GM's Ultimate Demise

So management and labor finally decided to settle the GM strike. As predicted, both sides claimed "victory". But the way I count, the score was UAW 23, GM -2. Apparently the major sticking point was resolved when GM agreed to return the machines that they had taken out of the Flint plant. The UAW agreed, as far as we can tell, not to strike any more under the current contract unless they felt like it. This isn't a union-bashing article. After all, the UAW has managed to coexist relatively peacefully with both Ford and Chrysler -- at the same time that both those companies have turned in performances far superior to the sorry record at GM. Almost everyone has pointed out the raging incompetence of GM management -- but this article isn't about that either. Rather, it is a tale of the increasing irrelevancy of General Motors as a company, and the transformation of the entire motor-vehicle industry. All of us who are of a certain age remember "Engine" Charlie Wilson telling the American public, "What's good for General Motors is good for the country." Wilson later claimed he was quoted out of context, but in fact he needn't have apologized, because that was true not only in the 1950s, but for many years afterward. Consider what happened in 1970 when GM was on strike for 67 days. The economy, which had fallen into recession in late 1969, was beginning to show signs of recovery, but the GM strike caused real GDP to fall almost 4% in 1970. After a quick rebound in 1971, as GM production soared, real GDP then rose less than 2% the rest of that year. The GM strike not only prolonged the 1970 recession, but was partially responsible for a sluggish recovery in 1971. Since the recent strike lasted "only" about six weeks and spread gradually, as opposed to an immediate shutdown caused by a nationwide strike, perhaps the figures aren't comparable. Second quarter growth swooned, but that was due to factors that had nothing to do with the strike. For practical purposes, shutting GM down had no impact on the overall economy. Production of autos and trucks represents about 3% of total industrial production. Since GM is roughly 1/3 of the industry, a total shutdown by GM would reduce industrial production by 1%. Since output originating in manufacturing is roughly 1/4 of the economy, a total GM shutdown that lasted an entire quarter would reduce real GDP by only 0.25%, before considering ripple effects. Those ripple effects used to be quite large. Consumers would hesitate to buy a new car when GM was on strike because the overall shortage of vehicles meant they would probably pay a higher price. In those communities where GM was the principal employer, commerce would almost grind to a halt. Also, the importance of a GM strike would cause many other consumers whose livelihood was related to the auto industry to postpone their discretionary expenditures. A strike at one of America's major employers meant all was not well in the world. Today, though, the ripple effect is virtually zero. Consumers no longer reduce their purchases of other makes of motor vehicles because GM is on strike. Nor do they curtail other discretionary purchases. UAW members used the break to go on vacation, fix up the house, or possibly take other jobs; they managed on their strike pay and, in some cases, unemployment benefits. Merchants in GM towns extended credit to striking workers. There was no decline in consumer spending because of the strike. The Commerce Dept. figures on corporate profits are of interest in this regard. For the past three years, annual manufacturing profits as measured by the Bureau of Economic Analysis have been $181, $206, and $225 billion respectively. Every two-digit industry posted solid profits throughout that period except for the motor-vehicle industry, whose profits have been -$0.2, -$3.2, and -$1.9 billion. If the industry can't make any money during a period of rapid growth and an undervalued dollar, how can it expect to make money in the future? Defendants of GM have argued that is precisely why management took a tough line with the Flint auto workers and shipped all those dies to Mexico. But GM needed to make up its mind: either buy peace and flexibility with the unions at the cost of some high front-end payments, or battle to the bitter end by moving production facilities out of the country. As usual, the halfway-house approach they took does nothing except guarantee more red ink. From a longer-term perspective, there is no way to be optimistic about the outlook for the U.S. motor-vehicle industry. By 2001 total auto production will exceed demand by about five million vehicles per year, which means the high-cost plants simply will have to close -- or continue to operate at huge losses. Eventually the GM we know now will go out of business. This doesn't mean there will be no company known as General Motors, but they won't be manufacturing cars in the U.S. The plants are too old and the relationship with the UAW has deteriorated too far for GM to remain cost-competitive in the motor-vehicle industry, especially with new capacity coming on stream every year. There are several alternative solutions. One, GM simply moves its manufacturing facilities to other countries. The second, GM goes out of the "name-brand" business and sells cars to Wayne Huizenga with the "CarMax" label on them. The third, GM merges with some world-class motor-vehicle company, which then imposes the management discipline that is currently lacking in Detroit. And the fourth, GM simply spins off the auto-parts plants and the assembly-line plants to shareholders or even to the UAW. Let them stew in their own juices. A few years ago, some Wall Street analysts looked at GM stock and calculated that after subtracting the value of the finance company,liquid assets, and non-motor vehicle subsidiaries, the price of the auto-related part of the company was zero. That exercise was intended to show that GM was a screaming buy. But in fact the stock market was right, as was the analysis that showed that the automotive part of GM is worthless. After all, GM stock has appreciated only 22% since early 1994 at the same time that the S&P 500 has risen 143%. Five years from now I think the company currently known as General Motors will be unrecognizable -- if indeed it remains in business at all.