Ezra Klein: What's Killing GM?

« Fact of the Day | Main | Girls Gone. »

January 29, 2007

What's Killing GM?

This is actually quite smart. Time's economics blogger Justin Fox writes:

over the past 20 years the short-to-medium-term fortunes of the U.S. carmakers seem to be dependent mainly on one thing: The price of gasoline. The impressive return to profitability of Detroit's Big Three in the 1990s was in retrospect almost entirely attributable to the global oil glut that sent prices at the pump down and kept them there. Detroit makes its money on SUVs and pickup trucks, not on compact cars. Those don't sell well when gas costs a lot.

This is an obvious enough point, I guess, but I still thought it would be cool to plot GM's stock against the price of gas to see if the chart backed up the theory. It does.

Here's the graph:

What you'd expect to see on the chart, if Fox's hypothesis is correct, is that GM's line dips low when gas's shoots up, and vice versa. And, sure enough, that's roughly the reality. It's not perfect, but then you have to assume GM's sales will be affected by promotions they run, and consumer confidence, and all the rest. Moreover, the public impression is, I'd bet, that gas costs are now unstable, and that even months of low prices at the pump don't promise enduring affordability for a fuel-guzzling vehicle. GM needs a success in the economy market, but it's hard to simply pull even with Japanese automakers who spent the last 30 years learning, advancing, and perfecting the form, while their American counterparts focused on ever bigger, ever more powerful roadway behemoths.

January 29, 2007 | Permalink

Comments

Plotting GM's stock against gas prices seems like a distant way to test the hypothesis - why not track GM's monthly reports of new car sales to the price of gas instead? That seems the more relevant barometer; GM at a corporate level has other issues that complicate its stock pricing, not just lagging car sales. I also think this should be a broader discussion about the big three, anyway - neither Daimler Chrysler nor Ford have shown necessarily better responses to changes in the auto market over the past couple of years and Ford has lately done much worse than GM.

Posted by: weboy | Jan 29, 2007 6:34:33 PM

GM will learn how to make high mileage cars when they get bought out by Toyota or Hundai or Honda. Those GM plants that are not closed will make asian designs, with non-labor-union crews.

What's good for the country isn't good for GM.

Posted by: JimPortlandOR | Jan 29, 2007 6:44:35 PM

Note that if you used the "real" price for gasoline ... the price corrected for inflation, then the correlation would be even stronger ... since the stable nominal price through the middle 90's imply a declining price after correcting for inflation.

Posted by: BruceMcF | Jan 29, 2007 7:07:31 PM

GM deserves what it gets, because they have fought changes that would save them every frakking step of the way. i say this as a MI born, deep roots in labor in detroit, american car driving woman. i don't want to see the unions go away, but i assign blame about 25/75 union leadership/GM execs and management. the time to get with the program and make efficient cars was decades ago, instead they took the easiest path for short term profit. this is what they will reap, and while i'll mourn the final blow to the dream that was union middle class detroit, it's not like anyone watching the industry couldn't see this coming, decades ago.

what is happening to GM is a metaphor for america. union workers were too happy with 'enough' to demand better leadership. stockholders were happy with 'enough' short term gain such that they didn't stop self serving executives back when they had the chance. now both groups are going to lose as the golden goose finally dies. just as in america, where the voters and wealthy have put off making hard choices on (pick your issue) again and again. only, instead of just a few japanese companies "beating us" at our own game, this time, it's the whole world. oh well, it was fun while it lasted. i look forward to being a highly underemployed second world nation of debtors, don't you?

Posted by: chicago dyke | Jan 29, 2007 7:51:36 PM

This just in...

Peanut butter sales hurt by skyrocketing jelly prices.

Yes, car companies, airlines, trucking companies, Delivery and freight services, and even casinos will do much better when gas prices are low, all else being equal. Shoot, Walmart and Costco are greatly effected by rising gas prices. GM is by no means unique.

But that is not GM's problem. They have incredible health care and pension costs that their foreign competitors don't have. Toyota Motor may not rely on selling gas guzzlers to the same extent but they also rarely provide health care for their employees.

Lets not forget that the corporate boards at GM, Ford and Daimler are not the only ones to blame. This is one area where unions have done a disservice to their workers and america at large. The UAW has consistently fought against higher emmisions standards and fuel efficiency. They have also fought to protect the health plans provided by GM and ford - using the nice health plans as a selling point for their workers. They have fought against more comprehensive government health care programs, because it would undermine what proven benefits they could provide workers.

I'm generally pro-union, but it is pretty clear that the UAW has helped dig the grave of the US auto industry.

Posted by: tomboy | Jan 29, 2007 8:09:26 PM

Hate to rain on the parade, but I don't see any such thing in that chart at all. Over the second half, you see rising gas, falling GM stock, but the start of the gas rise doesn't match with the start of the stock fall. The higher frequency variations don't seem to show a particular anti-correlation, either.

