When Does Detroit Run Out Of People To Cut? (GM)

GM (GM) is preparing to go through another round of layoffs. It has hopes, which are probably futile, that it can push out enough people, in addition to getting creditor concessions and supplier price cuts, to prove to Congress that it can operate at break-even. That would give it additional government funds to keep it afloat while it restructures. To reach part of its goal, the company is offering incentives which it believes will get 10,000 union members off its payroll. Bloomberg has reported that it may fire another 5,000 white collar workers.

Although it seems Detroit cannot cut enough in an effort to drive out the costs necessary to become profitable, the process will reach a tipping point where the US industry will not have enough people to take any real advantage of a recovery of US vehicle sales when that happens. While Toyota and other Japanese companies are cutting back some capacity, they are not going through a process which would essentially gut much of its production ability. As a recovery takes shape, the Japanese company will be able to meet demand without a colossal struggle to get plant after plant back online.

Detroit may be forced to bring its production structure to a level where it can eventually do without financial help when the domestic market is only supporting 11 million or 12 million sales a year.  However, the by-product of this process is that at 16 million unit sales, which is the level from just three years ago, Detroit may be forced to give up market share because it cannot replace its old plants and labor infrastructure fast enough to take advantage of a modest but rapid sales recovery. At a 20% market share, GM will only have to produce 2.2 million vehicles in the US this year. If it wants to keep that share when sales get back to where they were the year before the economy dropped into recession, the company will have to build 3.2 million vehicles.  GM’s annual output capacity would need to be somewhere near 3.5 million, if it is to have any chance of recovering the market share that it had early in the decade.

In effect, labor and credit costs, along with the costs of the parts needed to keep Detroit running, will rob the US car companies of any chance at all that they can take advantages of a better market when it returns. The auto firms are in the process of completely undermining their future, and may end up destroying themselves in order to remain in business.

Douglas A. McIntyre