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Inside Scoop on Economics
G.M to Cut 30,000 Jobs and Close Some Factories
General Motors, suffering from inefficient sales, high costs of
production and massive losses, announced that they planvned to close
down a dozen facilities in the U.S. and Canada and eliminate 30,000
manufacturing jobs over the next three years. This decision is based
upon their competition with other car-manufactures, such as Toyota and
other overseas automakers, the annual increase in the price of
oil/gas, and the consequential decrease in demand for their vehicles.
G.M states that, “these actions are necessary for us to get our costs
in line with our major global competitors.” Through these actions G.M
hopes to recover a sustainable part of the market; however they must
change their products for them to be able to compete with the overseas
car manufacturers.
During most of the 1990’s SUV’s, minivans, and big pickup trucks were
tremendously popular. G.M made most of their profits on these vehicles
and followed the money and demand signals. This functioned efficiently
for them as long as gas was cheap and there was little competition.
However due to the large increases in oil prices over the past several
years, the demand for SUV’s and other G.M produced cars is decreasing
rapidly. This is because with the gas prices high, the real cost and
price of the vehicles increases and therefore doesn’t appeal as
strongly to buyers as when the real cost of the car was less. Sales of
large SUVs such as the Chevrolet Suburban and G MC Yukon, G.M’s
highest-profit vehicles, have collapsed as gas prices have risen and
competition has increased from lighter, more manoeuvrable crossover
vehicles that offer many of the functions of a larger SUV. Many
consumers also feel that an SUV is a demerit good that has negative
externalities, such as air-pollution, and will instead buy a more
fuel-efficient car that won’t pollute as excessively. The government
interferes and will tax larger less fuel-efficient cars more than
smaller ones, which will directly add to the real cost of a SUV and
decrease its demand. The government can also set laws restricting the
use of large SUV’s, for example, in California a law was set
requiring a certain percentage of the its vehicles to be
fuel-efficient, in order to minimise certain negative externalities
that result through the usage of some of G.M most profitable cars.
This decrease in demand has resulted in sharp decreases in G.M
profits. Over the last year G.M has lost billions of dollars due to
the increasingly low demand for their vehicles.
In order for them to stay in business and start to recover from their
losses G.M are trying to decrease their variable and fixed costs. G.M
has done this by eliminating ten thousands of employees and shutting
down dozens of factories and plants across North America. This will
allow them to stay in business until they can produce a new line of
cars that, by igniting buyers, will gain them back some, if not more,
of their lost market. However they are burdened by heavy costs from
health-care and pension obligations to their employees, retirees and
their dependents, which will make it difficult for them to change the
direction of their accumulated momentum. Despite the difficulty of
cutting costs a decrease in their variable and fixed costs will
consequently decrease their average cost.
This will cause an increase in their total revenue and keep them away
from the point of shutdown, however the real challenge or issue for GM
isn’t the cost cutting, it is upgrading their products. The most
efficient way in dealing with their losses is not by cutting tens of
thousands of jobs or closing down dozens of factories and facilities.
Until GM can make cars that appeal to buyers they will continue to
loose money and the size of their market will continue to shrink, as
Japanese and other overseas car manufacturers take over the market.
They must build cars that will attract buyers; this will increase the
demand for their cars and consequentially increase their profits.