X

CPA Op-ed: GM cutbacks due to offshoring, not tariffs

January 06, 2019

You read that right, a good year. Maybe even an excellent year. The company’s third-quarter earnings knocked it out of the park. Wall Street was expecting GM earnings of $1.25 per share, yet the carmaker delivered $1.87.

Overall, company CEO Mary Barra is bullish, saying, “We expect full-year [earnings per share] to be at the top of our previously-communicated guidance range with potential for further upside.”

But you might ask: Didn’t GM just announce the shutting of five auto plants in November, and is laying off some 14,000 workers in the U.S. and Canada? And isn’t all of this supposedly due to President Donald Trump’s tariffs?

The fact is, GM’s recent cutbacks have little to do with current sales, and nothing at all to do with the president’s tariffs. Overall, the company is following an ongoing trend of offshoring its vehicle production to Mexico. GM is shutting sedan production at four U.S. plants — and one Canadian facility — that are operating below capacity. But in the past nine years, GM has also increased production in Mexico by 300,000 cars.

In fact, GM keeps ramping up its Mexican production and is now the number two vehicle producer in Mexico — and on the way to being No. 1.

The most popular model GM is axing, the Chevrolet Cruze, is produced at two plants: Lordstown, Ohio, and Ramos Arizpe, Mexico. The Lordstown plant is now slated for closure.

But GM is not closing Ramos Arizpe. Instead, the Mexican plant will also be building the mid-size SUV Blazer, which hits the market next year. The last time GM sold Blazers was back in 2005, when they were produced at three GM plants: Moraine, Ohio; Linden, New Jersey; and, Pontiac, Michigan. All three are now gone.

Automotive production figures from Marklines reveals that Mexican auto production has surged 85 percent in the last nine years, and now accounts for 24.1 percent of North American output. Along with Nissan, GM has been aggressively increasing production in Mexico. And even as GM’s Mexican production is up by 300,000 units over the 2008 level, its U.S. vehicle output has declined by roughly 330,000 units.

With the closures announced last month, it’s likely that GM’s U.S. production will continue to drop, even as Mexican production rises. But if GM shifted some of that output to the same U.S. facilities it’s planning to close, those plants would be running at much higher levels of utilization — and likely be profitable.

Of course, GM is already highly profitable, with $2.8 billion in third-quarter profit for North America, including a profit margin of 10.2 percent. That’s an increase of almost two points over the same period last year. Much of this success comes from pick-up trucks, with sales of high-end crew-cab trucks running 30 percent above forecast.

Clearly, the closures of the U.S. and Canadian plants are not driven by a lack of profits. And they aren’t driven by steel and aluminum tariffs that have added only a few hundred million dollars in production costs — which are completely overshadowed by the additional revenue and profit flowing from rising truck sales.

No, the closures are driven by two things: a continuing consumer shift towards trucks and SUVs; and, GM’s desire to move production out of the U.S., where auto workers earn some $30 an hour, and into Mexico, where they earn about $3 an hour, according to U.S. Representative Sander Levin, a Michigan Democrat.

Underlying all of this is GM’s core philosophy, as explained by CEO Barra: “I want to assure our owners that we are focused on creating shareholder value.”

Shutting down a clutch of sedan models will undoubtedly help GM generate cash. But shifting production out of the U.S. will continue to eliminate the same middle-class jobs that allow U.S. consumers to buy GM cars and trucks. It may work right now for GM’s shareholders, but it’s a poor strategy for America’s future economic security.


Be the first to comment

Please check your e-mail for a link to activate your account.