Trouble in Ohio: GM's Fight for Competitiveness

Home manufacturing has been on the minds of Americans recently, particularly since the 2016 election season. Presidential candidates debated whether to implement policy that would bring manufacturing back to the U.S., return manufacturing jobs to average Americans, and make America the former manufacturing powerhouse it used to be. The topic is still on the minds of Americans today. Passenger car production in the U.S. has been declining since the late-90s and took a particularly heavy dive in 2017.

GM is no different. GM will shut down a number of facilities, one of which includes the Lordstown facility. This has recently gained publicity, as politicians, including Ohio’s two senators and President Donald Trump, have expressed their discontent with the decision and have urged Mary Barra, CEO of General Motors, to reconsider her decision and reopen the recently shut down Lordstown production facility near Youngstown, Ohio. Mary Barra maintains that the company will move forward with its decision to close the facility and that negotiations between the company and the UAW will begin to ensure that facility employees will not be discarded like used tissue.

Despite negative sentiment, GM should not reopen the Ohio plant because it produced the Chevy Cruze, which is currently experiencing a weakening market as consumer demand shifts to trucks and other large vehicles. Closing the Ohio plant allows GM more flexibility in investing and focusing their efforts in plants that produce vehicles in higher demand and ultimately allows GM to maintain high levels of cash. One such plant includes the Lansing Delta Township facility, which not only produces a higher demand vehicle, the Chevy Equinox, and is cheaper to operate, but it also improves the company’s CSR reputation, as it is one of the most efficient automotive production facilities in history. 

The Weakening Market for the Chevy Cruze

The market for the Chevy Cruze, and generally compact cars as a whole, has experienced nearly consecutive decline in the U.S. and Canada each year since 2014. Canada experienced a slight increase in Chevy Cruze sales in 2017, but 2018 sales continued the trend (“Chevrolet Cruze Sales Numbers”). This is an outlier that should be ignored. The Chevy Cruze is primarily produced in the Lordstown plant, the facility surrounded by controversy and negative publicity.

Weakening sales figures are generally followed by two manufacturer actions. Most generally respond to weakening demand for a certain product by discounting it or completely halting production. Though this is an obvious fact to state, a surprisingly high number of Americans, workers, and politicians fail to understand that this is a common and generally necessary response to declining market demand for a certain product. Thus, in order to remain competitive, GM has decided to quit producing the Chevy Cruze and shut down its production plant along with it. This was the appropriate decision to make because:

• Continuing to produce the vehicle would reduce the amount of cash in the company bank account;
• And there are other stronger markets in which they could produce.

Cash for GM

The first reason is likely the most important of the two. GM was unprepared and unable to ride out of the 2008 recession without a government bailout. This is because GM failed to maintain adequate levels of cash. Still affecting the company today, the GM bailout greatly hurt the company’s reputation. Some argued that they were not competitive enough, and, thus, should not have been bailed out by the federal government. Others argue that GM has been given an unfair and unnatural competitive advantage in the market. As a result, the GM brand has suffered slightly from this sentiment. Continuing to produce the Chevy Cruze and pour money into the Lordstown plant would hurt GM’s cash levels and position them for another Government bailout.

With the automobile sector in decline and economists predicting a recession to take place in the coming years, it is of massive importance to the company that it maintain high cash levels. This would allow the company to ride out the current automobile sector decline and the next economic downturn.

Making Due with Stronger Markets

All in all, there is simply not enough demand for the Chevy Cruze, meanwhile General Motors’ position in the SUV and truck segments is healthier and much more robust than that of the compact and subcompact market. Take these statistics, for instance. Chevy Equinox and Silverado sales in both Canada and the United States have increased tremendously since the year 2014 (GM Authority). This is largely due in part to the improving reputation of the quality of GM large vehicle products and the growing market for SUVs, trucks, and other large vehicles.

In response, GM executives have chosen to close down the Lordstown, Ohio facility and invest more in other plants that produce more high-demand vehicles, such as the Lansing Delta Township facility.

