General Motors and the Auto Industry

  • SumoMe

The collapse of General Motors is, perhaps, being looked upon as one of the biggest blows to the US real economy. General Motors stood as a symbol of America’s talent for innovation. A company that, once, sold half of the cars in America and was the cause for uplifting millions of employees to the middle class, filed for Chapter 11 in Federal Bankruptcy Court in Manhattan on Monday, 1st June 2009. “It marks the end of ‘the old GM’” President Obama says instigating hope amidst misery.

 

G.M. will be closing 14 more American factories and cutting up to 21,000 more jobs. After the factory closings, which will leave 12 in Michigan, G.M. will have fewer than 40,000 workers building cars in the United States — one-tenth of a work force that in the 1970s numbered 395,000 people.

 

General Motors which once marked the dominance of US capitalism worldwide is today being looked upon by many as the end of Capitalist beliefs in The United States or at least of Capitalism offering the “American dream” of rising standards of living for working people.

 

Though the final collapse of GM was greeted by indifference by most-the Wall Street, Congress and Americans-the collapse holds important lessons about management, about government and even about the future of the car industry. An analysis of GM’s past reveals how past mistakes must have bowed down heavily on it making it collapse with a thudder.

 

GM presents a fine example of how the US has only advocated policies of free markets, but, seldom, practiced them in true sense. GM’s architect, Alfred Sloan designed the company around the needs of customers-‘a car for every purse and purpose’ was the principle the company worked on. Though the organization was brilliantly designed for dominating the industry, testing times proved it to be inefficient and inflexible in adapting to the dynamic industry. In the 1970s, there was an inflow of small, lighter and fuel -efficient Japanese cars into the US. Due to Detroit’s influence in the government, it was successful in garnering protection from them. Instead of adapting and evolving in the wake of new competition by introducing superior products, GM acted short sighted. The government restricted import of Japanese cars, succeeding in protecting its domestic industry.

 

Another aspect to be highlighted is a series of events that led to the company to lose its vast number of loyal buyers through a series of strategic and cultural mis-steps.
GM that once stood for brands such as the Buick, Cadillac, Chevrolet, in order to cut costs in 1980s started sharing the underpinnings of its cars across different brands, which dissolved its existing identity.

 

G.M., unlike any other player in the auto industry had the strongest pension & health schemes and set standards for blue-collar wages and benefits, all thanks to the workers union. According to a contract signed in 1990, GM paid workers even when plants were not running; forcing it to build cars and trucks it could not sell without big incentives. GM also had a policy of giving retired workers full pensions and health care for life. It is not an unknown fact that US even today is struggling with expensive and inadequate health care-which surely robbed GM’s coffers.

 

Already burdened by financial obligations, GM was caught in a rift between its own Finance Department and Marketing department. The marketers pushed for aggressive spending on new cars and trucks. But faced with launch of so many brands at short intervals, G.M. often resorted to a practice called “launch and leave”. They spent billions introducing the vehicles in the market, but then failed to keep supporting them with sustained advertising.

 

GM’s market share was crippling while its competitors Honda and Toyota were successful in attracting customers to the Accord and the Camry respectively.

 

Over the years, G.M. executives became practiced at the art of explaining their problems, attributing blame to everyone but themselves. Though GM along with its fellow American brands Ford and Chrysler had almost caught up with Japanese standards of efficiency and quality, they realized that Americans had moved on and remained loyal to their Toyotas, Hondas and Mercedes. By this time, GM represented a company which was first doing badly as a car company and secondly, was burdened by insurance that far exceeded its capacity to pay.

 

But does the collapse of the iconic General Motors really indicate doom for the auto industry world wide? Probably not! It would be foolish to imagine that people all over the globe will stop demanding cars, when a car is, in fact, one of the biggest planned investment that a person makes on reaching an income of about $ 5000. According to IMF forecasts, the world will have nearly 3 billion cars in 2050 compared with around 700 million cars today. This does not, however, mean that manufacturing should continue at present levels. Capacity stands at 90 million cars per year as against a demand of 60 million (in good economic times). Though the prospects of the auto industry, namely, the fact that they employ a lot of people and is a repository of high technology, lure nations and governments to constantly increase capacity, it is high time they realize that this overproduction, in fact, causes harms in the long run.

 

As far as GM is concerned, attempts are being made to lure private capital into taking over a profitable ‘new GM’ that’s rid of its debt and unwanted assets. and within a period of 6-7 months, the world will witness a GM which will primarily be owned by the government . The stake would initially be as large as 60 percent, in return for $50 billion in bankruptcy financing. Most of the rest will be owned by bondholders and the United Auto Workers, which will receive its shares as financing for a health-care plan whose costs, were formerly borne by G.M.

 

I ,however, feel that the Obama administration is face to face with a challenge that it can well turn into an opportunity. If the purpose of bailing out auto industry is truly to help in coming out of the industrial decline, then, why not invest in the falling GM, Chrysler and other manufacturing companies to produce what the USA truly needs-such as light rail systems and new energy efficient materials, and training laid-off autoworkers for the technician jobs of the future? That would be taking the ‘road less travelled’-perhaps a kind of path that Obama has been talking about since his campaign-before his victory.

 

Hemantika Verma

[Image source:http://www.thecontrarianinvestor.net/wordpress/wp-content/uploads/2009/05/gm20sinking_640.jpg]

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How did General Motors Go Bankrupt

General Motors Corporation (GM) is an automaker based in Detroit, U.S. In 2008 it was the world’s second largest automaker...

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