General Motors announced on Tuesday that it would close seven factories and cut its workforce by 14,000 people. The announcement was met with criticism from President Trump, Senators Sherrod Brown and Rob Portman, and many others. Of the plants that are due to close, four are in the United States and one is in Canada.
While politicians can criticize the company all they want, GM is a for-profit corporation and what they did was the responsible thing to do.
Corporations have an obligation to their owners—the shareholders. That obligation is to make money and pass some of the profits on to the shareholders. Yes, I sympathize with the workers that will lose their jobs as a result of the plant closures, but the company itself has to think about the bigger picture.
Many of the comments criticizing GM, from people on both sides of the political aisle, are pointing to the recent tax cuts and the fact that the company saved $340 million from the tax law changes that were implemented at the end of last year.
Unfortunately, tax cuts do not create demand for goods. And that in a nutshell with giving tax cuts in hopes of improving the economy. Giving a corporation a tax cut will improve the profitability of the company, but it doesn’t necessarily mean that the company will spend the profits to produce more goods. Companies only produce more goods if there is a demand for the goods.
I tried to make this same point two weeks ago with an article about oil. President Trump is pressuring oil producing companies and countries to maintain current production levels while OPEC is lowering demand projections. For companies to continue producing at the same level while demand is falling would be irresponsible and it would damage both the company and the economy.
If indeed the demand falls like OPEC expects, keeping production at the same levels would lead to a surplus in supply, and that would cause oil prices to fall even farther. The surplus would also stall any sort of a rebound in price as consumption would have to work its way through the excess supply before it reaches the need for the companies to boost production.
The same thing will happen if GM continues to produce cars that aren’t in great demand. If they produce a car and the demand for the car is low, they have to discount the price to sell it. This hurts profitability. If they continue the same production levels just for the sake of keeping employees working, they will end up with a surplus of vehicles with low demand. It is the most basic tenet of economics—if supply outpaces demand, the price will fall.
This whole story is emblematic of the problem with the most recent tax cut. The tax cuts were nice, and they lifted the stock market for a while, but from what we have seen so far, they didn’t increase the demand for most goods. Companies are posting record profits, but they are giving a lowered forecast for 2019. This is what led to a great deal of the selling that we saw in October.
With 90% of the S&P 500 companies reporting in the current earnings season, 78% beat their earnings forecast, but 40% came up short on the revenue estimate. This is a sign of slowing demand as the revenue is the result of consumption. In addition to so many revenue misses, a number of companies issued a lower forecast for 2019.
Politicians can get upset and voice their criticisms all they want, but the economy is cyclical, and we have been in an economic expansion for quite some time now. We are due for an economic slowdown. Yes, that would hurt politicians that are currently in office with their re-election bids, so it is understandable that they are upset with GM’s announcement.
The fact of the matter is, GM is being responsible to the shareholders and to the rest of the workforce by closing plants that are producing cars that aren’t in great demand. If they kept the plants open and continued to produce cars that aren’t selling, they would jeopardize the good of the whole company and the jobs of approximately 165,000 other workers. Sure, it is awful news for the workers at these plants and the communities where they are located, but that is better than having the entire country impacted.
GM who took a Federial “BAIL OUT” because they were not making any “money” did not change ANY OF THE THINGS THEY WERE GOING THEN! We’re making s—t CRAP products then, and have been doing so for years! Moving new Production out of Country to increase therre Bottom Line. Not even TRYING TO BAY BACK the shairho.ders Who LOST MONEY THEN. And DONT GIVE A S—T, crap now about there workers, or Shairholdes now! SCREW GM, MANAGEMENT!
Lack of demand for GM cars is due to Tariff war. You cannot have trade restriction and free trade at the same time for international trade. GM should shift the factories from US to India and other African countries where same cars can be produced at much less cost for the poor people there.
As long as it is an equitable closure and layoff. Meaning that only three of the seven plants are outside the USA. Question: Are the remaining plants (I assume mostly in China) producing the same vehicle/s as the USA plants and if so why not those being the plants that are closed. You get my point. We all know why!
The USA auto workers union has been very greedy over the years and the auto industry owners have allowed them to be so, both at fault here. The auto workers contracts are over the top with wages, compensations and benefits which in turn has caused an over confident and very spoiled workforce. In my opinion (and I know some auto workers) their compensation has been so over the top that some (not all) revel in the fact of how many days they can miss work and still be compensated.
Another example of a very spoiled workers union is the USA dock workers union.
The auto manufacturers share the blame in that they have caved into the demands of the USA auto workers union. However, with a call to the table to clear the air and to get to the facts concerning the plant closures with both the manufacturers/owners and the union willing to make concessions the plants can be closed outside the USA and not continue with 4 of the 7 closures within our borders.
I would venture to guess that supply and demand is less an economic factor than the cost to build the vehicles in question. Get real and save the USA plants by working together as the owners/manufacturers can always retool the subject plants to produce the more profitable, in demand vehicles, if that is really a motivating factor. However, the union will have to make some concessions for that to happen and their workers/members can afford to do so rather than lose 4 plants and 14,000 jobs.
Spoken like a true capitalist.
If it wasn’t for the workers, there would be no GM. Corporations will always make decisions based on their bottom line, with little or no consideration of the workers who produced the product that made the company a success. A few less dollars in dividends, maybe a reduction of the multimillion dollar salaries the top execs get, and how about designing a product that people actually wanted, and could afford, to buy would probably have saved those 14,000 jobs. I suppose you can justify any kind of heartless behavior, kind of like Marie Antoinette suggesting the starving masses eat cake instead of bread. How well did that work out? Workers are getting mightily tired of corporations taking the whole loaf and being tossed crumbs while being told they better take what they are offered and shut up if they want a job. Things are going to need to be changed for the good of both workers and companies if this great country of ours is to survive, or this all about me greedy anything for a buck mentality will surely be the end of us all,
Here in Massachusetts, with fuel prices in the 2.50 range, and the economy rolling, you would think that a cutback of the vehicles that aren’t selling would be a good idea. Retool the plants to make the ones people want… look at how FAST THE KIA’S AND HYANDIA’s are.
THEY ARE ALMOST AS FAST AS A CORVETTE.
STICK A KIA Stinger MOTOR, in a SPORTY LIGHT WEIGHT GM Fully dressed OUT, AND SEE WHAT HAPPENS
For so many years, I’ve been looking for a newer car.. Full size Blazer to be exact, but mileage issues have been a stumbling point… so now I’m looking at E 350 Benzes, with around 100 k on them for 5 grand in the ten year old range, and the prices are dropping faster than Stormy Daniels bloomers… LOL
PRODUCING SOMETHING THATS NOT SELLING, IS NOT THE WAY TO GO.
LOOK AT THE MARKET TO SEE WHATS SELLING, AND THE DEMOGRAPHICS & AGE OF YOUR SELECTED MARKET. I’m 64 YEARS OLD, and I still own 2 Oldsmobile 442’s THE way to go is give the public what they want.
Do a market survey at car shows all over the country. Get a feel for what WE WANT……AND BUILD THEM…. If You Build Them, we will come!!!
GM is acting responsibly, good idea? Stock may be a buy on this news