Michigan is sad. I hear about it everyday from the family and friends I have who still live there. “It’s a sad day for Michigan,” my mother says on nearly every phone message she leaves. “But the weather is nice today,” she concedes. Michigan is sad, and so is the country. We should not downplay the significance of GM’s apparently ineluctable chapter 11 bankruptcy they filed on June 1st. It comes as an unsurprising finale to a decades-long free fall in market share and profits. Unfortunately, predictability and a comprehensive understanding of causality do little to soften the blows manufacturers, auto workers, and American citizens have had to endure and will continue to endure as a result of the collapse.
Analysts have jumped all over the bankruptcy, using it to reinforce long-held beliefs about business structure, efficiency, and government intervention. The story tends to be told the same way across the board: GM used expansive corporate organization throughout the middle of the century to thrive in a market where variety of products dominated. Then the company started losing to more efficiently made and higher-quality cars from automakers like Toyota. In a short span of time, GM went from controlling more than half of the American demand for cars to less than a quarter of the market. Bogged down by rigid union contracts and a stubborn adherence to a diverse and expansive corporate form, GM’s cost structure prohibited it from competing with its Japanese and European counterparts. Soon there was little to do but watch the downfall of an American manufacturing empire.
But despite the pervasive reports purporting inevitability, it did not have to happen this way. Like many economists, I tend to view market competition in terms of natural selection, in which corporations are self-evolving organisms and fitness is determined by their bottom lines. In good times, even unfit companies can survive; but when disaster strikes, the standards for fitness are dramatically heightened and the unfit are left for dead. The unhappy reality is that just when GM was making the changes it needed in order to survive in a competitive market, economic disaster struck and swept away its hopes for long-term recovery. GM may have been able to evolve to match the efficiency of its competitors, but demand dropped abruptly and left GM without the resources it required to actualize its evolution. At best the world demand for cars is at a low 60 million a year, but with the saturation of supply, more than 90 million cars a year are being produced. GM simply could not survive in a world so short in demand and so plentiful in supply.
What was the evolution that was occurring and why should we care? The changes included a renegotiation of GM’s contract with the United Auto Workers union such that pay of benefits were reduced to rates similar to their competition; a downsizing of the previously over-expanded corporate structure; and a successful commitment to producing less-costly and higher-quality cars. All of the changes were in place before the end of 2007, and all of them were contributing to improvements in GM’s market share. But the changes weren’t complete enough for GM to compete after the economic recession when only the strongest would survive; GM needed more time. The federal support of 50 billion dollars was intended to buy GM the time they needed, but, unsurprisingly, it was not enough. Most of the money was used to pay debts and pensions, doing little to lower costs of production. Additionally, demand has worsened, credit is less available, and structural changes take multiple years to realize.
We should care that GM was on the right track before the recession because it informs us of a couple important realities. First, American-made cars can be efficiently produced and can achieve a high level of quality; this means domestic automakers can match the cost structures of their foreign rivals if they are committed to efficiency, a commitment we saw from GM too little too late. And second, all American companies, especially in the manufacturing sector, have a lot to gain from less rigid union contracts; if we want workers to be protected in the areas of health care and retirement pensions then the government needs to incur the burden, not corporations that are being asked to compete internationally.
