From THE ECONOMIST - Dec. 2018
GM's boss announces factory closures at home and abroad
The car industry's changing fortunes have left a deep mark on Detroit's urban landscape. Once-bustling factories such as the Fisher body plant, Ford's Highland Park and the Packard plant became vast, abandoned graffitied shells—a sad reminder of the former might of America's "motor city". Now General Motors's Hamtramck assembly plant looks likely to join the list of closed facilities. On November 26th gm announced that Hamtramck, along with four other factories in North America, and two more unspecified plants elsewhere, would not be assigned new vehicles or components to put together after next year.
News of the cost-cutting initially sent gm's shares soaring. In total it will trim its North American workforce by a substantial 15%. Another Michigan plant is among those to be idled, as well as facilities in Ohio and Maryland, and in Ontario, Canada. The day after the announcement, however, criticism from President Donald Trump sent shares the other way. Mr Trump tweeted that he was "very disappointed" in Mary Barra, gm's chief executive, noting that she was not shutting down plants in Mexico or China: "The us saved General Motors, and this is the THANKS we get!" He threatened to cut off gm's access to federal subsidies for electric cars (although industry-watchers noted that this is not a concern, since gm has mostly used up its permitted allocation of such subsidies).
Mr Trump is not the only disgruntled politician. Justin Trudeau, Canada's prime minister, tried to reassure workers about the proposed closure of the plant at Oshawa, on the shores of Lake Ontario, where gm started making cars over half a century ago. After trade liberalisation led to tighter integration of the North American car market, cars became Oshawa's lifeblood. When the financial crisis pushed gm towards bankruptcy, Canada joined America in bailing out the company to save local jobs.
Yet the swirl of forces upending the industry means gm probably had little choice but to take some action. Car sales in America and China are already growing only tepidly. Some worry that a harsh automotive recession is coming. Capacity utilisation in the American automotive sector has plunged from nearly 90% in late 2015 to 80% now. This is a particular problem for GM, which in the past was known for a "bigger is better" mindset. On one estimate, the five North American plants to be shut down have the capacity to make 800,000 cars but are producing fewer than 300,000.
A big factor behind that gap is collapsing consumer demand for saloon cars, long a mainstay of the big car firms. Six years ago, annual sales of pickup trucks and sport-utility vehicles were roughly 7.5m in America, equivalent to sales of saloons. Now Americans buy over 12m Pickups and SUVs each year, more than twice the sale of saloons. The plants that GM is winding down make the Buick Lacrosse, the Chevrolet Cruze and other saloons. Once buzzing with three shifts, these plants have been running just one shift of late.
Another trend forcing Ms Barra's hand is rising costs. Both GM and FORD, its CHIEF American rival, have estimated the infract on profits of the tariffs imposed by Mr Trump's administration on a variety of essential imports (most importantly, steel and aluminium) at over $1bn each. On top of this are the heavy investments that GM must make for the future in electric-vehicle and autonomous technology. Cruise Automation, its well-regarded autonomy division (which in May attracted $2.3bn of investment from Japan's SoftBank), expects to launch robotaxis on the streets of San Francisco next year.
Seen in this light, the cuts look sensible. Since taking over four years ago, says Colin Langan of UBS, a bank, "Mary Barra has done a phenomenal job". She moved faster than rivals in preparing for the future, he notes, by selling off GM’s loss-making Opel division in Europe and pulling out of several unpromising emerging markets. Nor will her cuts hit the factory floor alone— they include a vow to trim GM’s executive ranks by a quarter. In total the changes will take $ 6bn off the firm's annual cost base by 2020. Mr Trump may attack her and unions will revile her. But tough decisions are needed if GM is to survive another downturn and without another bailout. ■