A Degenerative Company

Will the new GM ever be another General Motors?
Throughout the 1980s General Motors controlled almost half of the American automobile market, and since then that share has diminished to less than 20 percent. In the past decade, as GM struggled to convince its investors that it had a viable business model, its stock steadily declined. The economic crisis, and an accompanying collapse in car sales, was the final nail in the coffin. As GM suffered through this degenerative process in which the company became too large to manage given its reduced market share, structural barriers and a corporate culture of complacency prevented it from downsizing without government intervention. Yet while government-assisted bankruptcy has allowed the company to unload debts and reduce its break-even point, the gain in viability does not equate to a gain in competitiveness going forward.
A Lame Duck Company
As William Holstein, author of Why GM Matters: Inside the Race to Transform an American Icon, explained to the HPR, “GM followed business models and manufacturing models that were many decades old, and when the Japanese came in, American auto makers were at a competitive disadvantage.” Over the years, GM had grown into a complex operation with many different brands, an excessive number of dealerships, an inefficient manufacturing system, and a large number of legacy costs. Through its recent bankruptcy, GM overcame legal and structural barriers to downsizing and sold off all but its four core brands. Holstein added that the bankruptcy allowed GM to “justify consolidating its factory footprint and allowed it to get around state franchise laws protecting excess of dealerships and accelerate the process of closing unnecessary ones.” Billions of dollars in GM’s debt were left with the old GM, renamed “Motors Liquidation Company,” which will remain in bankruptcy. Additionally, GM transferred responsibility for the health benefits of retirees to a trust in the control of the Union of Auto Workers. All these changes have reduced GM’s fixed costs, creating a lower break-even point for the company.
However, critics believe that GM could have downsized without bankruptcy had it not ignored its lingering problems and declining market share for decades. Clifford Winston of the Brookings Institute told the HPR that the company “never seemed to address decline in performance and couldn’t really define what went wrong.” The former head of Obama’s Auto Task Force, Steve Rattner, bolstered this claim when he recently revealed to the media his surprise upon encountering GM’s slow-moving culture. Tom Wilkinson, Director of GM News Relations, told the HPR that while Rattner had valid points, “he was harder on GM people than we thought was fair.” When GM begged for financial assistance from the government, the Auto Task Force rejected its February 2009 restructuring plan on the grounds that the company remained too optimistic about the recovery of auto sales; GM had to adopt a more aggressive plan, which reduced its expectations for auto sales, and set a lower break-even point, in order to obtain government assistance.
No Reigning King
Yet while the downsizing of GM has made the company more viable, viability is not competitiveness. In terms of viability, restructuring means that GM is less likely to lose large sums of money. As Wilkinson explained, “the goal of GM in resizing the business is to be able to break even during the worst down turns. Traditionally, GM was structured to make a lot of money in the up years, and lost a lot of money in the down years.” Now, since GM’s overall costs are lower, it will require less revenue to avoid losing money. Whether it will actually turn a profit, however, remains to be seen. GM’s profits are dependent on its number of car sales, and car sales have shown great vulnerability to fuel prices. The plan GM submitted to the government predicted gas to be at $4 per gallon by 2014, and for industry auto sales to return to the all-time highs of 2005-2006 by 2014. Holstein insisted, however, that, “We will never see auto sales going that high for a long time.” The market for the auto industry is difficult to predict, and there is thus no guarantee of GM’s profitability.
Furthermore, GM does not have the auto industry to itself. The company struggles to compete with some of its foreign rivals, such as Toyota. According to Winston, “GM has been playing catch-up with a moving target.” GM has only now reached the most basic level of competitiveness by nearly matching the cost structure of “transplants,” foreign auto company factories located in the United States. But Winston sees nothing remarkably different in the new GM that will produce a more competitive company. When the American government funded the recent Cash for Clunkers program, which temporarily boosted auto sales, Holstein noted that, “Toyota was the greatest beneficiary of the program.” In the consumer’s mind, GM is far from being the frontrunner.
Winston pointed out that the “industry has been evolving for a long time in a way that has been shrinking these companies.” As domestic automakers face more competition from foreign competitors from Japan, Korea, and eventually China and India, GM’s market share is likely to continue to decline. The only way to reverse this trend will be to introduce new, innovative, and affordable vehicles that consumers want to buy. But given the large number of players in the industry, it is unlikely that one company will dominate. This development is bad for GM, but good for consumers; over the last three decades, increased competition has produced more reliable, higher quality, and diverse cars.
The debate about whether or not the government should have bailed out GM is likely to continue. Winston believes that “there should have just been a sell-off,” while Wilkinson argued that “the auto industry employs too many workers to allow it to go under.” The decision to bail out GM should have rested on a cost-benefit analysis, Winston insisted, without being “wrapped up in the politics.” In such an analysis, the cost to the taxpayers of bailing out the company ought to be less than the sum of the benefit to consumers in terms of affordable cars, and the economic gain of keeping GM’s workforce employed. In the future, as GM becomes even smaller, and as foreign automakers employ more workers within the United States, it is unlikely that this cost-benefit analysis will favor GM.