The Case for Reopening: Job Loss

Many have been and will continue arguing that the Lordstown facility is of massive importance to the local economy. It is estimated that closing the plant will result in a loss of 15,000 jobs. Politicians and residents alike are arguing that for this reason alone, the company should reopen the plant. Trump is an avid advocate for this strategy. Tweeting after an intense conversation with GM’s CEO, Mary Barra, he wrote,

“I want jobs to stay in the USA. and want Lordstown (Ohio), in one of the best economies in our history, opened or sold to a company who will open it up fast! Car companies…” (@realDonaldTrump).

The fact that the closure will result in a loss of 15,000 jobs is daunting, and rightfully so. According to recent studies, the local economy in Youngstown, Ohio will lose billions of dollars in economic output. A recent assessment by Cleveland State University shows, “...the closure of the General Motors plant in Lordstown, Ohio will have a negative impact of $3 billion in total economic output. This includes the loss of $270 million in labor income and almost $600 million of value-add to the economy. In addition, the region will lose over $12 million in state and local tax revenue” (“Assessing the Economic Future of Youngstown”). This loss accounts for approximately 9-percent of the regional GDP. The local economy is suffering. Although these negative effects are massive, GM should still not reconsider its decision to close the Lordstown facility because the company plans to relocate factory workers to other plants, the local government is creating a plan to work their way through the recession, and the local economy is able to recover, according to the business cycle theory. 

Plans for Relocation

Rather than leaving each former factory worker completely unemployed and left to their own devices, the company plans to relocate a set number of interested Lordstown facility workers to other facilities. The GM CEO recently said in a statement, “Our focus remains on providing interested employees options to transition[,] including job opportunities at other GM plants. We remain committed to working with local government officials, our unions and each individual to find appropriate opportunities for them” (Ferris, Robert).

Despite the planned closure of five North American plants, 9 U.S. plants are to remain open. These plants allow GM to remain competitive because most produce vehicles that are in higher demand and stronger markets, and will allow the company to maintain high levels of cash.  There are approximately 2,700 job openings at U.S. production facilities, and over 1,000 workers have volunteered to relocate (Ferris, Robert).

Relocation will help to alleviate the effects of the loss of 15,000 jobs, and it will allow workers to retain their benefits and continue working for GM, to which they are accustomed. Although not all workers will retain their jobs, there are simply not enough available, and it would be unwise of GM to employ more workers than needed. In fact, there seems to be a lack of interest for relocation amongst former Lordstown employees. Only 1,000 have volunteered for relocation in this length of time, not even half of 2,700 job openings. It is not logical to create jobs for the 14,000 former employees who appear disinterested in continuing their career with GM. With the decision to close the factory, the company has improved its competitiveness. With increased competitiveness, those thousand or so who volunteered for relocation will benefit from heightened job security.

Local Efforts

Individuals and organizations are taking action to fight the damaging effects of the Lordstown plant closure. According to Cleveland State University, “In partnership with the Eastgate Regional Council of Governments, Lendel and her team have met with area elected officials, economic development leaders, and non-for-profit organizations to share their findings and plan on working with Youngstown leaders to assist in developing a comprehensive economic growth strategy for the region” (“Assessing the Economic Future of Youngstown”). This team of individuals is highly diverse and qualified, with economic development leaders knowledgeable in strategies for recovering the local economy, non-for-profit organizations providing assistance to individuals and families affected by the worsening economic conditions, and government officials with the means of implementing strategies for economic recovery.

What about the Cycle?

Current theory, more specifically the business cycle theory, supports the statement that the local economy of Youngstown, Ohio will recover. The theory is relatively straightforward and easy to understand. In essence, it states that economies will experience phases of high and low economic recovery due to a number of factors, such as technological shock and even the closure of local plants or businesses. The business cycle theory shows that periods of low economic activity will be followed by economic expansion; however, the speed at which the economy recovers can vary from place to place, situation to situation. In fact, the people of Youngstown, Ohio may benefit from this. The local economy might diversify into something more beneficial for the people. Residents will also benefit from improved economic strength. 

