Saturday, December 01, 2018

The real story behind the GM closures

General Motors (GM) announced in November 2018 that they would be closing 4 auto assembly plants, one of them in Canada. Both the unions and the US and Canadian governments are acting shocked and disappointed at this announcement. I hope they're kidding.

The official reason GM said they are closing plants is because they are restructuring their operations to make way for the future of automobiles. GM said they need to get ready for the imminent reality of autonomous vehicles and electric vehicles. So why does that require fewer assembly plants?

To answer that question, you have to look at recent automotive trends. Ford just announced that it is no longer cost effective for them to make sedans, so they won't. Sedans just aren't selling as much as they used to. Now, the money is in SUVs and trucks, at least for Ford. The reason GM is closing the 4 assembly plants is because they're the ones producing primarily sedans.

From a bigger picture perspective though, fewer people are choosing to buy a personal vehicle at all. The youngest generation are shunning car ownership in growing numbers, and it's not surprising, considering that a typical young consumer has to make wiser choices on how to spend their money. Do I buy a house, or do I buy a car? Do I buy a car, or do I have children? These questions may seem ridiculous to anyone over the age of 40, because it had almost always been possible to do all three. But for many young people who are not earning $60,000+ salaries, you might be able to have one of those 3, or maybe even 2, but perhaps not all 3.

The fact is, with car sharing services popping up all over the continent, you can still use a car when you need one without the hassle of ownership. For example, if you're a paid member of Car2Go, you can essentially rent a Mercedes or Smart car by the minute and never have to deal with the separate costs of gas, insurance, oil changes, maintenance, tires, nothing. This is a very attractive alternative to ownership, because if you can train yourself to be disciplined enough to only use a car 3 times a week at an hour each, that's around $230 per month, all in. Driving a new Mercedes! Try getting that kind of price for a car loan, insurance, gas, maintenance, etc. In fact, try renting a Mercedes for a week for $230.

So, car companies, not being stupid, they see the writing on the wall. Although Mercedes is only partnered with Car2Go, other car manufacturers are either already partnered with ride sharing services, or are planning to very soon. Some of these ride sharing services will feature vehicles that drive themselves. Waymo is already full swing into a major public trial in Phoenix, driving more than 10,000 collective autonomous miles every day. Tesla has indicated that it intends to create a car sharing service for its Tesla owners to rent out their cars when they're not using them.

Because the truth is, in a typical week, the average consumer car is only being driven 6 out of 168 hours, or 3.5% of the time. As soon as a critical mass of consumers realize that they're paying upwards of a thousand dollars a month to park a vehicle for 96% of the time, vehicle sales are more likely to free fall.

And that's why all the disappointment and shock in the world isn't going to make an iota of difference going forward. The days of outright car ownership for many people are numbered. And car companies have to get ready for that.

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