General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China

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By Jason Simpkins
Managing Editor
Money Morning

For decades, General Motors Corp. (NYSE: GM) was an icon of American industry. But over the past decade its sales in China have steadily increased, while dwindling sales at home have turned the company into a relic.

Now facing bankruptcy, GM has an opportunity to shift its operations to China, its fastest growing and most profitable market. The company is already attempting to move its manufacturing operations to the Asian powerhouse, and that has given rise to speculation that it will move its headquarters as well.

Of course, if GM – which has already received $15.4 in government loans – were to pick up stakes, the political fallout would be epic. What could be more “un-American” than a 101 year-old American automotive company that’s being propped up by taxpayer dollars moving to a communist nation?

But the reality is that American consumers aren’t buying GM vehicles and Chinese consumers are. That means if the company is going to remain viable, China, not America, is GM’s land of opportunity.

GM CEO: Bankruptcy ‘Probable’

GM still has two weeks before the government imposed deadline to demonstrate sustainable viability expires on June 1. But even GM Chief Executive Officer Fritz Henderson has admitted that bankruptcy is “probable” at this point. And in the minds of analysts, it’s almost certain.

“[Bankruptcy] is looking like a real high probability,” Brett D. Hoselton, an analyst with KeyBanc Captial Markets, told the New York Times. “Chrysler is the best indicator at this point of where we’re heading with GM.”

GM reported a first-quarter net loss of $5.98 billion, compared to a loss of $3.3 billion a year earlier. Revenue fell to $22.4 billion, a 47% drop from 2008. The company burned through $10.2 billion in cash in just three months. GM has now lost $88 billion since 2004.

Last year, GM lost its crown as the world’s largest carmaker to Japan’s Toyota Motor Corp. (NYSE ADR: TM). And a company that 40 years ago produced one out of every two vehicles sold in the United States, has seen its U.S. market share slide to just 19%.

On Friday, GM notified 1,100 of its 6,000 U.S. dealerships that it is terminating their contracts, and it plans to cut its network down to 3,600 dealers by next year.

This company is sick,” Charles Ballard, an economics professor at Michigan State University told Michigan NBC television affiliate WILX 10, “they’re likely going to file for bankruptcy.”

Investors are equally pessimistic. GM stock has plunged 70% since the Obama administration announced it would give the company 60 days to restructure outside of bankruptcy court. GM has lost 94% of its equity value in the past year.

Is China the Right Cure for GM?

So if GM is sick, what then is the medicine? Many analysts believe it’s a healthy dose of China.

While its U.S. sales have plunged, sales in China continue to grow exponentially. In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the U.S., a 36% decline from a year ago.

And while global car sales continue to plunge, auto sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.

And unlike the United States, there is actually a strong demand for GM model cars. In China, where the company is neck and neck with Volkswagen for the market-share lead, GM set a monthly sales record of 151,084 vehicles in April. That’s a 50% increase from its April 2008 results.

Within 10 years, this will be our largest market in the world,” Kevin Wale, president of GM China, told TIME magazine.

GM has been so successful in China it is reportedly negotiating plans with U.S. lawmakers that will send the carmaker’s production overseas, the U.K.’s Telegraph reported.

GM will start shipping cars to the United States from Shanghai in 2011. The company plans to export slightly more than 17,000 vehicles in the first year before ramping up to 50,000 by 2014.

Backlash from GM’s China Plan

While many carmakers import components from China to save on labor costs, GM would be the first company to import whole cars from the Mainland.

Of course the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.

Two weeks ago, GM CEO Henderson said his company would cut an additional 21,000 factory jobs, close 13 plants, eliminate about 2,600 dealerships and close its Pontiac division. GM aims to shed 23,000 jobs – 38% of its workforce – by 2011.

But the company expects to open a new factory in mainland China within the next few years and continues to build upon its 21,000 Chinese employees. 

“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told NBC’s WILX. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”

On the other hand, GM argues that it is only logical to produce cars where they’re going to be sold.

GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the Associated Press

Plus, GM already imports cars from other countries, just not China. The Chevrolet Aveo and Pontiac G3 come from South Korea. The Pontiac G8 comes from Australia. The Saturn Astra comes from Belgium, and the Vue from Mexico.

Harvard Business School professor Clayton Christenson – who was also a consultant to Richard Wagoner, the architect of GM’s China strategy – told TIME that inexpensive, Chinese-made Chevys, exported to the United States could be the “disruptive” force the company needs to resuscitate North American sales.

“It’s exactly the right thing for them to do,” Christenson said.

While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, TIME reported.

MSU professor Charles Ballard says that while the notion of outsourcing more jobs to China may not be pleasing, it is also in GM’s best interest.

“I think everyone needs to keep in mind that if this company fails, that's the worst case scenario," Ballard said. "It would be really good for the people of Michigan and for Lansing for GM to become a viable company. Right now, it's not."

And perhaps that’s the root of the issue. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the two diverged. Now, they’re too far entangled for there to be an amicable solution to this problem, and the Obama administration is left with a political powder keg.

The government stepped in to fire former GM chief Richard Wagoner, but it doesn’t want to be too heavy-handed in its treatment of the private sector. It has already spent months sidestepping questions about whether or not it would nationalize U.S. banks.

“We didn’t think in America that the President could fire the CEO of a private company,” one Chinese executive told TIME. “For us Chinese it was very confusing.”

But if the Obama administration lets GM move ahead with its plans, it must confront the unpleasant reality that it is subsidizing the outsourcing of U.S. jobs with taxpayer money.

“Production location is a corporate decision, but when it's on the taxpayer dime, there are different sensitivities, so the notion of billions for a rescue package and offshore production, I think, could be politically combustible," Harley Shaiken, a professor at the University of California at Berkley who specializes in labor issues, told the AP.

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