The Impact of a Recession on Goodwill Tire and Rubber Company

1 The Impact of a Recession on Goodwill Tire and Rubber Company The economic stability of a company is often indicated by its level of industrial production, rate of unemployment and its Gross Domestic Product (GDP). An economic recession is a financial crisis that causes a reduction of all the three indicators of economic stability. In the United States, there have been several recessions over the years, but two stand out as having the most significant impact on the economy; the Great Depression that occurred between October 1929 and 1939, and the Recession of 2007 to 2009.

Goodyear Tire and Rubber Company is a leading tire manufacturing companies in the world. It an American multinational corporation that was founded in 1898, and whose headquarter is in Ohio. The corporation manufactures tires for all forms of motor vehicles and aircraft and generates billions of dollars worth of revenue annually. Goodwill is recognized globally for the quality of its products, services, performance and leadership. This paper examines how the corporation would be affected by the occurrence of an economic recession.

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Effects of Recession on the Company Several manufacturing companies in developed countries, including Goodwill, reduce their costs and increase their operational efficiency by purchasing their raw materials from developing countries, and also outsource production to developing countries (Schenker, 2016). This is referred to as the globalization of capital. Consequently, the rate of unemployment and underemployment is gradually increasing in the developed world (Berberoglu, 2014). The globalization of capital has exposed the global economy to periodic economic crises. Given the ever-increasing rate of globalization of capital, it is likely that in the future there might be another economic recession.

During a recession, the economy shrinks and consumers have a lower spending capacity due to the increase in the cost of goods and services. Therefore, consumers will only purchase essential commodities such as food and shelter, and reduce their purchase of non-essential products. The demand for tires will slow down because they are not a basic good. During an economic crisis, consumers can avoid purchasing new tires by using other transport options or extending the use of their current tires. Alternatively, they may resort to cheaper tires from Goodyear’s competitors. Thus, the volumes of tires sold will reduce significantly. This will reduce its revenues.

Like most corporations, Goodyear Tire and Rubber Company have debtors and creditors. A recession makes the economy go into shock and reduces the amount of money in circulation. This would make debtors to either default or delay their obligations to the company, and Goodyear would, therefore, have to strain to make payments to its creditors

3 (Veblen, 2017). The inability to make payments on time would cause the company to introduce cost-cutting measures, which might include reducing the scale of its operations.

As the economy continues to shrink and market demand declines, Goodwill may also have to lay off staff to reduce its overheads. A recession leads to a reduction in the rate of production since there are fewer buyers for the goods a company manufactures. As a result of more idle factory time and lower sales, Goodwill Tires might be forced to lay off several staff, and in extreme cases, reduce its employees hourly wages. Reducing expenses through cutting employee wages and retrenching staff, will lead to a demoralized workforce, and in turn, affect the rate of production and quality of service.

An economic recession would result in a major decline in Goodyear's business performance. It will reduce investment into the company and also reduce the number of business mergers, takeovers and partnerships. The company’s stock prices will also decline, thus lowering the value of the company. As a result of the recession, the market will have low spending power, and business activity will slow down. Depending on the severity of the depression, some of Goodwill’s factories may lie idle due to the high costs of production and low market demand. During the recession, banks will be wary of lending money to companies, thus Goodwill will not be able to access credit facilities, hence straining its cash flow. . It might have to sell off some of its assets to boost its cash flow, and avoid going into bankruptcy, thus, the recession will also affect the corporation’s asset portfolio.

Businesses grow due to an increased level of productivity and the ability of the market to purchase the goods it produces. In normal market conditions, increased production and sales, lead to higher revenues (Gilder, 2013). This enables the business to invest in technologies that facilitate innovation and greater productivity. The increase in production

4 among firms in the same industry, which in this case, is the tire and rubber industry, lowers the cost of production and leads to a decrease in the price of goods and allows the company to increase the wages of its workers. These gains are all reversed during a period of recession.

Goodwill will be unable to invest in new technologies, which will reduce the company’s ability to innovate and grow. The rate of production will decline and the cost of production will increase, which ultimately, will make the goods more expensive for the market.

Additionally, customers will have less disposable income to purchase the goods produced by the company.

Being a manufacturing company, the financial stability of Goodwill Tires is crucial to the economy of the country. The employees of the company use their income to purchase goods and services such as education, food, housing, electronics and motor vehicles. This creates employment and generates employment for these sectors. According to Hughes & Cain, one job in the manufacturing industry generates 2.5 employment opportunities in other sectors (2011). Therefore, the effects of the decline of Goodwill Tires due to an economic recession will spiral down to other sectors of the economy, leading to reduction of revenues and unemployment, thus deepening the impact of the financial crisis.

During a recession, there is a significant decrease in the amount of money circulating in the economy and this will affect Goodwill Tires negatively. Its revenues will decrease, hence it will have to rely on debt to finance its spending. This will increase the company’s risk of financial distress, since more of its income will go towards interest expenses, and on the other hand, the income will have reduced significantly.

Conclusion

5 The globalization of the economy and the factors of production causes countries to rely on each other more, subsequently, increasing their exposure to financial crises. While it may not be possible for Goodyear Tire and Rubber Company to prevent the occurrence of a recession, it can design policies that will enable it to cope with the effects of a downturn, and facilitate faster and more efficient recovery.

6 References Berberoglu, B. (2014). The global capitalist crisis and its aftermath. Ashgate Publishing.

Gilder, G. (2013). Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World. Regnery Publishing.

Hughes, J., & Cain, L. (2011). American Economic History. Pearson Addison-Wesley.

Schenker, J. (2016). Recession-Proof: How to Survive and Thrive in an Economic Downturn.

Gallery Books.

Veblen, T. (2017). The theory of business enterprise. Abingdon, Oxon: Routledge.