The automaker’s decision to halt production at five manufacturing plants in North America, a move that will likely eliminate 14,000 jobs in the United States and Canada, has rocked communities and drawn the ire of President Trump among others.
The transparent goal? Boost General Motors (GM) free cash flow in order to add cushion for the company in the event of a recession. One of our auto contributors took a look at why GM opted to restructure now.
- GM is worried about a recession: Auto sales are cyclical, and during a recession the pace of sales could drop significantly. Like every automaker, GM has high fixed costs no matter how many vehicles it sells. That means any decline can have an outsized impact on profit margins. CFO Dhivya Suryadevara said that the restructuring could allow GM to remain profitable through a severe recession. Given that the current stretch of economic expansion is growing old by historical standards, a recession seems likely sooner rather than later.
- GM wants to lead in future technologies: The company has an aggressive electric-vehicle development program underway and is spending extensively to develop self-driving cars. So far, GM has positioned itself well. The electric Chevrolet Bolt was the first long-range, mass-market-priced vehicle, and the company aims to deploy self-driving taxis in 2019. If forced to cut spending (perhaps because of a recession), GM could fall behind rivals. The shift allows it to preserve funding for these expensive programs.
- The factories likely were not profitable: Three of the five North American factories were ones that produced finished vehicles. (The other two are smaller facilities that make transmissions.) A general rule of thumb is that auto factories break even when running at about 80% of capacity — with capacity meaning two shifts a day, five days a week — but with sedan sales falling these factories have had their production cut. For example, Chevrolet Cruze sales have fallen by more than half over the last five years and the Lordstown, Ohio, factory that produces them is only operating on one shift.
By moving now, GM is aiming to keep the products it hopes can win the future funded no matter what the economy might have in store.