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GM & the National Industrial Model

The layoff notices came right after Thanksgiving. GM, a symbol of American industry, was going to close four US plants and can over 14,000 workers. Despite the relatively low numbers of people involved, the symbolic value is tremendous. The company was once the symbol of American manufacturing might. Besides, after a bankruptcy and government bailout the company surely has had what it needs to bounce back, right?

Yet there is much more to the story than this. Automobile manufacturing is in a period of massive, completely disruptive change. GM has been in trouble for a very long time simply because it cannot possibly change, and there are reasons to believe that everything is only going to be worse.

Mary Barra, the CEO of GM, has been trying to explain the situation to members of Congress this week. It’s unlikely that she can, especially since the very fact that she is obliged to do so points to the real problem. The national industrial model is dead, and it is being replaced with a global market model. GM’s problem is that it simply has not adapted to this reality in any important way.

There aren’t a lot of auto workers left, but they depend on those jobs.

To understand how deep the problem is at GM, we can start with how long we have known that something is wrong. Since 2005, the company has lost a total of $51 billion, which is just under $1,300 for every vehicle they have sold in that time. The losses are fairly consistent over the entire time, too, rising and falling a little but never showing a significant profit.

This is obviously a company in a lot of trouble, but what kind of trouble?

The auto industry is always the most accessible and classic example of economies of scale. To make such a complex product, it’s important to have large factories with a lot of functional pieces all working together in great harmony. The equipment involved is expensive, as are the workers. It’s very difficult to scale this up and down with the needs of the market.

This is where the old industrial “push” model dominates. The factories have to keep putting out cars because they have a very high overhead. The more cars that go out, the more that overhead is spread out and affordable. So they keep on keepin’ on, regardless of what the market says, because the factories do not throttle back easily.

the inventory of lease returns is staggering.

As a result, the inventory of unsold cars has been tremendous. Never fear, however, because there are always ways to move those cars if you are innovative and quick, yes? That’s why attractive lease options have been available on so many cars for so long. It moved the inventory out by creating demand, the old fashioned way. Everything seemed good post bankruptcy.

There are many problems with this, of course. Leased cars return after two to three years, meaning that GM found itself in the business of not only selling new cars but also used. There were a lot of them coming back, so buyers had to be found. That’s also not a problem, given low interest rates, as long as you don’t worry too much about the credit score of the buyer. Just charge a bit more in interest to take up the risk of default as the market has always done and it will all be fine.

Every aspect of this thinking was both short-term and old-fashioned.

The day of reckoning has finally come as default rates on used cars have reached new records and banks are less willing all the time to finance them. GM has been pushing out the demand for years to keep its factories running and the limit was finally hit.

Keeping those factories running was about much more than cost, of course. It’s a political problem. And now there is no way to deny it.

Taken together, this is definitely a good example of why the old industrial demand generation models that push product have failed. Yet GM is also failing on the market side as everything changes, especially with electric cars.

The Chevy Bolt.

The Chevy Bolt has all the technology necessary to be the electric car that changes the world. It is relatively cheap, has a decent range, and appears solid. Every review has generally praised it and it is finally selling relatively well.

Yet there is so very much wrong with the Bolt. The fit and finish is always panned for a car in the $40k range, suggesting that GM doesn’t understand its own market. The styling is not as much ugly as strange, suggesting that it is neither a crossover nor a car. The range is low at only 200 miles.  Advertising is nonexistent.

It is very clear that GM has no idea what to do with the Bolt, or more accurately the technology that it contains.

There is a typical plan for new technology at GM. The LS engine, for example, was adapted to cars across the entire line. It come in V6 and V8 configurations, and for a while was even a supercharged V6. The technology was used in low end Chevies and Buick land yachts and some incredible Cadillac beasts that really earned the premium they commanded. That incredible market segmentation and ability to adapt new technology is GM’s strength all around.

Looking at things that way, the ability to respond to and define a new market with technology should be easy for them.

They all deserve better.

Somehow, however, GM has utterly failed. It’s kept its factories running and the politicians happy, yes, but it did so at an enormous cost. Where it could be a technology leader, it was left scratching its head.

With the technologies that make up the Bolt, there is no reason that GM couldn’t confront electric car leaders Toyota and Nissan. They could even head off the oncoming storm from Volkswagen as they retool. GM could easily have strangled Tesla in the cradle, rendering the Model 3 pointless.

None of that happened, however. GM kept on keepin’ on regardless of any signals from the market. That starts with actual demand for what they do make as well as the redefinition of the market based on new technologies.

This is how the industrial national model fails. It’s all about the same arguments regarding economies of scale and the need to keep politicians happy. It’s all about production, in quantity, and never about quality or even profit.

GM doesn’t have to fail. There are at least ten years left before the full conversion to electric cars becomes a reality, given all the infrastructure needs and consumer concerns. They have time. So far, however, 13 years and a bankruptcy hasn’t been enough to change anything significant at the company. There is no reason to think that the next 13 will be any different unless something changes very quickly.

The first thing to go? The old industrial national model that pushes product onto the world rather than responds to demand. That’d be a good start.

6 thoughts on “GM & the National Industrial Model

    • There seems to be A LOT wrong with them, yes. But I think most of it stems from this kind of thinking. They have to keep the factories running, there are always economies of scale. That makes them risk adverse among all the other problems, which I think is what is wrong with the Bolt.

      Oh, and everyone has to be completely on board before anything happens.

  1. TL; DR: Millennials are killing the car industry, too.

    Such a lack of sensitivity to demand seems to be the hallmark of dozens of companies/conglomerates such as GM. Decades of frenzied consolidation were accepted as inevitable, as it was believed that The Market had deemed the buyer to be more fit, more capable of providing greater quantities of goods/services to a malleable consumer base. And what does consolidation do best? Keep costs down through economies of scale. And how do we drive up demand for the sudden surge of homogenized product? Advertising and marketing, of course!

    However, the whole thing comes crashing down if/when a) marketing/ads fail, b) products do not actually meet consumer’s needs, or c) tastes change, leaving a manufacturing behemoth high and dry.

    … or, you know. Millennials.

    • We would have gotten our quarterly profit goal if it weren’t for you meddling kids!

      Seriously, the old industrial model has to be the biggest force for conformity and homogeneity that we had. It wasn’t just political order, it was where all money came from. You wouldn’t want to mess with that, would you? Noswshut yer mouth and then open it up to eat food from cans and things like that.

      There is a place for leadership in the market model, so there is a place for supply-side push. I’ve been thinking about this some for the purposes of People’s Economics, but generally it’s a very different animal than the old industrial model, IMHO.

  2. GM also had issues with GMAC, it’s lending arm. In general the U. S. automotive industry missed the boat decades ago when it failed to successfully compete with foreign producers. Many overseas manufacturers simply make better cars. GM does shine in the pickup truck category, but not in a number of other areas.

  3. Pingback: Endgame? | Barataria - The work of Erik Hare

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