General Motors recently announced that they were closing five plants and cutting 14,000 jobs. Why are they doing this?
Much has been written on the resurgence of the domestic auto industry following the 2008-09 recession and GM’s return to profitability; however, there are less reassuring trends. One is that General Motors continues to lose market share after emerging from bankruptcy. In 2008, GM’s sales represented 22 percent of total vehicle sales in the U.S. This market share has steadily declined to 17 percent by 2017. Each point of market share represents about 180,000 vehicles sold. Thus, losing five points of market share represents 900,000 fewer General Motors vehicles sold each year, resulting in excess production capacity that GM is now shedding. In 2017, General Motors sold fewer vehicles than in years prior to the recession.
A decline in oil and gasoline prices is another trend that contributed to General Motor’s downsizing. Oil and gas prices steadily increased throughout the 2000s, with oil peaking at $140 a barrel and gasoline at $4 in mid-2008. Thus, when the Chevrolet Volt and Cruze were debuted at that time, it looked like oil and gasoline prices would continue to rise and these fuel-efficient vehicles would be popular with consumers. The trend of oil and gas prices reversed itself in the 2010s though, with oil being $50 a barrel and gasoline averaging $2.51 a gallon by the end of November, 2018. With lower fuel prices, consumers are shifting to larger, less fuel-efficient sport-utility vehicles. Consequently, passenger cars only represent 30 percent of U.S. vehicle sales, their lowest share ever. General Motors had a goal of selling 100,000 Volts per year, but was only able to sell 20,000 of them in 2017 with sales declining by nearly 30 percent in 2018.
Steel tariffs imposed by the Trump Administration are unlikely the cause of the downsizing. If they were significantly cutting into the company’s profit, GM’s stock price would be declining. Instead, it is largely unchanged from its five-year average of around $36 per share.
With strong economic growth and low unemployment, a recession does not appear to be on the horizon. General Motors likely is using the strong economy to position themselves for whenever the next recession arrives. Excess capacity and costly overhead drove the company into bankruptcy when their market share dropped below 20 percent in 2009. The bailout and subsequent bankruptcy allowed the company to shed this overhead and become profitable at a lower market share. The bailout was politically unpopular outside of Michigan, and politicians are unlikely to spend the political capital needed for another one, should the company find itself in trouble again. GM likely knows this and is shedding excess capacity and overhead now, so that the company can weather future downturns without entering bankruptcy. Thus, if there is a silver lining to this downsizing, it’s that it makes GM more resilient to future economic headwinds.
