development of new energy sources, fuel-efficient automobiles and energy-saving electric appliances. This policy undoubtedly is aimed at mitigating climate change.
It has long been said that the central theme of the 21st century will be protecting the environment. I have long contended that environmental constraints should trigger innovation and economic growth. This appears to be coming true. The financial crisis wreaking havoc throughout the world seems to signal the end of the oil- and automobile-driven civilization of the 20th century and the beginning of a new civilization led by green industries.
Takamitsu Sawa is a professor at Ritsumeikan University’s Graduate School of Policy Science and a specially appointed professor at Kyoto University’s Institute of Economic Research.