We all grow up hating communism, dictatorships and every other radical regime, and I agree with the idea that they are failed forms of government. A capitalist economy always wins, but recently, our capitalist economy has failed us. Too many people took advantage of the holes in our system, and what we are left with is a nationalized auto manufacturer. Our largest auto manufacturer, General Motors (GM), filed bankruptcy earlier this month and had to be bailed out even further by our government. Our national government now has a 60% stake in General Motors, as well as Canada with a 12.5% stake. All is not lost.
GM refused to restructure and reorganize when the housing bubble was on the verge of collapsing, and it is now paying the price for it, but it seems that they have learned their lesson. Have you seen the new GM commercial, “Reinvention”? Well, that’s what GM needed to do 4 years ago. Since then, 8 different car brands haven’t made sense.
What should a firm naturally do when overall demand goes down? A firm should cut back production to re-equilibrate the market, bring down costs in order to make some short-term profits, or at least break even. GM did nothing of the sort. They continued to produce eight different brands, focusing on light-weight trucks, and hopefully sell them at whatever price, but the demand simply wasn’t there, especially for trucks. GM, as a result, was forced into a debt of about $150 billion dollars with their assets at $82 billion. GM had no choice but to file bankruptcy and cut down costs by closing plants and laying off workers, those workers being hurt the most by that bankruptcy.
Of course, GM is at a loss. Profits are gone for the time being. They’re reputation has been hurt tremendously, but as they said in their commercial, this is simply the “rebirth of the American car”. The bankruptcy and our government’s stake in the company is a reinvestment, a needed change. The success of the American car was never because it was cheaper. The success always depended on two things, quality and the fact that it was revolutionary. Lately, foreign car companies, such as Mercedes Benz (DCX), dominated the sedan market, all while demand shifted from the “gas-guzzlers”, such as SUV’s and trucks, to those sedans. As a result, the American automobile manufacturers lost 17% of the market share in the past decade. GM has learned it’s lesson though. They are showing a stronger focus on sedans, even though the profit margin isn’t as high as light trucks, there will be a profit margin.
As long as GM sticks to their promise in “Reinvention”, they will once again reestablish market equilibrium. Consumers will benefit by seeing quality automobiles, and consumer confidence will resurge. GM will be a stronger global competitor for it, and it will once again become a powerhouse in our economy.