You need to plot one variable on the x-axis, and one on the y-axis and see if they correlate. Or, better, plot the correlation function between the two, to account for some potential time lag. The human-eye is pretty weak at doing a good statitically valid pattern match between two lines like that, unless they're really, really obviously close, like the Global Temp-CO2 plot.

Posted by: Larry | Jan 29, 2007 8:56:14 PM

The unions have fought against higher emissions standards and fuel efficiency? I think you're giving the unions a bit too much credit. Management fought against both of those things, too, and the unions weren't the ones deciding which cars to build and where to spend the R&D money. The unions certainly deserve a good share of the blame, but let's not be silly about it.

Posted by: mwg | Jan 29, 2007 10:38:14 PM

I tried making a scatter plot of the data which you can see at:

http://www.kaleberg.com/images2007/gmgas.jpg

There is definitely no time when both GM and gas prices were both high. I didn't run a correlation test though. I'm too lazy, and I had to enter the data values from that chart in your blog by hand. (Why isn't there a way to include the data with the chart? It would make a great HTML or TIFF extension).

Unfortunately, the stock price isn't a great indicator of the health of GM. If I remember correctly, there was an equity shortage in the late 90s, so PE ratios were soaring. After the tax cuts, demand for equities dropped across the board, so PE ratios have dropped. I should probably look up some other financial indicator, perhaps profit per book capital, but as I mentioned earlier, I am lazy.

Posted by: Kaleberg | Jan 29, 2007 10:43:07 PM

The bitter irony in all this is that, by the end of the 90s, GM's mid-sized cars were generally more fuel-efficient than their Japanese competition. But rising gas prices don't much shift the market for Malibus and Camrys, but rather increase Civic sales at the expense of SUVs (obv., they're not direct replacements, but it affects which way people will go from the middle, and also when people buy new, etc.). GM's competent, competitive Cobalt came out way too late to make any impression when people first woke up from the cheap-gas dream of the 90s, and they simply refuse to make anything better or more fuel-efficient.

The most criminally incompetent GM decision of the last 15 years (aside from squandering staggering goodwill at Saturn) was not taking the profits from SUV sales and plowing them into better compacts and, to a lesser extent, mid-sizes. The '91 Saturn was, I would argue, the best subcompact available in America, with the best mileage and a cult following. GM couldn't have cared less.

Posted by: JRoth | Jan 30, 2007 12:09:18 AM

I'm going to have to disagree about the Cobalt. I recently rented one and I was counting the days until I could get my Protege back. I'm positive that I'll never buy an American car.

Posted by: eriks | Jan 30, 2007 7:28:57 AM

GM deserves what it gets, because they have fought changes that would save them.......

Yeah, the steel and apparel industries got what they deserved as well, right? And of course, there is the phone support industry that fucked up and it all went to India. Bastards!!

Posted by: Fred Jones | Jan 30, 2007 8:26:11 AM

mwg,

Yes, the unions fought this legislation for years and have lately supported Bush administration policies on CAFE standards. The UAW fought against tougher standards "that would jeopardize the jobs of thousands of UAW members."

Unions bought into the argument of GM and Ford execs that higher fuel standards would hurt profit margains and force job cuts. They put their money where their mouth is and asked members of congress to vote against these standards.

Companies and execs aren't the only campaign contributers with deep pockets.

Just read the last action alert on this page...

http://www.uaw.org/cap/06/issues/issue05.cfm

Posted by: tomboy | Jan 30, 2007 8:50:18 AM

Gm's problems, however you wish to measure them, are entirely of their own making. Even if I were to accept (and I don't) that their health care costs are killing them, who made those deals? Martians? Evil Japanese automakers? No, GM made those deals. Take some responsibility for your actions GM. And the product, holy shit, nobody wants a GM car (with a few notable exceptions), people just buy them because, they're made in "America", their mom/dad owned one, it's all they can afford. Ask most buyers if they would rather have a Cobalt or Corolla and then, five years later, ask them how happy they were with the decision. Come on. There's no secrets here, GM, for the most part, makes crappy cars with, at very best, all of the emphasis on exterior design and marketing.

And just to be clear on minor matter, having driven the Cobalt and it's competitive vehicles there is no question, it's readily apparent to anyone who has also driven the cars in this class, that Cobalt is the triumph of marketing and little else. It's a cheaply made (and it feels like it) car. There's nothing about the vehicle that doesn't scream, "junkyard in five years".

And that is perhaps GM's biggest problem that is still plaguing them. They think they can run out of the clock on fuel efficiency. First it was, "we don't believe in hybrids, E85 and hydrogen are the future". Then, after getting their ass handed to them for two years, suddenly, hydrogen is all but forgotten and E85 is just another thing to mention to the press, gues what? We're building a hybrid! But then, dig deeper into the press release and find out that GM actually cannot build the hybrid they've been getting huge press on (the Chevy Volt) until there is a major breakthrough in battery technology. Shorter GM: Look at what we might do if things change significantly.

Once GM starts focusing on building better cars, designing better cars and spending less on their heinously bloated marketing budget, GM, and its' potential customers, will be far better off.

