Expert Pitch

IU Kelley School expert explains changing market conditions leading up to GM announcement to close plants, lay off 14,000 people

Indiana University
27-Nov-2018 2:05 PM EST, by Indiana University

General Motors on Nov. 26 announced plans to close five manufacturing sites and consolidate production in North America and eliminate an estimated 14,000 white collar and blue-collar jobs. Rodney Parker, associate professor of operations management at Indiana University’s Kelley School of Business, said the announcement reflects several new realities for GM.

“First, it reflects the ongoing shift of consumers preferences from cars to SUVS and pickups. The announcement to discontinue several cars models and focus more on trucks mirrors Ford’s announcement in April 2018 to drop all car models other than the Mustang and Focus to concentrate on trucks. SUVs and pickups are more profitable and they are what consumers want. 

“Consequently, GM has numerous plants which are under-utilized but still incur substantial fixed costs, resulting in losses. The plant closures are necessary for the whole company to remain profitable and competitive with rivals which are making similar moves.

“Second, despite 2017 being a very good year for GM (record operating profit, sold over 10 million vehicles), sales in China can be credited for much of that success. The recent growth in the Chinese vehicle market has benefitted GM greatly and compensates for slower growth in the US domestic market. But the sales in China will necessarily be serviced by plants in China or nearby, rather than plants in the US. Also, the shift in production to more SUVs and pickups in the US plants caters to domestic tastes, not those in China.

“Third, the substantial savings accrued from these closures will be necessary for future investments in autonomous vehicles (AVs) and electric vehicles (EVs) and hybrids. In 2016, GM wisely bought Cruise Automation, an AV startup in San Francisco, and has leapfrogged a number of auto rivals in this critical area. However, further development in AVs will require considerable investment by GM in order to keep pace with Google’s Waymo unit, with the possibility of launching their own ride-sharing service in the future. 

“Predictions for the automobile industry frequently suggest a shift from exclusively selling vehicles to also ‘selling miles,’ where the manufacturers are providing transportation services, through a combination of per usage fee or subscription. The economic argument for the usage of AVs in ride-sharing services is compelling and GM wants a part of this. At least part of the current plant closures are being done with an eye to the future and the big down payment GM needs to make in AVs.”

Parker, who also is the Fettig/Whirlpool Faculty Fellow at Kelley, can be reached at 812-855-3329 or rodp@indiana.edu.

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