According to the WSJ, the Obama administration is pressuring GM to abandon its GMC brand. GMC produces mainly SUVs and small pickup trucks.

From a business perspective, this is kind of hard to understand. If GM does anything right, building small cars and SUVs is probably one of them. The division’s products carry the highest profit margins and consumer satisfaction surveys routinely give the vehicles high marks.

GM’s problems aren’t that it doesn’t produce certain products that are profitable and attractive to the consumer, rather that its cost structure doesn’t permit it to produce small cars CAFE standards mandate at a profit. Its survival up to this point in time has been accomplished by subsidizing small car production with light trucks and SUVs.

If the Obama administration vision for the company is one that involves making smaller more fuel efficient passenger cars that transition to a non-carbon using vehicle without the profit contribution from GMC then a couple things are going to have to happen. The cost structure — labor costs — are going to have to be radically reduced and the consumer is going to have to embrace the product. I suppose it’s remotely possible to get the labor costs down quickly via a reorganization but changing consumer preferences is not going to be that simple.

In all of this it might be possible to see the designs of the administration. We know from recent experience that high gas prices have a notable effect on car buyers’ behavior. At $4 a gallon, trucks and SUVs sat on dealers lots while smaller cars and hybrids sold briskly. As soon as gas prices declined Americans reverted to their old buying behavior. Basically, we like big cars and trucks and won’t change absent some external force.

So, if the government plans to recreate GM as the “green” manufacturer it might well mean that they also intend to nudge the consumer towards that type of product. It could be done with subsidies — tax credits, favorable financing — or it could be accomplished by manipulating fuel costs. 

Dropping GMC doesn’t make sense from a business perspective. Therefore, it would have to be justified on a social policy basis. That’s fine but you then are faced with the need to change other metrics to get the economics back in alignment.

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