GM is damned if it does, damned if it doesn't

GM is damned if it does, damned if it doesn't
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General Motors (GM) can’t win. In the 2008-2009 financial crisis, many criticized GM for waiting too long to make painful but necessary cost-cutting decisions.

With last week’s manufacturing capacity announcement involving “unallocated product” at five North American plants and the recently announced salaried buyouts and cuts, GM now faces criticism for moving too quickly.


While GM remains profitable and economic conditions are good, U.S. light-vehicle sales are softening as the economic recovery is well into its 10th year. While economic recoveries do not die of old age, everyone in the auto industry knows a downturn is coming. GM is trying to fix problems before it is too late.

Taken together, the new U.S.-Mexico-Canada Agreement, tariffs and the threat of even more tariffs are raising the cost of building cars and trucks in the United States.

Tariffs and trade policy may not be the driving force behind GM’s cost-cutting, but these policies are not helping GM, or for that matter any U.S.-based automaker or supplier, to become more competitive.

U.S. automakers now face the highest metals prices in the world for essential steel and aluminum manufacturing inputs.

GM and Ford have already reported that the metals tariffs are costing each company $1 billion in lower profits this year (and that equates to a $1,000 hit to each United Auto Workers union member's 2018 profit-sharing check).

Raising the cost of manufacturing in the United States by imposing even more tariffs will lead to higher prices for consumers, lower overall light-vehicle sales, lower employment levels in the industry and the economy and could precipitate the next recession.

Trade is just one source of uncertainty in the auto sector. Automakers are also in the midst of a whole host of significant changes. The business model of selling cars is giving way to personal mobility-as-a-service.

Vehicles are becoming more electrified and driving more automated. The regulatory environment is growing more stringent in some markets. Moreover, China has now eclipsed the United States to become the largest market in the world for new vehicles.

GM is not the only automaker that is making big bets on electric vehicles, automated driving technologies and investing in serving the critically-important Chinese market, and it is not the only company that must cut costs to make these investments.

Under the terms of GM’s agreement with the United Auto Workers (UAW), the company cannot “close, idle, nor partially or wholly sell, spin-off, split-off, consolidate, or otherwise dispose of in any form, any plant, asset, or business unit of any type."

Some exceptions allow GM to close or idle plants for conditions that are beyond GM’s control, such as overall market declines or acts of God. With neither of those conditions met, what is GM to do when the products they are currently building in these facilities are not selling well, and the company is losing money by continuing to operate them?

Automotive assembly plants need to operate at 80 percent or more capacity utilization to be efficient and profitable. While most automakers in the United States are operating above that threshold, GM is well below the mark.

GM plants account for roughly one-third of the approximately 3 million units of underutilized auto production capacity in the United States, and all of GM’s underutilized plants build sedans.

Remarkably, sales of GM sedans have held up relatively well even as the market has shifted to the cross-utility segment (CUV).

The sedan share of the U.S. market has fallen from 46 to 27 percent of light vehicle sales between 2009-2018 (-41 percent); GM’s share of sedan sales has fallen less dramatically — from 15 to 11 percent (-30 percent). In 2017, two out of every five vehicles sold was a CUV.

So, why doesn’t GM allocate new products, presumably CUVs, to the plants that have been producing sedans? It is not that easy. First, GM continues to operate other plants below 80 percent capacity and may choose to place new products in these plants rather than Detroit/Hamtramck, Lordstown, Ohio or Oshawa, Ont.

Second, renewing a product costs $500 million to $1.6 billion and can take as long as 2-3 years to complete. Third, all automakers seek to defray some of the cost (and risks) of large investments by getting stakeholders to shoulder some of the burden.

In GM’s case, that means asking the UAW for a lower-cost or more flexible agreement to secure a new product and job security for their members and asking host communities and states to compete for the investment with economic incentives.

Many companies play this game, and some (Foxconn, Amazon) win big prizes in these competitions.

GM may or may not reinvest in all five of the plants where they have announced capacity actions this week, and the GM-UAW workers and supplier workers tied to those plants have an uncertain future ahead.


Some will retire, most will have the ability to transfer to other facilities within the company that need workers (and will be paid to relocate, if necessary), and still others will find jobs elsewhere in the economy.

At 3.7 percent unemployment in the United States, their job prospects are solid, though it is unlikely they will earn the same compensation at a new non-GM job.

Excess capacity was a problem for GM and other automakers heading into the last recession. This time, GM seems determined not to repeat their past mistakes.

Kristin Dziczek is vice president of the Center for Automotive Research, an organization based in Ann Arbor, Mich. that conducts research, forecasts trends, develops new methodologies and advises on public policy.