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Wednesday, June 4, 2008

GM making the right move?

Of course I don't know. There are many factors companies usually consider when deciding to close factories. But I was struck when listening to GM's announcement the other day, and when listening to NPR's description of that announcement, as a decision by GM to close 4 of its truck manufacturing plants in the US due to slowing sales largely if not entirely due to gas prices.

As someone who does not believe that gas price fluctuations in the ranges the US is seeing is a determining factor in a person's decision to buy a car versus a truck or a reduction in gas consumption to any significant level, I am skeptical of GM's decision and NPR's discussion of it. The discussion and indeed GM's own spokespeople talk about how the sales of their larger vehicles have declined by some 27% from last years level in large part due to escalating gas prices. I would hope that the decision to close the plants was not made on that judgement. Sales and indeed the amount of gas demanded is not very responsive to price changes in the short-run, and in my opinion, the long-run as well.

The fact that GM's sales have declined so much this year and that gas prices have risen is a correlation not a causation. Lot's of things have happened in the past year that are far more likely to have significant impacts on sales of GM trucks, namely: the recession, rational or irrational (but temporary) expectations about the future trend of gas prices, the housing crises, etc. just to name a few. The fact that gas has risen from $3 to $4 seems like a minuscule and insignificant cause for the sales decline when compared to the above stated more serious concerns.

I hope (and assume) that GM made its long-term business decision based on the obvious fact that their sales have not just fallen dramatically this year, but have actually been weakening for the past number of years - largely due to the en vogue "green" movement and due to shifts in consumer preferences, NOT due to gas prices.


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