Lifestyle

GM: Small Is the New Big


CEO Wagoner says the carmaker will scale back production of trucks, and possibly the Hummer, while emphasizing small cars such as the new electric Volt

General Motors (GM) is turning more than a decade of car-making on its head.

At the company's June 3 annual shareholders' meeting in Wilmington, Del., Chairman and Chief Executive G. Richard Wagoner Jr. announced plans to introduce a new line of compacts for North America, while also boosting passenger car production and closing four truck plants.

The GM chairman, who has been struggling to move the company's North American business back in the black since 2005, also said GM will build the Chevrolet Volt electric car in 2010. And in perhaps the most symbolic shift away from massive vehicles, the company may sell the Hummer brand, Wagoner said.

GM lost $3.25 billion in the first quarter of 2008, including special charges. Analysts expect the company to lose more than $2 billion this year just from operations. However, Wagoner's latest actions represent more than just a downsizing of production and sales to match the weakening U.S. auto market. They also represent a stark change for a company that has long relied on trucks for the lion's share of its sales and profits while—until recently—giving smaller, less profitable passenger cars short shrift when it came to investment and design.

The Subcompacts Are Coming

With high gas prices now hammering truck sales and consumers moving back to smaller, more efficient vehicles, Wagoner has his company sprinting to get in step with market demand. Wagoner called the shift "a structural change, not just a cyclical change."

GM plans to introduce a new compact car that will be better equipped than today's compacts, with more amenities and also a 9-mpg boost over today's 27-mpg Chevrolet Cobalt. An all-new version of GM's Korean-made Chevy Aveo subcompact is coming, Wagoner said. GM will also build an all-new 1.4-liter turbo engine for its new compact cars.

Wagoner said GM will close four truck plants, two of which make full-size SUVs and pickups. Those two plants are located in Janesville, Wis., and Oshawa, Ontario. Another plant in Moraine, Ohio, which builds the Chevrolet Trailblazer, GMC Envoy, and Saab 9-7X midsize SUVs will be shuttered as well as a medium-duty pickup plant in Mexico. Sales of the Trailblazer and Envoy—once big moneymakers for GM—are off at least 33% this year.

"If the market is going away, there's no sense making the vehicles," says James N. Hall, principal of 2953 Analytics, a Detroit consulting firm.

Aligning Itself with the Market

Overall, Wagoner is cutting GM's production from 4.2 million vehicles in North America now, to 3.7 million by the end of the decade, says JPMorgan (JPM) analyst Himanshu Patel. At the same time, GM is adding a third shift at two plants that build, separately, the Chevy Cobalt and Pontiac G5 compacts and the Chevy Malibu and Pontiac G6 midsize cars.

For Wagoner, the latest announcement comes just as he has been trying to shift GM into better alignment with the market. The Malibu and G6, launched last year and in 2004, respectively, were major efforts by GM to win back passenger car buyers, who deserted domestic brands over the last few decades for Japanese cars as the U.S. auto companies placed a higher priority on trucks and SUVs. So far, the new Malibu has sold well and is winning converts. The model sells for about $4,000 more per car than the old Malibu, but GM doesn't make enough money on most of its passenger cars and will need to boost profitability from its smaller vehicles to make up for shrinking truck profits, said company President and Chief Operating Officer Frederick "Fritz" Henderson in an analyst briefing on June 3.

For the next couple of years, GM will be facing a much weaker auto market than it has had to deal with up to now. Sales were off 9% through April and trucks took the biggest hit. Some experts think U.S. car sales will total fewer than 15 million vehicles this year. Plus, GM is still burning cash and could have to spend more because of ongoing problems at ResCap, the mortgage unit of GMAC, of which GM owns 49%. GM may also have to pony up money to help its former parts unit, Delphi, emerge from bankruptcy.

Rebelling by Buying American

Now GM has to try even harder to win car buyers back. One big challenge is convincing U.S. consumers, many of whom recognize Japanese and Korean brands as the better small cars, that GM can offer competitive models. The good news, says Hall, is Gen Y buyers don't think GM's largest car brand, Chevrolet, has a bad image. In fact, their parents drove Honda Accords and Toyota Camrys, so domestic brands may be able to offer them a way of rebelling against their parents' stodgy rides. "They don't see Chevy as baggage," Hall says. "It's a blank slate."

Reaching those buyers will be vital over the next couple of years. Wagoner's cost-cutting moves, as well as those made in last fall's newly inked four-year labor deal, will deliver most of their savings around 2010 and 2011. That's when the United Auto Workers will take over a health-care fund that covers production workers, saving GM at least $4 billion a year in cash.

At that point, the production cuts and new, lower-wage hires should also help GM. Add in the fact that around the same time, GM has a flurry of new passenger cars and smaller SUV models coming, and GM could prosper, after weathering a tough couple of years, writes Merrill Lynch analyst John Murphy. He predicts GM can erase its losses and earn roughly $3.5 billion by then.

Welch is BusinessWeek's Detroit bureau chief.

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