By Ray Birch
NEW YORK—General Motors’ plans to close seven factories worldwide by the end of next year is not a sign lenders need to begin giving serious thought to shifting portfolios away from good-old-fashioned auto loans toward financing solutions for car subscription services or monthly expenses for self-driving car rides. Instead, it’s a sign of something else, say the experts.
In the immediate term, the move is a strong indication lenders should brace for annual new car sales to markedly decline from recent record levels, sources told CUToday.info. The move also suggests that GM may soon place a greater emphasis on electric vehicles, and that lenders should plan for greater financing of what is for now a niche market.
GM recently announced four factories in the U.S. and one in Canada could be closed by the end of 2019, with more than 14,000 salaried staff and factory workers losing their jobs. The automaker plans to close factories in Lordstown, Ohio, which makes the Chevrolet Cruze compact; in Detroit-Hamtramck, where the Chevrolet Volt, Buick LaCrosse and Cadillac CT6 are produced; and in Oshawa, Ontario, which primarily makes the Chevrolet Impala. In addition, the company will halt operations at transmission plants in the Baltimore area and in Warren, Mich.
For credit unions serving the automaker—which has long been a prime sponsor of CUs–assistance and guidance will be needed by members who take buyouts or lose their jobs. General Motors has offered voluntary buyouts to roughly 17,700 eligible employees in North America with at least 12 years of service, and is hopeful of getting 8,000 voluntary buyouts among its salaried workers as part of a total headcount reduction of 14,000, according to a spokesperson.
While reports are mixed on whether GM’s move is simply a means to address sluggish new vehicle sales and forecasts a further slowdown, or a longer-term signal around the future of self-driving vehicles, one expert told CUToday.info his view is the move is more about rightsizing.
What’s Really Happening
“GM's moves have nothing to do with subscription services and driverless cars—which are decades away—and most likely not possible at Level 5 anyway (the highest level of automation, where a driverless car can operate on any road and in any conditions a human driver could negotiate),” said Kevin Tynan, global director of automotive research for Bloomberg Intelligence.
Tynan said the restructuring is about aligning GM’s product portfolio while the economy and sales are still reasonably good.
“Up until now, large, global automakers have only given half an effort on vehicle electrification,” Tynan said. “For GM, these moves look like they clear the deck on car nameplates that are not selling well and losing money. GM car sales were negative 18% in 2017 and down another 20% year-to-date in 2018.”
One of the indicators of automakers getting serious about electric autos is having dedicated factories for the technology, Tynan said.
“We've seen Volkswagen start to move in that direction and this could be GM's opportunity to realign its manufacturing footprint so it can legitimately compete on EVs,” he said.
Kevin Tynan
No Subscription Services in Near Future
Maryann Keller, principal at Maryann Keller & Associates and a former Wall Street auto industry analyst, said automobile subscription services will not be used by a large number of consumers in the near future.
“People are not moving to subscriptions, because they are more expensive than car ownership,” said Keller. “I think that the electric car will revolutionize the auto industry and that will mean fewer jobs and more competition, because if a vacuum cleaner guy like Dyson can make an electric car—and he is—there are few barriers to entry, so incumbent automakers need to be prepared for the transition to a different and tougher market.”
Addressing reports that GM’s decision signals a move toward driverless cars, Keller said that investment comes with a huge risk.
“The technology isn’t ready and won’t be for years,” she said. “It costs far more to run an autonomous car without a driver than it does to run a taxi with a driver and no one is ready to give up their car in favor of waiting for a robot taxi to come take them to Trader Joe’s and then come back for them 45 minutes later.”
Keller stressed that people own cars for their convenience, and the fact they often sit in the garage most of the day is “irrelevant.”
“I have a washer and dryer that are not in use most of the time,” Keller said. “Does that mean I should create a home laundry for my neighbors?”
Maryann Keller
Focus on Profitable Segments
Turinng to GM’s plant closings, Keller said the carmaker is preparing for a downturn in U.S. car demand and is concentrating on vehicles that allow the company to make a profit.
“Washington has raised vehicle production costs with tariffs on steel and aluminum and Chinese made parts,” said Keller. “So, the choice is to make cuts or shrink your margins. Lordstown and Oshawa have been without future product assignments for some time, so GM just confirmed what was suspected for more than a year. Automakers have learned to squeeze more production from fewer factories by running six or seven days a week and two long shifts, so the old math that determined capacity no longer applies.”
Keller said that GM concentrating on China and North America makes sense, since both are profitable and GM can serve smaller markets around the globe from China.
“GM will not export significant numbers of cars from China to the U.S.,” Keller said.
Trucks & Trends
Scot Hall, executive vice president at Cincinnati-based Swapalease.com, said that while lenders don’t yet need to figure out how to make loans for Jetsons-age transportation needs, he believes they should prepare to make more loans for trucks, and even consider offering leasing.
Scot Hall
“It is very apparent that GM is recognizing that today’s automotive shoppers are continuing to shift toward trucks, crossovers and SUVs,” Hall said. “Even on the Swapalease.com marketplace we are seeing more search traffic for vehicles in these segments. We also believe that this shift will continue to shift car shoppers toward lease deals that offer monthly payments in a range that keeps budgets affordable. As tastes shift toward more expensive segments such as trucks and SUVs, dealers and OEMs will need to continue pushing lease deals as a way to keep payments affordable for auto shoppers.”
Not An Easy Decision, But…
Black Book, took a similar position, saying the carmaker’s move clearly indicates consumers want more trucks.
"GM's decision to cut small cars and sedans represents the latest evidence that a large population of car shoppers continue to shift their preference toward crossovers, SUVs and trucks,” said Anil Goyal, executive vice president of operations at Black Book. “While it may not have been an easy decision internally, the abundance of data and analytics is clearly aiding the world's largest companies in guiding them toward decisions they may not have made in the past. GM and other OEMS are also rationalizing production in anticipation of slowing demand for new vehicles. Higher incentives to support sales is not a good strategy, as it hurts residual values.”