GM's Down, But the Auto Industry Chugs Along

General Motors’ plant closings will no doubt deepen America’s pessimism about the U.S. economy, even as other automakers here are building plants and selling cars like crazy.

The sheer size of this mega-corporation, still a major automaker, and the magnitude of its cutbacks–laying off 30,000 workers and shutting all or part of 12 manufacturing plants–is enough to cast a pall of gloom over an economy still trying to shake off voter anxieties about its recovery.

But this is a huge, highly diversified economy that produces $12 trillion worth of goods and services annually and will certainly survive GM’s latest downsizing–as long as we pursue the kind of capital investment, savings and tax-cut incentives that have made us one of the strongest economies in the world.

There should have been no surprise about GM’s announcement. The company that once manufactured more than half of all the cars and trucks sold in the United States has seen its market share shrivel to 26 percent and has more than $4 billion in losses in North America alone. Its stock value has plunged. Its debt rating is at near junk-bond status.

GM has never been able to shake its image as an overweight, slow-moving behemoth whose huge bureaucracy prevented it from competing with its slimmer, quicker and far-more-efficient rivals. To its credit, GM has instituted changes in its management and plant operations, eliminating overpadded middle management that took forever to make its marketing decisions, while its fleeter rivals, Toyota and Honda, were outracing them.

So, last week, GM said it will shut down six assembly plants in Michigan, Oklahoma, Tennessee, Georgia, Ohio and Ontario, Canada, and will close or shrink another half-dozen parts plants elsewhere by 2008.

It’s not that Americans are buying fewer cars or that the U.S. auto industry is shrinking.

"Sales in the United States have continued to surge for the largest Japanese automakers, which include Toyota, Honda and Nissan Motor Co.," Washington Post writer Sholnn Freeman reported last week.

We’re buying more cars and trucks and more vehicle plants are being built in America — there just not GM’s.

Toyota, for example, seems to announce a new plant opening here about every other year. Honda can’t seem to keep up with consumer demand for its most popular models. These are well-engineered cars made in America by American workers.

"In recent years, the Japanese have consistently beaten GM, Ford and Chrysler to the market in growing vehicle segments, such as soft-riding car-like SUVs and gas-electric hybrids," the Post reported.

Many things have contributed to GM’s problems, particularly its lethargy and its resistance to needed management changes, downsizing to bring costs in line with market share and increased outsourcing. But in the end, it was the product quality and consumer choice that ultimately led to their woes.

Unfortunately, a lot of workers will suffer as a result of GM’s fall from its once powerful position, but this is a company that has the ability to bounce back, and I think that can happen.

Downsizing, however late, is the right short-term medicine as GM goes about the task of finding ways to produce better cars at less cost through smarter technology, robotics and, where necessary, outsourcing. To start, it might take a closer look at how its Japanese rivals run their plants and build their cars here. Japan succeeded decades ago by studying U.S. plant and marketing practices. Maybe GM should do the same — study the competition.

What we should not do is ask the federal government to shore up and subsidize a weak company that must undergo fundamental top-to-bottom changes.

It’s called "industrial policy," and Phyllis Borzi, a George Washington University professor of labor policies and practices, wants the feds to step in and save the company with federal assistance. "Other countries help industries to modernize and get into a position to compete, and we don’t," she told the Post.

We certainly need to help displaced GM workers in every way we can, and the government is going to do that — from unemployment benefits to job-retraining programs. But subsidizing failing businesses is not the way to go. Just look at the countries that have tried this.

For several decades, Japan stuck to its "too big to fail" policies as they propped up failing banks and other businesses, only to fall into a long and costly economic slump. Taking a page out of American Economics 101, Japan has in the past several years encouraged mergers and buyouts, and yes, even allowing weak firms to fail, and its economy has turned around dramatically.

Europe, on the other hand, has stuck with the old "industrial policy" of business subsidies and welfare-state benefits for its workers, and the result has been decades of 10 percent unemployment, anemic 1 percent to 2 percent economic growth, and a persistent brain-drain exodus of the best and the brightest workers, who have fled the continent for better opportunities in the global economy.

GM can work its way out of this mess without a federal bailout, and last week made some tough but necessary changes to put itself back on the road to recovery. I’m betting they’ll succeed.