GM catches hell for making the smart, long-term play

Corporate critics rebuke corporate leaders for conduct alleged to be the result of short-term thinking. CEOs are accused of thinking more about quarterly results than about investing in their company’s future.

The company’s future was exactly what General Motors’ (GM’s) CEO, Mary Barra, was thinking about when she announced potential plant closings and reductions in salaried and executive jobs. She wasn’t worried about quarterly results. The quarterly results were good. Barra was thinking about repositioning GM for the future.

What does GM’s future look like, and why does it require GM to close plants? The future looks like selling fewer of the sedans assembled at those plants. Fewer people like the sedans assembled at those plants.

{mosads}Even when gas prices go back up, the people who prefer SUVs and trucks are not going back to sedans. People who switched to minivans did not switch back to station wagons. Cutting production of sedans is not a short-term move. It reflects a long-term change to designs that suit many people better than sedans.

The change in preferences is not the only thing that drove GM to think about closing those plants. If GM needed the manufacturing capacity at the plants to produce more SUVs and trucks, it would retool the plants to build them — expensive to do but something the company does periodically when new models come out.

GM isn’t retooling them because it doesn’t need the capacity. It can assemble enough of the popular models at plants that already produce them. It is less expensive to run extra shifts at those plants than to run one shift at another plant you would have to retool.

GM’s capacity calculations are not based solely on predictions of short-term vehicle demand. The industry is in the downhill phase of one of its typical sales cycles, but there is more to GM’s calculations than that.

GM’s calculations are based on a long-term prediction that fewer vehicles will be sold in future cycles. Future peaks in sales will be lower than the last peak, and future troughs will be lower than the last trough.

The long-term view of sales cycles (and therefore of capacity needs) is based on a prediction that fewer people will buy personal vehicles because more people will shift to using transportation as a service.

Transportation as a service used to be reserved for city dwellers who used mass transit and taxis or for people unable to afford or unable to drive a car of their own. Then came Zipcar, and then Uber and Lyft. Now, people in suburbs and small towns don’t need to own their own car. On top of that, many young people don’t want to own their own car.

The economic advantages of transportation as a service and the cultural change among young people — from it being cool to have your own “wheels” to being cool by “Ubering” — are driving a change that is beyond cycles.

GM doesn’t need all the manufacturing capacity it has, and the places to cut capacity are the plants that produce vehicles whose future is grim.

Another future-looking factor supports GM’s moves. The future will include more sales of electric vehicles and vehicles with increasing driver-assist and autonomous capabilities. GM needs to spend many billions to develop and manufacture those vehicles.

When they do manufacture those vehicles, they will manufacture them on assembly lines that are configured differently than existing assembly lines. GM might not even sell all the vehicles it manufactures. It might manufacture vehicles for itself — its own car-sharing business. That will require GM to deploy a lot more financial capital.

{mossecondads}GM will have to raise and spend those billions of dollars years before they make a profit on their investment. That’s why the company is not just closing manufacturing capacity it doesn’t need, it also is reducing its executive ranks. GM can’t waste cash it needs in order to invest in its long-term survival.

It is unusual to see GM (or any of the “Big Three” car companies) think long-term. They more often have suffered the consequences of short-term thinking, as when they flooded their dealers with cars and offered cheap financing in order to prop up quarterly sales numbers.

It is unusual — and good — but that doesn’t mean GM won’t be hammered with criticism from loud politicians and vilified by the union whose survival depends on GM’s survival.

GM will hear about the government bailout a decade back, even though the bailout achieved its goals and wasn’t about guaranteeing jobs forever. It will hear about labor concessions that achieved their goals of saving many jobs for many years.

If you run GM, you will be criticized for focusing on the short-term and attacked for investing for the long-term. It seems to be part of the job. The consolations are the pay, and the fact that not everybody gets to be threatened by the president of the United States.

Erik Gordon is a clinical assistant professor at the University of Michigan’s Ross School of Business.