GM Decides What is "Core"

Yesterday, General Motors announced that it's selling Allison Transmissions to a pair of private-equity firms, for about $5.6 billion.

GM's stock price rose for the day, and one can take that as a "yes" vote in the ongoing referendum about corporate policies on Wall Street.

Still,it raises a puzzle. The spinners are portraying this as a case of a company selling off a "non-core" asset to raise some cash so it can better fix what ails its core.

But since when is the manufacture of transmissions non-core? What is the core? The assembly of automotive parts into a whole and their marketing and sale, presumably.

Isn't there something to be said for the view, though, that if the same company makes the transmissions, and then makes the cars, installing its own transmissions, there is an efficiency gain, because that company doesn't need to haggle with itself over transmission prices?

I suppose GM executives might well say, "yes, there is some gain in efficiency there, but the present discounted value of that gain is a good deal less than the $5.6 billion pricetag we've put on it." Maybe. The language of "core" versus "non-core" doesn't illuminate that question, though.

An old story about eating one's seed corn comes to mind, rather.

Do janitors clean out the GM executives' offices at night? Is that service contracted out to a separate operation, or are those janitors employees of GM? If the service isn't contracted out, should it be? The question of the boundaries of a firm, what it makes sense to keep within the hierarchical structure, what it makes sense to outsource, and why, is a complicated one, raised in clear theoretical form by Ronald Coase as long ago as 1937, in a fascinating essay, one that stills stands up to scrutiny today.