Michigan is sad. I hear about it everyday from the family and friends I have who still live there. “It’s a sad day for Michigan,” my mother says nearly every time she calls. “But the weather is nice today,” she concedes. Michigan is sad, as is the country, after GM’s collapse. Indeed, we should not downplay the significance of GM’s apparently ineluctable filing of Chapter 11 bankruptcy on 1 June 2009 - more than a century after GM’s founding on 27 September 1908. It comes as an unsurprising but hard-to-swallow finale to a decades-long decline in market share and profits. Unfortunately, the purported predictability of GM’s demise, or a comprehensive understanding of why it occurred, does little to soften the blows endured by manufacturers, auto workers and Americans in general as a result of GM’s fall and ultimate collapse.
Just what does this mean for the U.S. economy, already saddled with the collapse of Lehman Brothers and burgeoning government debts? The negative affect of the ensuing layoffs will take time to reveal itself as the loss of industry spreads from its epicenter in Detroit, but when put in the context of the entire U.S. industry sector certain indicators suggest that the actual impact of the GM collapse may not be commensurate with its symbolic impact as a face of industry.
Analysts have jumped all over the bankruptcy, using it to reinforce long-held beliefs about business structure, efficiency and government intervention. The story tends to be told the same way: GM used an expansive corporate organization throughout the middle of the century to thrive in a market where a variety of products dominated. Then the company started losing profits to more efficiently made and higher-quality cars from automakers like Toyota, Honda… etc. In a short span of time, GM went from controlling more than half of the American demand for cars to less than a quarter. Bogged down by rigid union contracts and a stubborn adherence to a diverse and expansive corporate form, GM’s cost structure prohibited it from competing with its Japanese and European counterparts. Soon there was little to do but watch the downfall of an American manufacturing empire.
But despite the pervasive reports opining about the inevitability of GM’s fall, it did not have to happen this way. Like many economists, I tend to view market competition in terms of natural selection, where corporations are like self-evolving organisms whose ‘fitness’ is determined by their bottom lines. In good times, even unfit companies can survive. But when disaster strikes, the standards for fitness raise dramatically and the least profitable companies die off. The unhappy reality is that just when GM was making the changes it needed in order to survive in a competitive market, economic disaster struck and swept away its hopes for long-term recovery. GM may have been able to evolve to match the efficiency of its competitors, but demand dropped abruptly and left GM without the resources it required to actualize its evolution. At best the world’s demand for cars is at a very low 60 million a year, but with the saturation of supply, more than 90 million cars a year are being produced. GM simply could not survive in a world so short in demand and so plentiful in supply.
What was the evolution that was occurring in GM, and why should we care? The changes included a renegotiation of GM’s contract with the United Auto Workers union such that benefits were reduced to rates similar to their competition; a downsizing of the previously over-expanded corporate structure; and a successful commitment to producing less costly, higher quality cars. All of the changes were in place before the end of 2007, and all of them were contributing to improvements in GM’s market share. But the changes weren’t complete enough for GM to compete after the economic recession, where only the strongest would survive. GM simply needed more time. The federal injection of $50 billion was intended to buy GM the time it needed, but sadly it wasn’t enough. Most of the money was used to pay debts and pensions, doing little to lower the costs of production. Additionally, demand has worsened, credit is still hard to come by, and structural changes take multiple years to realize.
We should care that GM was on the right track before the recession because it informs us of a couple important realities. First, American-made cars can be efficiently produced while achieving a high level of quality. Domestic automakers can match the cost structures of their foreign rivals if they are committed to efficiency - a commitment that was simply too little to late from GM. And second, all American companies, especially in the manufacturing sector, have a lot to gain from less rigid union contracts; if we want workers to be protected in the areas of health care and retirement pensions then the government needs to incur the burden, not corporations that are being asked to compete internationally.
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Tags: american business, economic policy, economy, general motors, GM, U.S. Economy
So Finally where has the conclusion come to? GM is bankrupt, We are bankrupt and the average man is going nowhere in this struggle, I ask you guys today What did we gain out of this?