General Motors: A Perfect Storm

General Motors: a perfect storm of delaying much-Needed factory shutdowns, ignoring a changing auto industry structure, and high x-inefficiency

Once upon a time, it was said that, as GM goes, so goes the nation -- in other words, that the automotive manufacturing behemoth was such an integral part of the national economy, that its prosperity and America's prosperity were inexorably intertwined. Now, however, GM struggles to stay afloat in a newly competitive world car market, where Toyota has come to dominate the traditional American automotive brands. "GM has seen its slice of U.S. vehicle sales slide steadily over the last 30 years, taking its share of the U.S. market down to 26.2% in the first 10 months of this year, compared with 43.8% in 1980. (Isidore, "Many problems dog the No. 1 automaker,"2005)

Streamlining and shutting down old, inefficient factories were deemed part of GM's necessary survival strategy. GM was so desperate to close inefficient factories that it renegotiated an agreement with the powerful United Auto Workers union (UAW). The union encouraged its workers to take early retirement packages so that GM could hopefully stay solvent and honor its commitment to its many current and retired employees to pay wages, pensions, and benefits. Now, all GM workers are guaranteed full pay and benefits through the end of their contract in September 2007, whether or not the company has work for these employees. (Sahadi, 2005)

This means that GM can close outmoded assembly, stamping, and power-rain or eliminate unnecessary shifts at its existing plants. However, "with the announced closings, GM is essentially keeping its capacity of large sport utility vehicles and pickups intact, even though big SUVs sales have slumped in recent months in the face of higher gasoline prices...The plan is essentially as expected, meaning not terribly aggressive," observed one auto industry insider. (Isidore, "GM's Big Shakeup," 2005)

In other words, although there will be some reduction in the costs of production, in terms of maintaining the salaries of the workers at these plants, and the overhead costs, the company's failure to address the industry-wide changes that have shook the world car market remain.

After years of unquestioned industry dominance, GM was not prepared to shift its approach to making cars to cope with the competitive edge possessed by Japanese automotive manufactures such as Toyota since the 1980s. "To be sure, GM has seen sales jump from time to time, but always because of costly incentives, like zero-interest financing after the Sept. 11 attacks, or the 'employee pricing' last summer. Ford and Chrysler have been forced to follow GM's lead on incentives, though the Asian automakers have largely avoided them by offering more attractive vehicles." (Isidore, "Many problems dog the No. 1 automaker," 2005) More attractive vehicles do not necessarily mean more luxurious vehicles -- far from it. Rather by offering inexpensive, reliable and mid-sized cars tailored to the average consumer desiring fuel efficiency, Toyota has gained an industry edge. It anticipated the desires of the public, and also deploys a largely non-union workforce, unlike GM.