The Challenges GM Is Facing, and the Reasoning Behind Its Plant Closures
General Motor’s announcement that it plans to idle five North American factories and cut 14,000 jobs has sparked much discussion in the media and outrage in Washington. While the job losses are a terrible blow to those workers and the families they support and the local economies where the factories are located, it is a wise decision that could prevent the kind of crisis that resulted in it seeking bankruptcy protection in 2009 and a $50 billion bailout by the U.S. government. It is far better for GM to reallocate sources now, while it is healthy, than to wait until it is trouble. And the same applies to the affected workers: The tight labor market means there are opportunities for those who go through retraining.
General Motor’s announcement that it plans to idle five North American factories and cut 14,000 jobs has sparked much discussion in the media and outrage in Washington. While the job losses are a terrible blow to those workers and the families they support and the local economies where the factories are located, the decision could prevent the kind of crisis that resulted in it seeking bankruptcy protection in 2009 and a $50 billion bailout by the U.S. government. It is far better for GM to reallocate resources now, while it is healthy, than to wait until it is in trouble. And the same applies to the affected workers: The tight labor market means there are opportunities for those who go through retraining.
GM has good immediate reasons for its decisions. Car sales in the U.S. had a boom period thanks to all the individuals and businesses who deferred buying new vehicles during the Great Recession. But car sales are now probably past a cyclical peak, not only in the U.S. but in China as well, and there is too much global auto-assembly capacity chasing that demand. Another problem is demand for small and mid-size cars in the U.S. has plunged, and consumers haven’t been flocking to buy GM’s hybrid Chevy Volt.
All those factors have been taking a heavy toll on the plants in question. For example, the Lordstown, Ohio, factory that makes the Chevy Cruze is running one shift a day, down from three a few years ago, and last year produced 180,000 vehicles, down from 248,000 in 2013. Capital-intensive factories have a high-fixed-cost, low-variable-cost operating model. If you greatly reduce the production volume, the cars that do come out have to absorb more of the fixed costs, and that eventually sends the product into a profitability death spiral. Every day GM operates such factories, it expends more resources that could be redeployed elsewhere.
Another issue involves reallocating resources in the face of fundamental market shifts. When and how are the best ways to do it? These are questions that don’t get asked enough. It’s important because companies build assets and capabilities to deliver products and services to a market of consumers that values them at some point in time. But markets and tastes shift, and changing assets and company processes is hard. Given the shift in immediate U.S. demand from small and medium-size sedans to light trucks and SUVs and the long-term need for GM to make the transition to electric and self-driving cars, I think that GM is smart to act now while its cash flow can sustain the shutdown of these facilities and reinvestment in new products.
Then there is the question of how to reallocate assets. Many firms — and GM is a notable example — have used bankruptcy as a way to shed assets. When it initiated the process during the heights of the Great Recession, it eliminated the Pontiac, Oldsmobile, Saturn, and Hummer brands, along with countless other obsolete assets. GM also used bankruptcy as a way to get out of dealer agreements, renegotiate labor contracts, and sweep away decades of ways of working that were no longer in step with the market’s needs.
I believe a far-better path is to restructure the operations in question way before they threaten the company’s survival. That is what GM is trying to do. Another way to do this is to sell off pieces that no longer are sustainable to someone who has the political ability to restructure them. A major rationale for a great deal of outsourcing activity has been to put assets in the hands of somebody who can restructure them. The Detroit Big Three did this with a significant portion of their component operations.
A separate question that the GM announcement raises is who is responsible for retraining the displaced workers and helping them to find a new way to support their families? The tragedy in America is that there is no consensus among leaders in business and government. Should retraining be a public or a private good? Most employers no longer seem to take primary responsibility for this, and the debate at different levels of government tends to confound the question with the provision of “welfare.” As is the case with education, I think it is a public good. Both individuals and companies benefit, as do the communities around them. A capable workforce with up-to-date skills makes a community or region attractive to prospective employers. What is gratifying is local leadership at the grassroots level is finding effective solutions for retraining — the topic of a recent article I coauthored.
So, all in all, it is better for both GM and the affected workers that it is acting now rather than waiting until the problem gets worse. Yes, the workers have a tough road ahead of them. But they should ask themselves whether they are better off holding on to an unsustainable job as long as possible or trying to change now? I learned from my jobs in industry that most problems don’t get better over time; this one almost certainly won’t.
Willy C. Shih is the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School.
The Challenges GM Is Facing, and the Reasoning Behind Its Plant Closures
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