Why The General Motors Layoffs Were Strategic
Stephanie Denning
Stephanie Denning
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I write about strategy and leadership.
Mary Barra, chairman and chief executive officer of General Motors.© 2018 BLOOMBERG FINANCE LP
Earlier this week, General Motors announced its plans to lay off more than 14,000 employees in North America. The layoffs were triggered by a change in strategic direction. “We recognize the need to stay in front of the changing market conditions and customer preferences to position our company for long-term success,” the company announced.
There is no question mass layoffs can trigger an economic ripple effect, negatively impacting a community. Layoffs can indirectly impact surrounding local businesses and the housing market. A New York Times article cited an estimate “that three additional jobs were lost for every one cut at the plant.” Not to mention the devastating economic impact it can have on a family unit.
Any announcement of layoffs is a little like dropping blood into the media ocean, attracting all the piranhas who like to prey on the weak and injured. It is never a happy announcement. And among the very unhappy was President Donald Trump, who, following the announcement, quickly threatened to remove any incentives GM receives for its electric vehicles and possibly to tack on tariffs for the company.
The question, then, that hangs above is: Were these layoffs necessary?
A banner depicting the Chevrolet Cruze model vehicle is displayed at the General Motors' Lordstown plant. (AP Photo/John Minchillo)ASSOCIATED PRESS
Were The Layoffs Necessary?
Yes.
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Layoffs sometimes mistakenly signal that a company is weak or injured. Yet, GM’s operations have been performing well over the last few years. In 2017, GM grossed $10.7 billion in operating income, up from $10.6 billion in 2016 and $7.9 billion in 2015. Cash flow from operating activities in 2017 was $17 billion. So why layoffs and why now?
The best way to assess the strategic decision for layoffs is to understand both the internal and external circumstances a company faces.
A. Market Dynamics
The car market has drastically changed over the last decade, arguably one of the most transformational periods in auto’s history since we pivoted to cars from . . . horses.
Customer Preferences: Tesla has played a dramatic role in shifting customer preferences towards electric vehicles. When electric vehicles were first introduced, there were many reservations such as long-distance travel. But Tesla has eliminated many of those challenges, not to mention added cachet to electric cars. It has acted as a “forcing function,” as Elon Musk puts it, for other carmakers like GM to get into the game. And interest in electric vehicles is only likely to accelerate. One forecast cites “sales of electric vehicles increasing from a record 1.1 million worldwide in 2017, to 11 million in 2025 and then surging to 30 million in 2030 as they become cheaper to make than internal combustion engine (ICE) cars.” It is also estimated that in 20 years, by 2040, electric vehicles will make up 55% of all new car sales.
Competition: Competition, though, is not only coming from carmakers. Uber and Lyft have changed the necessity of owning or needing a car. As a consultant, even in the most remote places, I no longer need to rent a car; there is always an Uber nearby. Driverless cars is another looming threat. While it hasn’t developed mass appeal, and there is still some weariness about the technology, it can’t be ignored. Both constitute unexpected threats to U.S. carmakers. The entire car journey is changing, according to Benedict Evans of venture capital firm Andreessen Horowitz: “Software and batteries are unbundling cars and car journeys...into different sorts of vehicles and different modalities,” he said.
B. Company Dynamics
To remain competitive, carmakers like GM have to address these shifting market dynamics. It’s a strategic choice to stop production of smaller cars like sedans and instead to prioritize cars that match customer preferences like electric vehicles and its popular SUV and crossover vehicles. To do so effectively, it has to take the following actions.
Transform Product Development: Shifting product development efforts to focus on electric vehicles and autonomous driving technology.
Optimize Product Portfolio: Streamlining the number of models it produces. “t is expected that more than 75% of GM’s global sales volume will come from five vehicle architectures by early next decade.”
Increase Capacity Utilization: Prioritizing plants that operate at full capacity. Operating plants that don’t operate at full capacity can bleed cash.
Staff Transformation: Enlisting the right skill sets for the products GM has prioritized.
This may sound like business jargon but that doesn’t make the choices any less strategic. And these layoffs are part of that strategic repositioning.
Layoffs are oftentimes a reinvestment opportunity; moving dollars away from products on which it isn’t making a lot of money, and using it instead to fund new products like electric vehicles which GM hopes will yield a higher return. In essence, it will be a better use of dollars.
An important part of operating a business effectively is making sure your dollars are being put to the best possible use. "A strong cash position is the only way the company can deal with these factors and also continue to invest in growth opportunities and to set ourselves up for the future," it was announced. “These actions are expected to increase annual adjusted automotive free cash flow by $6 billion by year-end 2020 on a run-rate basis,” it added. The $6 billion in savings is expected to come primarily from $4.5 billion in lower capital expenditure, e.g., plants, which has a $1.5 billion annual run rate. That’s a lot of cash.
For Such Large-Scale Layoffs, Did GM Do The Best It Could?
It appears so.
Contrary to popular belief, businesses rarely choose to implement mass layoffs as their first line of action. It is an unquestionably difficult decision that can often lead to increased workload on staff and lower morale. Issuing layoffs is an extremely painful decision and there really is no good way to go about it. There are, however, better ways than others, and reports indicate that GM performed its layoffs in the best way possible, taking three important steps.
Smallish-Scale Layoffs: By most benchmarks, cutting 14,000 employees is a large-scale layoff. But for GM, a company that employs 180,000 people as of the end of 2017, these layoffs represent about 7% of its workforce. For GM’s overall health, it has to make this strategic pivot, otherwise the entire company’s future―and all 180,000 of those jobs―could be at risk.
Buyouts: GM offered buyouts to 17,770 employees, CNBC reported. Only 2,250 employees ended up accepting the buyout, even though the firm had hoped to hit 8,000. Firms that offer buyout packages to employees is a far more tactful approach than those that conduct widespread layoffs with little or no notice.
Transference of Workers: “Many of the U.S. workers impacted by these actions will have the opportunity to shift to other GM plants where we will need more employees to support growth in trucks, crossovers and S.U.V.s,” GM announced. While the jobs were eliminated, there is still an option for workers, most likely based on skill set, to transfer to other high growth areas in the company.
The "Absurd" Economics Of Making Cars
Perhaps one way to understand these layoffs is to go back to the basics of carmaking. CEO of Tesla, Elon Musk, made a prescient comment on Kara Swisher's podcast, Recode Decode:
“Making a car company successful is monumentally difficult. There have been many attempts to create a car company and they have all failed, even the ones that have had a strong base of customers, thousands of dealers, thousands of service centers, they’ve already spent the capital for the factories, like GM and Chrysler, still went bankrupt in the last recession. Ford and Tesla made it barely through the last recession. There’s a good chance Ford doesn’t make it in the next recession. So, as a startup car company, it is far more difficult to be successful than if you’re an established, entrenched brand. It is absurd that Tesla is alive. Absurd! Absurd.”
It can be easy to look at decisions made by executive teams of large corporations and fault them for what seem like dumb, negligent decisions. But car industry economics are, to quote Musk, absurd. Trying to establish a strategic position with both a competitive advantage on the supply and demand side is increasingly difficult. Even Tesla, a car maker steeped in cutting-edge technology, hasn’t been able to establish a competitive advantage or stronghold in its production of cars (which it was hoping to do with robotics).
GM's CEO Mary Barra faces a difficult future and these strategic choices seem to be a step in the right direction. From someone who’s seen too many layoffs up close, I can report that sometimes it gets worse before it gets better.
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