Disclosure: I own and run a popular hybrid car site hence my knowledge of the particulars. I also have a relative reasonably high up in the GM marketing chain which gives me some unique insights into that process as well.

Posted by: ice weasel | Jan 30, 2007 9:25:37 AM

I agree with Larry. This graph really doesn't show anything at all. You need to look at the correlation function specifically, see what you get, and then run a regression to see if anything pops up. By common sense, I do agree that a (probably) strong negative correlation will show up, but this graph doesn't prove anything.

Posted by: AT | Jan 30, 2007 10:06:48 AM

i'm with Larry and AT - i'm fully willing to be convinced that moronic businesss practices at GM are killing them, but, this chart doesn't show much.

anytime you need to squint real hard at a chart to see a supposed correlation, it's probably not really there, and, i'm doing a lot of squinting at this one.

further, you would really need to see what happens to, say, Toyota or Honda stock as gas prices rise to make this a story about GM management and not the auto industry in general.

josh bivens

Posted by: joshb | Jan 30, 2007 10:20:50 AM

Gas prices certainly haven't helped GM in recent times, although interestingly, their SUV's and large pickups actually get better gas mileage than Toyota's do these days. The big problem with GM is the UAW, which is primarily the fault of bad decisions made by GM years and decades ago. As of 2005, the Big three paid around 12000 workers to basically sit on their asses. Why they agreed to do that is a long story, but agree they did and it has cost them billions. http://www.detnews.com/2005/autosinsider/0510/17/A01-351179.htm

That is money that could have been spent on R&D and things like better transmission etc that would have made their products better. Add on health care costs that are greater for retirees rather than actual workers and you have a situation where they are paying so much money for people who do nothing for the company that they just don't have the money to build better cars.

Posted by: Scott | Jan 30, 2007 11:38:12 AM

Months of low prices at the pump...

But gas prices are only low relative to the very high prices of the last 3 years. Gas is still more expensive, today, than it was at any point between 1986 and 2002.

Posted by: SamChevre | Jan 30, 2007 11:58:52 AM

It's worth noting that GM's failure to deal with high fuel prices is all on the head of management. They have subsidiaries out in the rest of the world that compete reasonably well (this goes for Ford too) with the Japanese in the "fuel efficient compact car" markets in Europe. They have the technology, they have the designs, they just don't have the intelligence to sell them in the US.

Posted by: Meh | Jan 30, 2007 3:21:59 PM

The big problem with GM is the UAW, which is primarily the fault of bad decisions made by GM years and decades ago.

Odd, I had almost been willing to believe that GM agreed to their contracts with the UAW.

No, the problem with GM, and with Ford, and with Chrysler, is their incompetent management. (Re Chrysler, the Germans can be incompetent managers, too. Daimler Benz's management has been incompetent for years.)

On the other hand, the problem with the entire automotive industry is huge world-wide over-capacity.

Posted by: raj | Jan 30, 2007 6:21:50 PM

I see somebody brought up the issue of high medical insurance costs for the GM workers, compared to workers for companies in other countries.

It's a tricky comparison. Many other countries have healthcare largely funded through taxation. And at least some figures, such as per capita health expenditure, show Americans paying more, yet still seeing poor performance in terms of some of the commonplace measures of healthcare quality: for instance, infant mortality and life expectancy.

So is that part of GM's financial problem a bad deal with the workers, or a general American problem with healthcare costs?

As has been said, the American auto industry already produces good, fuel-efficient, cars in other countries. Even in the SUV market, there are vehicles out there which are more fuel-efficient.

So why can't GM sell these products?

Well, after checking the conversion rates, I find I pay around $6.40 a gallon for fuel, in this part of Europe. If that was the price in the USA, I'm sure that GM would be selling every small car they could ship into the country.

Posted by: Dave Bell | Jan 31, 2007 3:38:40 AM

There is no doubt that UAW has been dragging Big 3 down to the hole. Yes management of Big 3 has been incompetent as well to accept extremely unreasonable demands from unions, such as a special grade of toilet paper in the company rest rooms. Give me a break.

GM and Ford are a country club organization which happens to be in Auto business. A good ole boy system had plagued the company and still doing it. The biggest problem GM and Ford are having is to hold on to its good engineers and managers who have been ignored for a while. Old incompetent managers find ways to get rid of good young managers who would have potential to surpass them.

Union on the other hand had been fighting fiercely to defend incompetent and unwilling workers. Majority of workers who are convicted to stealing and drinking on the job do make it back after a dismissal with back pay. Good workers just wait for their turn to see union representative.

Connecting Big 3s failures with gas prices, insurance and poor marketing is nothing but blowing smoke over real issues. No company can succeed until all of its machinery is willing to succeed. That is not going to happen until someone in the board of directors of these Big 3s take a strong stand and initiate a change.

Posted by: Vijay | Jul 29, 2007 12:19:36 PM

托盘
 托盘
 钢托盘
 钢制托盘
 塑料托盘
 木托盘
 木制托盘
 纸托盘
 木塑托盘