GM’s Uncertain Future Plans

Following General Motors’ recent announcement of a new chief executive officer it seems the company has been in the news with some sort of different business plan or goal every day. Some of GM’s recent actions have been very positive, like the announcement of an upcoming $1.3 billion investment in existing General Motors factories in three different states. GM will invest the money over the next two years to make new pickup trucks as well as new, more fuel-efficient engines and transmissions at a Flint, Michigan assembly plant; an engine plant in Romulus, Michigan, a transmission factory in Toledo, Ohio; and a casting plant in Bedford, Indiana. The new factory investments follow General Motors’ recent rebound to profitability after emerging from bankruptcy proceedings.

Some components of GM’s future plans are not quite as positive however, with some of the most disconcerting recent news being that GM may terminate its relationship with Australia’s Holden car company and cease production down under altogether. GM said it could stop making cars in Australia by 2017 due to high labor and material costs as well as due to the strong Aussie currency which makes international deals a bit tougher to balance. GM officials have pointed out that the Australian dollar has risen from 50 cents to the U.S. dollar to as high as $1.10 recently, and that makes exported vehicles more expensive and less desirable. GM’s prior CEO, Dan Akerson, summed up the troubles when he stated that “The decision to end manufacturing in Australia reflects the perfect storm of negative influences the automotive industry faces in the country, including the sustained strength of the Australian dollar, high cost of production, small domestic market and arguably the most competitive and fragmented auto market in the world.”

As far as a timetable, General Motors said it would probably discontinue vehicle and engine manufacturing in Australia and New Zealand by the end of 2017. In the run-up, GM will likely reduce its engineering operations and start making the transition to a “national sales company only” status. GM’s decision to close down the century-old Australian Holden unit follows Ford’s similar announcement earlier this year that it plans to terminate car production in Australia by as early as 2016.

Unfortunately, Holden has long been a valuable source of engineering and development since it was bought by GM back in 1931. Holden has also more recently been a source of finished cars for the North American market. Although GM did not say where the engineering, development and assembly now performed in Australia would be shifted, it is believed that that Holden will eventually become a sales organization that will import and distribute vehicles made elsewhere.

Making vehicles where they are ultimately sold usually helps keep costs and income in the same currencies. However, with Ford and GM exiting the continent, Toyota would become the only automaker building vehicles in Australia at all, and despite the advantage that might appear to be, the opposite could be the case. As the sole vehicle manufacturer in Australia, Toyota would also be the only company purchasing from local suppliers, and the economies of scale would all but disappear. Higher parts prices along with reduced tariffs on imported vehicles could make it very difficult for any automaker to turn a profit. This is especially true when one considers that the sales of Australian-made vehicles now account for just 10% of the total market there. If making vehicles in Australia is already expensive, fewer players will only make it more so.

Although things may look pretty good for the U.S. based parts of GM going forward, keeping the Holden component up and running may not be possible. GM’s new CEO Mary Barra said Holden will most likely become a sales organization that imports and distributes vehicles from other continents. She also said that many other additional organizational changes could be expected through 2017. If we had to guess the outcome, it seems likely that GM vehicles sold in Australia and New Zealand in the future may be Chevrolet branded. That’s another move that could be good news for the North American auto factories, and not so great for those down under.