Three Main Reasons for GM's Slow Decline

Includes: F, GM
by: Martin Hutchinson

U.S. President Barack Obama’s firing of General Motors Corp. (NYSE:GM) Chief Executive Officer G. Richard Wagoner Jr. may be the beginning of the final act of a long and sad drama - the slow death of GM. The company nameplate may soldier on in some form, but it seems increasingly likely that unless Ford Motor Co. (NYSE:F) can forever avoid government intervention, the once-unique capabilities of the U.S. automotive industry will be forever lost.

In 1970, GM had nearly 60% of the U.S. automobile market, and imports’ share was below 10%. Today, GM’s market share is little more than 20%, and imports and domestically produced automobiles of foreign brands dominate the market.

There are three reasons for GM’s decline, none of them easily reversible:

The first is notorious - GM has a major cost disadvantage: When foreign automakers had no automobile factories on U.S. soil, GM could - and did - allow the United Auto Workers (UAW) union to ramp up costs ad infinitum. Any cost disadvantage that GM thereby acquired compared to foreign brands produced in cheaper labor economies could be overcome through careful lobbying to provide barriers against excessive imports.

However, the arrival and establishment of foreign-owned manufacturers in America’s less-unionized states - combined with the inexorable aging of GM’s former and current work force, which greatly increased the U.S. automaker’s health and pension costs - shackled GM with an impossible cost disadvantage against its competitors. Some of that disadvantage is now being slowly negotiated away, but without a GM bankruptcy it seems most unlikely that the company’s costs can be brought down to competitive levels.

Second, GM has been bedeviled by government regulation: One great example is the Corporate Average Fuel Economy (CAFÉ) standards introduced in 1975. As a specialist in the traditional large cars that the U.S.-consuming public favored, GM was badly affected by the CAFÉ standards that, by mandating average fuel economy ratings for the entire fleet, enormously benefited Japanese and other makers that specialized in small cars. Eventually, GM and the other U.S. manufacturers found a loophole, and developed the sports utility vehicle (SUV) that, being based on a truck chassis, was not subject to the CAFÉ restrictions. By the time Chrysler, Ford and GM made that discovery, however, the damage - in terms of market share - had been done.

A further round of tighter CAFE restrictions introduced in 2007, this time including SUVs, has once again imposed gigantic development costs on GM, making its entire product range obsolete. A moderate gasoline tax, particularly one introduced over a lengthy period, would have been far less disruptive to the market, and to GM’s operations. It would also probably have achieved rather more in terms of fuel economy and combating global warming. “Cap-and-trade” regulations, as proposed by the Obama administration, will further increase GM’s costs, providing the biggest relative benefits to manufacturers in such low-wage countries as China and India that are not subject to such impositions.

However, the principal threat to GM’s competitive position, one which Wagoner’s departure will intensify, is the “culture war” between the upscale bi-coastal opinion formers and the general U.S. public: In 1970, the standard upscale car for all but the very rich was a Cadillac, a Lincoln, or a Chrysler Imperial. This was as true in New York as it was in Detroit or Dallas; only a small minority of consumers bought top-of-the-line foreign cars, generally with academic pretensions. Equally, for the upper-middle bracket, Buick or Mercury was the choice of the vast majority.

Today on the East and West coasts, consumer tastes are very different. Saloon Cadillacs and Lincolns are rare; the upscale driver generally chooses a Mercedes, BMW or Lexus. Only among those with families (such as the Obamas) is a large SUV sometimes chosen, although generally an imported one. Buick now sells far more cars in China than in the United States; the traditional Buick or Mercury driver on the East or West coast has migrated almost entirely to import models. Before his presidency, then-Sen. Obama himself drove a Chrysler 300C followed by a Ford Escape hybrid, but one has to guess that his choice of U.S. vehicles was strongly influenced by his political ambitions.

This preference for foreign automobiles is reflected in the media commentary (media bigwigs being almost entirely upscale and bi-coastal). GM and other U.S. manufacturers are persistently accused of “poor management,” although there is little or no evidence given, or discussion of what they might have done better.

Objectively, GM and Ford products perform extremely well in quality surveys, and represent much better value for money than most imported brands, yet without support from opinion-formers they are terminally unfashionable, with the upscale models destined to sell relatively poorly except between Pittsburgh and Boise. Even technological breakthroughs like the Chevy Volt electric car seem unlikely to change this.

President Obama’s decision to get rid of Wagoner reflects this attitude. His announcement was full of denunciations of poor management, with no acknowledgement that overblown union contracts are GM’s No. 1 problem (at least, the No. 1 problem that there is any possibility of solving in the short term). There appears to be little recognition in the Obama administration as a whole that recalcitrant unions and media-induced disdain for GM’s product range were far more important causes of GM’s decline than any shortcomings in Wagoner’s management moves.

Over his eight years as GM’s CEO, Wagoner has done about as well as he could have. He has overseen a considerable and successful restructuring of GM’s operations, together with an extraordinary success story in the Chinese market, where GM has emerged as one of the leading competitors in the world’s fastest-growing car market.

With the Obama administration overseeing GM’s operations, the company will move towards producing the cars that opinion formers want it to produce: cramped, dangerous and uncomfortable, but fuel-efficient or powered by subsidized energy sources. However, the “New GM” will reap little reward for its docility; unless it files for Chapter 11 bankruptcy, it still will have excessive costs, and it will find itself competing in a market crowded with foreign producers, but containing only a minority of the U.S. consuming public.

This is bad news for consumers between Pittsburgh and Boise, and for those on the coasts seeking low-cost, high-comfort transportation, but possibly very good news for Ford, if it can somehow avoid being caught in the government maw. If GM is emasculated by the government and Chrysler is downsized and sold to the small-car-oriented Fiat (FIATY.PK), Ford will have a huge market to itself, that of U.S. consumers wanting traditional U.S. automotive qualities.

Wagoner doubtless now wishes that in December he had chosen a GM bankruptcy over government aid. In the long run, the U.S. car-consuming public, its automobile industry and the U.S. economy (let alone U.S. taxpayers) may come to share that view.

In closing, let me offer a personal note of disclosure - and a final thought: Being “bi-coastal” but determinedly not “upscale” I drive an ancient Buick.

It’s a wonderful car …

Original post