providing the same easy credit to GM’s customers, which turned out to be a significant blow to GM’s sales. Yet another problem was GM’s labor costs. In 2008, GM was paying an average of about $70 per hour for labor. That $70 included $30 that the worker actually received in wages, and $40 that went to fund other labor costs including the worker’s benefits and pension, plus the cost of providing health care and pensions to about 432,000 GM retirees. Because GM had been operating for 100 years, the number of its retirees was much larger than those of new car companies. Toyota, for example, was paying about $53 per hour for labor in its U.S. manufacturing plants, of which $30 went to the worker as wages, and $23 went to pay for the worker’s benefits and pension, but very little for retirees since the number was relatively low. In some of its plants, a Toyota spokesman said, it was paying as little as $48 per hour for labor. But perhaps the major cause of GM’s difficulties was its self -inflicted dependence on large SUVs (sport utility vehicles). Japanese car makers could make small and midsized cars for less than it cost GM to make comparable cars. To compete, GM had to lower its prices until the profit margins on its small and mid-sized cars were
Business Ethics - THE GM BAILOOUT vanishingly thin. But during the 1980s, when gas was cheap, GM discovered that large SUVs were big hits with male customers and with couples with growing families. Moreover, unlike its smaller car models, profit margins on its large SUVs were hefty, as much as $10,000 to $15,000 per vehicle. As its SUV sales boomed during the 1990s, GM expanded its line and eagerly converted many of its plants over to the production of the lucrative big vehicles. By 2003, the bulk of its profits were coming from SUV sales. But when the price of gasoline gradually crept upward, the costs of owning an SUV also increased causing the SUV market to slow and then to decline. In 2004, unsold SUVs started piling up at car dealerships. When Hurricane Katrina made gasoline prices soar in 2005, sales of SUVs eventually collapsed. Thus, GM ended 2005 with a loss of $10.4 billion. Things improved somewhat in 2006, but then losses climbed to record levels: $38.7 billion in 2007, and $30.9 billion in 2008. Unfortunately, by now GM’s plants, strategic plans, research and development programs, and its mindset, were all locked into the production of SUVs, and it would take years to change them. Because of its reliance on SUVs, GM had put off investing in the small fuel-efficient cars a gas-conscious public had turned to in 2005. In the 1990s, GM had developed the technology for an all-electric car, the EV1. The EV1 Explore the Concept on mythinkinglab.com 202 THE BUSINESS SYSTEM: GOVERNMENT, MARKETS, AND INTERNATIONAL TRADE was, in fact, the first mass-produced modern electric car made by a major car company. By 1999, GM had spent $500 million producing the EV1 and $400 million marketing it, yet had leased only 800 vehicles. Convinced that the car would never match the profitability of its SUVs, the company stopped making the cars and in 2002, it
You've reached the end of your free preview.
Want to read all 10 pages?
- Spring '14