Evans On The Economy -- Road Not Smooth For GM

July 24, 2006
Lots of bumps lie ahead.

From mid-April to late May of this year, General Motors Corp. stock rose from $20 a share to a peak of $29 per share, a whopping 45% increase, before the share price backed off in the early June sell off. The price of GM bonds also rose sharply. At least in the minds of many investors and traders, GM had turned a dangerous corner and was on the road to recovery. The employee buyout was oversubscribed, lessening labor costs in the future. All in all, that has to be considered good news for the economy. No one, with the possible exception of moviemaker Michael Moore, wants to see GM go bankrupt.

But I wouldn't bet on GM just yet. There are still too many bumps in the road -- including the following.

  1. Most companies -- and industries -- that have been as distressed as the current Detroit auto manufacturers are never going to recover. Look what happened to the railroads. The airlines. The steel industry. Sure, they are all still around because they are vital industries. But look what happened to the wages they pay. Workers who stayed never got back to square one.
  2. There is some discussion about exactly how strong the U.S. economy is, but no matter how you measure it, 2005 and the first half of 2006 have seen times of above-average growth. Yet the domestic auto companies still can't cut it in a time of plenty. Just what chances do they have the next time the economy plunges into recession?
  3. Even after the buyouts, GM and Ford Motor Co. will be stuck with having to pay production workers 95% of their wages even if they are sitting idle at home. Asian firms don't labor under that handicap -- whether they are located in Japan, South Korea, or right here in the U.S.
  4. Only a fool would imagine that Toyota, Nissan and Honda will stand still while GM, Ford and the Chrysler division of Daimler-Benz try to recover. Hardly anyone would not admit that the quality of these cars is much higher than it was in 1973 or 1983. But in relative terms, their quality has continued to slide backwards. Check the recent quality ratings, and in third place is Hyundai, which used to be so far down it was in danger of falling off the list completely. My point is that some firms have managed to move up the quality scale in a relatively short period of time. None of them has headquarters in Detroit.
  5. China is now starting to get into mass production of better quality cars. All right, they will still have a relatively high proportion of bugs the first few years. But we saw how Japanese cars, and then Korean cars, rose from being the subject of bad jokes to highest quality motor vehicles. If Detroit thinks Japanese auto manufacturers have an unfair labor cost advantage, just what are they going to say about Chinese manufacturers five years from now?

So here's the current picture at GM. The company is still in last place in the automobile productivity race, and even with the buyout still has the highest labor costs. Over the next decade, global supply will increase much faster than demand, forcing vehicle prices down further. That's good news for consumers but not for autoworkers. In a decade, only the fittest will survive. While it has recently taken several major steps in the right direction, if GM is to survive, it still has many more tough decisions to make in the next few years.

Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

Popular Sponsored Recommendations

Global Supply Chain Readiness Report: The Pandemic and Beyond

Sept. 23, 2022
Jabil and IndustryWeek look into how manufacturers are responding to supply chain woes.

Empowering the Modern Workforce: The Power of Connected Worker Technologies

March 1, 2024
Explore real-world strategies to boost worker safety, collaboration, training, and productivity in manufacturing. Emphasizing Industry 4.0, we'll discuss digitalization and automation...

How Manufacturers Can Optimize Operations with Weather Intelligence

Nov. 2, 2023
The bad news? Severe weather has emerged as one of the biggest threats to continuity and safety in manufacturing. The good news? The intelligence solutions that build weather ...

How Organizations Connect and Engage with Frontline Workers

June 14, 2023
Nearly 80% of the 2.7 billion workers across manufacturing, construction, healthcare, transportation, agriculture, hospitality, and education are frontline. Learn best practices...

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!