Is General Motors Ahead of the Curve?

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Judging from the howls of protest on Capitol Hill, politicians do not agree with analysts’ estimates that General Motors’ decision to shed 15% of its workforce and close seven facilities worldwide is the act of a smart first mover in an industry facing seismic changes.

GM’s plans, reported in the Financial Times, are intended to save $6 billion and will further move the company out of traditional sedans to focus on more profitable SUVs and crossovers.

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The Financial Times says manufacturers are having to pound investment into new technologies such as electric and self-driving cars against a backdrop of rising costs and falling demand for passenger cars.

GM is not alone — Ford and Fiat Chrysler may follow suit.

The Financial Times reports Ford is already planning $14 billion of cost savings. Unlike GM, Ford’s belt-tightening is expected to be directed at its struggling South American and European operations.

The Financial Times says Ford had originally planned to make its Focus car in a Mexican plant, but then moved production to China instead. In August, the automaker pulled plans to sell the vehicle in the U.S., where it would have faced additional import taxes.

What is more surprising to some is that GM is acting when results are strong.

GM’s third-quarter adjusted earnings per share were 42% higher than the same period a year ago and its underlying earnings before interest and tax rose 25% to $3.2 billion. Net revenues rose 6.4% to $35.8 billion.

But analysts see this as GM being a first mover and acting ahead of the curve.

It’s believed the writing is on the wall, as unused capacity across the U.S. car industry amounts to 3.2 million vehicles annually, of which GM accounts for 1 million. GM’s closure would see it all but abandon passenger cars, including the Chevrolet Cruz and the hybrid Volt.

Import tariffs on steel and aluminum are said to be adding cost to domestic producers, in the region of U.S. $1 billion for GM and for Ford, while the trend in a lower oil price environment for consumers to favor larger vehicles has skewed the market in a way for which manufacturers had not been prepared.

GM’s unused production capacity is said to higher than its peers and is almost solely in smaller, conventional four-door sedans.

GM’s share price reacted favorably to the announcement, as investors saw the news as evidence CEO Mary Barra was cutting the company’s cloth to match its prospects; politicians, both state and federal, however, saw it as a betrayal of commitment in U.S. manufacturing.

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Take it how you will, but, either way, GM and other big automakers’ moves will have consequences for their supply chains in 2019.

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