All-in-All

With the declining market demand for the Chevy Cruze, it was a wise decision for GM to shut down the Lordstown production facility. The decision is ideal and should not be reconsidered or withdrawn because it helps to maintain high levels of cash for the company, important for surviving the current downturn in the automotive sector and the next period of low economic activity without a government bailout. The company also participates in other markets, where they are more competitive and experience increasing sales. It is more beneficial to the company to invest in stronger markets rather than continue operating in a market where they do not possess a competitive advantage and are likely to lose money. Some may argue that GM should not close the plant because it will cost the local economy thousands of jobs and 9% of its regional GDP, but the truth is that GM is offering relocation opportunities for former factory employees. Local officials, economic development leaders, and non-for-profit organizations are actively working together to recover the suffering Youngstown economy. This is likely the most qualified team for the job, as economic leaders develop strategy for recovery, non-for-profits provide assistance to individuals suffering due to the recent decline, and officials possess the ability to implement strategy. The business cycle theory also clearly shows that the local economy will recover sometime in its future.

What about U.S. Manufacturing as a Whole?

More importantly, what does the future of U.S. manufacturing look like? The entire sector has been taking a steep dive since the 1990s. Some will argue that the North American Free Trade Agreement, AKA NAFTA, is the largest contributor to this downfall, but others will argue that U.S. manufacturing is less competitive as a whole, and that it is simply too expensive to manufacture in the U.S. This is not surprising, as U.S. labor is costly, labor and manufacturing regulations are stringent, and workers’ unions dominate manufacturing labor forces.

Despite these facts, the U.S. is ranked the second most competitive nation in global manufacturing (“Global Manufacturing Competitiveness Ranking”). The U.S. manufacturing sector is also expected to experience growth in the coming years. Although not nearly as high as the average sector, growth will take place (Miles, Robert). Manufacturing plant closures, like that of GM’s Lordstown facility, continue to wreak havoc on the nation, and few manufacturers have returned their production to the U.S. With U.S. manufacturing competitiveness second highest in the world and sector revenue experiencing growth, why is it that U.S. companies continue to close down plants, lay off workers, and continue to produce in countries other than the U.S? This is an issue in the eye of the average American and the home-focused politician that has yet to be resolved.

Works Cited

“Assessing the Economic Future of Youngstown.” Assessing the Economic Future of Youngstown, Cleveland State University, 7 Mar. 2019, www.csuohio.edu/news/assessing-economic-future-youngstown.

BEA. "Passenger Car Production in The United States from 1999 to 2017 (in 1,000 Units)." Statista - The Statistics Portal, Statista, www.statista.com/statistics/198482/us-passenger-car-production-since-1999/, Accessed 18 Mar 2019

“Chevrolet Cruze Sales Numbers.” GM Authority, gmauthority.com/blog/gm/chevrolet/cruze/chevrolet-cruze-sales-numbers/.

“Chevrolet Equinox Sales Numbers.” GM Authority, gmauthority.com/blog/gm/chevrolet/equinox/chevrolet-equinox-sales-numbers/.

“Chevrolet Silverado Sales Numbers.” GM Authority, gmauthority.com/blog/gm/chevrolet/silverado/chevrolet-silverado-sales-numbers/.

Ferris, Robert. “GM Says It Plans to Relocate 1,100 Factory Workers.” CNBC, CNBC, 14 Dec. 2018, www.cnbc.com/2018/12/14/gm-plans-to-relocate-1100-factory-workers-as-part-of-14000-job-cuts.html.

“Global Manufacturing Competitiveness Ranking.” Deloitte, Deloitte Development LLC, www2.deloitte.com/content/dam/Deloitte/global/Documents/Manufacturing/gx-mfg-rankings-competitiveness-index.pdf.

Miles, Robert. “IBIBISWorld Sector Report 31-33 Manufacturing in the US.” IBISWorld, IBISWorld Inc., June 2018, clients1.ibisworld.com.libproxy1.usc.edu/reports/us/industry/industryoutlook.aspx?entid=210.

Trump, Donald (@realDonaldTrump). “General Motors and the UAW are going to start “talks” in September/October. Why wait, start them now! I want jobs to stay in the USA. and want Lordstown (Ohio), in one of the best economies in our history, opened or sold to a company who will open it up fast! Car companies.....” 18 March 2019, 4:37 a.m. Tweet.