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GM thinks layoffs will boost its bottom line. The reality is more complicated.

- December 2, 2018

This week, General Motors announced plans to halt production at several of its plants. The move could see over 14,000 jobs lost, 8,000 of which are in North America. GM chief executive Mary Barra told reporters that while the company doesn’t foresee an economic downturn, the cuts are needed to “get in front of it while the company is strong and while the economy is strong.” Wall Street reaction was positive, with GM stock rising sharply.

1. What’s behind the move?

It comes down to cash. Consumer preferences have changed in recent years, with Americans increasingly opting for larger sports utility vehicles and vans over smaller sedans and coupes. Larger vehicles command higher prices, even though they don’t cost much more to build. Automakers know this and are keen to cash in by ditching production of slow-selling smaller vehicles and switching to their larger and more lucrative counterparts.

For GM, the switch could free up some $6 billion in cash at a time when the company’s losses are piling up. Despite hauling in over $12 billion in pretax profits in 2017, GM was the only Detroit car company to post a net loss — nearly $4 billion. That came on the heels of a $20 billion write-off from its European operation, which it has since sold. GM — like its competitors — also confronts generally waning demand for new vehicles as Americans hold onto old vehicles for longer.

2. What has the political reaction been?

Fast and furious. Democratic Sen. Sherrod Brown called GM’s decision “corporate greed at its worst.” His Republican counterpart Rob Portman followed suit, saying he was “deeply frustrated” with the automaker. Both represent Ohio, which is home to one of the plants slated for closure. Politicians from other states affected — Maryland and Michigan — have voiced similar sentiments.

On Twitter, Canadian Prime Minister Justin Trudeau called GM’s move a “deep disappointment.” More than 2,500 Canadian workers could lose their jobs as a result of the layoffs. Unifor — Canada’s largest private-sector trade union — was less diplomatic than Trudeau. After meeting with the prime minister, Unifor chief Jerry Dias said, “If you’re going to have a company that’s going to show us their middle finger, then I think our government should show them their middle finger as well.”

And then there’s President Trump. After GM’s announcement, Trump said he told Barra, “You better get back in there soon,” and he subsequently tweeted, “The U.S. saved General Motors, and this is the THANKS we get!”

Trump’s reaction is both understandable and surprising. During the 2016 campaign, then-candidate Trump said he would be, “the greatest jobs president God ever created.” Once he took office, he explicitly cautioned locals near one of GM’s manufacturing plants against selling their homes because the jobs would all come back. GM’s move challenges that narrative. But the president also backed tariffs on imported steel and aluminum — important raw materials in auto manufacturing. Those tariffs are said to have cost GM more than $1 billion. The company had warned that tariffs could “lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, [resulting in fewer] — not more — U.S. jobs.”

3. Does GM benefit from the move?

GM says it must invest in new technologies — specifically, electric and autonomous vehicles — to maintain its competitive edge. Partially shelving production of traditional cars, the company argues, will help it do just that and ultimately boost margins. However, the reality is more complicated.

For one thing, electric vehicles still cost more than their gasoline-powered counterparts. One big reason is that the labor-intensive processes involved in manufacturing and assembling electric batteries ultimately drive up costs. Whether GM can reinvest its cash in ways that reduce battery prices is unknown.

A larger problem facing GM — indeed, all automakers building electric vehicles — is that some of the raw minerals used in vehicle batteries come from the Democratic Republic of Congo, a country long dogged by allegations of child labor. A 2016 Amnesty International report found children as young as 14 were spending up to 12 hours a day in some DRC mines searching for cobalt, a key component of electric batteries. Although minerals can be extracted from the sea, this too poses political challenges; countries have long bickered over who owns the seafloor.

Autonomous vehicles pose challenges of their own. GM has invested billions of dollars in the technology. The company plans to launch autonomous taxi services early next year, although it has been quiet on where exactly. But many people are concerned about the technology’s safety. A Pew survey found the American public to be more worried than enthusiastic about autonomous vehicles. That survey was conducted before the crash of a self-driving car this year in which a woman crossing a street on foot was killed.

Another obstacle facing autonomous vehicles is that Congress has not been able to pass legislation regulating use of the technology. A House bill that easily passed last year has yet to get floor time in the Senate. Some lawmakers are concerned that the bill “indefinitely preempts state and local safety regulations even if federal safety standards are never developed.”

Given the hurdles, political and otherwise, facing electric and autonomous vehicles, some may question the wisdom of GM’s recent announcement.

Ashley Nunes studies regulatory policy at MIT’s Center for Transportation & Logistics.