Why GM Is Making Cuts Now

The Time Had Come For GM To Step on the Gas

Nov 28, 2018
Management

SMITH BRAIN TRUST  When it announced this week its plans to idle five factories in the United States and Canada and to cut roughly 14,000 jobs, General Motors looked very much like a company in retreat.

But this is very much the opposite, Maryland Smith’s David A. Kirsch says.

“GM is trying to stay ahead of a problem that’s just over the horizon,” he says. “And it makes a lot of sense to do that.”

That problem is the accelerating evolution of electric vehicle and autonomous-driving technology. And it’s threatening legacy automakers like General Motors with extinction.

It’s the reason why GM is sacrificing a number of underperforming sedans.

GM plans to halt production of the Cadillac CT6 and XTS, Buick LaCrosse, and the Chevy Cruze, Impala, and Volt hybrid vehicle, in a move that will idle five factories in Maryland, Michigan, Ohio and Ontario, Canada. The automaker hopes to boost its annual cash flow by some $6 billion, beginning in 2020, so it can increase spending on electric vehicles and autonomous-vehicle technology.

GM’s announcement this week sent shockwaves across the manufacturing sector and provoked an outcry from union leaders and policymakers, including President Trump. And that’s partly because the moves – manufacturing changes, plant closings, layoffs – were unveiled in a dramatic, one-fell-swoop fashion, says Kirsch. The decisions themselves, he says, were unsurprising.

“This is very consistent with how other automakers have been trying to deal with the coming changes that are affecting the traditional auto industry,” he says. Ford has made similar moves, phasing out small-car production and focusing on growth of electrified vehicle platforms.

Small cars account for just 33 percent of vehicle sales in the U.S., down from half in 2012, and GM has been losing market share in that segment to its Japanese and South Korean rivals. Roughly 75 percent of GM sales last year were trucks, SUVs and crossover vehicles, up from 60 percent in 2012.

It’s those larger, more profitable vehicles that will finance GM’s push into the future – a future that’s increasingly electric and autonomously driven. “GM needs to figure out what it can manufacture that will continue to make money so it can fund the investments it needs to – hopefully – survive the transition and secure a role in the mobility services industry of the future,” says Kirsch, who anticipated some of the industry’s current shifts in his 2000 book The Electric Vehicle and the Burden of History.

“The industry has pretty much operated on the same business model for the past 110 years,” Kirsch says, “but now the business is changing and the incumbent automakers have to adapt.”

If GM’s restructuring announcement this week seemed aggressive, you can be sure of this, says Kirsch, it’s only the start.

“GM is going to need to do more. But it’s a good start,” he says. “I don’t want to sound enthusiastic about a company retrenching in this way. Plant closings and layoffs are no fun. And for these impacted communities, this will be quite traumatic.”

But for the 110-year-old General Motors, the time had come to step on the gas or be overtaken and left in the dust.

“GM has to get in front of this. And if these moves liberate some resources that will allow GM to commit to some of the potential growth opportunities, then it is probably a good idea.”

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About the Expert(s)

David A. Kirsch is Associate Professor of Management and Entrepreneurship in the M&O Department at the University of Maryland's Robert H. Smith School of Business. From 1996 to 2001, Kirsch held various adjunct and visiting appointments at the Anderson Graduate School of Management, University of California, Los Angeles. He received his PhD in history from Stanford University in 1996. His research interests include industry emergence, technological choice, technological failure and the role of entrepreneurship in the emergence of new industries.

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