Review of GM & Ford

GM chief Rick Wagoner says that the company's restructuring plan, announced late last year, has already succeeded in cutting some $9 billion out of the struggling company's expenses.

'I’m not sure whether this is an EOS, but this move will certainly lower its LRAC and lower the overall production costs.'

In order to answer this query, we must first consider the issue of what exactly is meant by the 'restructuring plan'. I would think that the restructuring plan will mostly be simply undergoing the process of rationalisation, and improving the efficiency of the corporate structure.
Thus costs are reduced due to:
i) Reduction in number of employees
ii) Shutting down of some factories/plants/offices
iii) Reduction in delays et cetera

It may then appear to be involving economies of scale - for example, the reduction in number of say, machines, may result in the fixed costs being seemingly spread over a larger output level.

But, we must not forget to go back to the definition of 'economies of scale'. Economies of scale are experienced when long run average costs decrease, due to the scale of production increasing. In this case, we shall only consider the internal (dis)economies of scale since the measure involves only a singular firm, and thus external (dis)economies of scale are irrelevant.

Thus, while it is indeed true that the move by Rick Wagoner will reduce the costs incurred by the firm , it is not via any internal expansion or whatsoever, and hence scale of production does not increase. In fact, referring to an earlier part of the article:

"But in this case, size doesn't necessarily make for success in the car business. Today the companies are too big, with expensive plants that are not running and thousands of union workers they have to pay even when they do not need them. Combine that with the financial burden of pensions and providing health care to workers and their families, and you see that size can, in fact, hurt a company."

Thus, it appears that, in fact, GM is probably already experiencing significant internal diseconomies of scale instead, and so it is highly unlikely that GM would increase its scale of production. Even if it did, the increase in the scale of production would incur even greater internal diseconomies of scale, and most definitely not internal economies of scale.

Therefore, since the cost savings are not due to an increase in the scale of production, the measure thus does not involve internal economies of scale. I would think that the measures would be instead helping to reduce the diseconomies of scale experienced - for example, addressing issues in coordination and communication between departments, hence resulting in the cost savings.

I hope that has been useful.

Zhe Wei