Question

Please read the case and answer the question at the end of the case.

Title: Last-chance saloon GM prepares to close five factories, attracting Donald Trump’s ire Mary Barra is responding to customers’ soaring appetite for SUVs and pickups

By: Print edition | Business, The Economist.Nov 29th 2018 | NEW YORK

THE CAR industry’s changing fortunes have left a deep mark on Detroit’s urban landscape. Once-bustling factories such as the Fisher body plant, Ford’s Highland Park and the Packard plant became vast, abandoned graphitized shells—a sad reminder of the former might of America’s “motor city”. Now General Motors’s Hamtramck assembly plant looks likely to join the list of closed facilities. On November 26th GM announced that Hamtramck, along with four other factories in North America, and two more unspecified plants elsewhere, would not be assigned new vehicles or components to put together after next year.

News of the cost-cutting initially sent GM’s shares soaring. In total it will trim its North American workforce by a substantial 15%. Another Michigan plant is among those to be idled, as well as facilities in Ohio and Maryland, and in Ontario, Canada. The day after the announcement, however, criticism from President Donald Trump sent shares the other way. Mr Trump tweeted that he was “very disappointed” in Mary Barra, GM’s chief executive, noting that she was not shutting down plants in Mexico or China: “The US saved General Motors, and this is the THANKS we get!” He threatened to cut off GM’s access to federal subsidies for electric cars (although industry-watchers noted that this is not a concern, since GM has mostly used up its permit. Mr Trump is not the only disgruntled politician. Justin Trudeau, Canada’s prime minister, tried to reassure workers about the proposed closure of the plant at Oshawa, on the shores of Lake Ontario, where GM started making cars over half a century ago. After trade liberalisation led to tighter integration of the North American car market, cars became Oshawa’s lifeblood. When the financial crisis pushed GM towards bankruptcy, Canada joined America in bailing out the company to save local jobs.

QUESTION:

The swirl of forces upending the industry means GM probably had little choice but to take some action. As an independent economist, do you agree with the action taken by Ms Mary Barra, GM’s chief executive? Your answer must be supported by the appropriate data and information; and discussed using the appropriate concepts, theories and tools you have learned in Managerial Economics.

Answer 1

I totally agree with the action taken by Ms Mary Barra, GM's chief executive. The major objective behind the decision taken to shut down the manufacturing plants in US and Canada was to cut down the cost. As the labor, land and material costs is high in US and Canada, so the objective of cost cutting was not being met. Thus the decision of closing down the plants in US and Canada was being taken.

At the same time, the land, labor and material cost is very low in China and Mexico, leading to overall low cost of production. As a result, Mary Barra has decided to continue its manufacturing operations in Mexico and China, where the cost of production is low and the overall objective of cost cutting is being met. For instance, Apple Inc has set up its manufacturing plant in China being an American company only because of the low labor costs in China and thus the overall cost of production is low.