GM: An American Icon Failing

The world’s top car manufacturer is cutting back its work force and closing plants. The American economy is going to feel it.

On November 21, General Motors Corporation (GM) announced plans to cut 30,000 jobs and close nine manufacturing plants across North America, in an attempt, according to its ceo, to “get its costs in line with [its] major global competitors” and “return [its] North American operations to profitability as soon as possible” (Associated Press, November 21). These cuts represent approximately 9 percent of its 325,000 global workers.

For GM’s American operations, this is quite an earthquake. Out of 181,000 U.S. employees, 26,100 will lose their jobs—more than 14 percent of GM’s American work force. Under the plan, 7 percent of GM’s U.S. salaried staff will be cut in 2006, making for a 40 percent total cut in white-collar staff since 2000.

For almost three quarters of a century, GM has been the world’s number-one vehicle manufacturer. However, with the projected 19 percent decline in North American vehicle production accompanying the 2006 staffing cuts, this may not be so for long.

GM’s production cuts stand in stark contrast to number-two auto-maker Toyota, which plans to increase its American production. Some analysts are predicting that in 2006, Japanese-owned Toyota will overtake GM as the world’s largest vehicle producer.

In response to questions about Toyota this past January, GM Chief Executive Officer Rick Wagoner said, “We’ve been ahead 73 years in a row, and I think the betting odds are we’ll be ahead for the next 73” (Wall Street Journal, November 19).

Unfortunately, however, GM may have a rough road ahead.

GM’s U.S. market share, or percent of sales in the domestic automobile market, has been dwindling. During the early 1980s, GM held 40 percent of the domestic market, but its share has since steadily eroded and currently stands at only 26.4 percent.

Over this same time period, profitability has plunged. During the last three quarters alone, GM has lost almost $4 billion. According to the Associated Press, GM’s total debt now stands at $276 billion. To put GM’s debt into perspective, the U.S. federal government owes $242 billion to China, its second-largest foreign debt holder.

This past May, GM’s debt (sold as bonds) was downgraded to the first level of junk status. In September, it was downgraded even further. The downgrade in status means that it is becoming increasingly difficult and costly for GM to borrow money to fund operations, and for investors who hold GM bonds to purchase insurance against a possible GM bankruptcy.

Speaking of bankruptcy, Bank of America analysts recommended selling GM stock, saying that it was “inevitable” that GM would eventually seek bankruptcy protection.

If GM were to declare bankruptcy, it would be catastrophic for many Americans. Today, GM pays pension and medical benefits for 519,000 retirees, up from only 96,000 in the 1970s. Unfortunately, it is these legacy costs that are in part making GM vehicles more expensive and hence hurting sales. Approximately $1,500 dollars of every GM vehicle sold goes to pay medical costs of employees—mostly retirees. GM now pays more for employee medical costs than it does for steel! (Christian Science Monitor, June 9).

The auto industry is just one example of the decline in American industrial might over the past two decades. Dave Kassel of the outsourcing firm International Smart Sourcing said, “There’s no point looking in the rear-view mirror.” With alternatives like China, he said, expecting U.S. industrial manufacturers to dominate in the decades to come is foolhardy (Daily News, New York, August 9). Mr. Kassel is also predicting that “in a decade, Detroit is going to be a fraction of what it is today.”

Are GM’s layoffs the beginning of the end for the American auto industry—or worse, a sign of a more rapid decline of American manufacturing?

An old adage says, as General Motors goes, so goes the nation.