Market forces drive GM decision; tariffs don't help
Saturday, December 1, 2018
President Trump believes he can command markets like King Canute thought he could the tides. But General Motors has again exposed the inability of any politician to arrest the changes in technology and consumer tastes roiling the auto industry.
GM said it plans to eliminate 15 percent of its salaried workforce in North America and stop production at five plants that employ 6,700 workers, including one in storied Lordstown, Ohio. “We are taking these actions now while the company and the economy are strong to stay in front of a fast-changing market,” CEO Mary Barra said.
The U.S. auto maker plans to redeploy some $4.5 billion in annual savings to more profitable truck, electric-car and autonomous-vehicle manufacturing. Investors cheered by bidding up GM’s stock, but the president reacted like a spurned suitor. “You know, the United States saved General Motors and for her to take that company out of Ohio is not good,” he said Monday, adding Tuesday that he might end GM’s subsidies. GM shares promptly fell 2.6 percent.
As a candidate Trump lambasted Ford for shifting production to Mexico, then took credit when the company announced it would keep its Lincoln MKC in Louisville, Kentucky. But both decisions were motivated by market changes, and so is GM’s.
GM is halting production at plants that make sedans including the Chevy Cruze, Impala and Volt hybrid. Americans are buying more trucks and SUVs amid lower gas prices and better fuel efficiency. Small cars make up a third of U.S. vehicle sales compared to half in 2012. About 75 percent of GM sales last year were trucks and crossovers, up from 60 percent in 2012. Its share of the small-car market also has fallen by a third in a decade amid Japanese and Korean competition.
The main driver of GM’s failure a decade ago was its uncompetitive labor contracts. Rather than reduce costs or idle unproductive plants, GM offered bigger discounts to goose sales. But the market tides still rolled in, and GM executives have learned that staying competitive is necessary to avoid another collapse.
GM is essentially following Ford and Fiat Chrysler by phasing out small-car production. Last year GM cut production by a third at Lordstown and nearly half at a plant in Oshawa, Ontario. Keeping these factories open at lower levels of output would waste human and physical capital that could be deployed to more productive and profitable units.
The Trump Administration deserves credit for giving auto makers flexibility to make more of the cars consumers want by relaxing corporate average fuel-economy standards. GM’s third-quarter profit in North America surged 37 percent even as U.S. sales fell due to strong demand for pricier pick-ups and SUVs.
Boosting production of higher-margin vehicles is imperative as auto sales flatten after eight years of robust growth and rising interest rates curb demand. Material costs have also increased due to Trump’s steel and aluminum tariffs. GM said in July the tariffs could raise its costs by as much as $700 million this year, which is equal to the pay of about 9,400 employees.
Trump and liberals howling about layoffs ignore that GM is steering more investment toward electric and autonomous vehicles. Electric cars make up only about 1 percent of U.S. auto sales and often sell at a loss though they could become more popular as batteries improve.
But China is GM’s largest market, and it sold a third more cars there than in the U.S. last year. Beijing has set electric-car quotas, and to be competitive GM has little choice but to make cars in China. All the more so after Beijing raised tariffs on U.S.-made cars to 40 percent from 15 percent in retaliation for Trump’s tariffs.
GM is also betting that autonomous cars will become the rage as millennials and aging baby boomers give up the wheel. Ford is experimenting with self-driving cars to deliver pizzas. Google’s Waymo will soon deploy a self-driving taxi fleet of Chrysler minivans, which GM is planning to challenge.
Trump and Democrats seem to believe that with the right mix of tariffs and managed trade they can return to a U.S. economy built on steel and autos. This is the logic behind the administration stipulating in its new trade agreement with Mexico and Canada that 40 to 45 percent of a vehicle’s value must consist of parts made by workers earning at least $16 an hour.
But an economy doesn’t run on nostalgia. U.S. auto makers don’t fear the new wage mandate because engineering performed by higher-skilled U.S. employees accounts for ever-more of a vehicle’s value. GM could soon become as much a tech company as a manufacturer. Amid a strong economy, most laid-off GM employees should find work. GM may also decide to retool idled factories to produce trucks as Fiat Chrysler has with a plant in Michigan.
Trump thinks his trade machinations can overrule the realities of the marketplace, but he’s as wrong as Barack Obama was about the climate and regulation. Fine with us if he wants to end subsidies for all car companies. But if he intervenes to make GM less competitive, Trump will merely hurt more workers.
The Wall Street Journal