DETROIT -(Dow Jones)- Building small cars in the U.S. has generally been a money-losing venture for General Motors Corp. (GM)
But now the auto maker believes it has found the formula to turn a profit on compact cars, even if those cars are built by union labor in a traditional Rust Belt town.
GM on Thursday will announce a major investment in its Lordstown, Ohio, assembly plant designed to ready the factory for a next-generation compact car: the Chevrolet Cruze.
Mired in red ink and faced with sinking sales of profitable pickup trucks and sport-utility vehicles amid high fuel prices, the auto maker can no long afford to concede losses on small cars.
“Small cars are becoming a permanent feature of the U.S. market, and the odds of earning a decent return have gone up” for domestic auto makers, said auto analyst John Casesa, managing partner of Casesa Shapiro Group. “The window of opportunity for GM is now.”
The Cruze will be built on a single platform around the world, leveraging economies of scale.
Meantime, factory workers building the car will be working under a new labor deal that was inked last year with United Auto Workers and is expected to save GM roughly $5 billion a year in wages and benefits. The Ann Arbor-based Center for Automotive Research estimates the new contract will cut GM’s average cost of building a car or truck by $4,000 to $5,000 per vehicle by creating a second tier of lower-paid factory workers and offloading retiree medical benefits to the union.
GM is counting on one more critical - but still uncertain - element to turn small cars into money makers, which is that consumers will ante up thousands of dollars more for a new small Chevy.
The auto maker believes growing demand for nicer, well-equipped small cars coupled with a dramatic redesign for the Cruze will be enough to command sticker prices well beyond the $15,000 base price of a compact Chevrolet Cobalt.
GM’s cars typically sell for less than $20,000, or about half the price of many trucks and SUVs. While the bigger vehicles cost more to develop and build, profit margins on trucks are still far bigger than on cars.
GM is likely losing hundreds of dollars on each compact Chevrolet Cobalt it sells in the U.S., while the auto maker’s trucks deliver thousands of dollars in net profits, said David Cole, chairman of the Center for Automotive Research.
Deep production cuts also will help the auto maker run its factories at full capacity, further eliminating waste, he said.
“What they are enabling is a business model they have not had in years,” he said. “They’re going to be profitable across their entire product line.”
“This car will represent the first U.S. application of our global architecture strategy,” GM Chief Executive Rick Wagoner said of the Cruze in June, when he laid out a plan to build fewer trucks and ramp up production of small and midsize cars. “This strategy will pay major dividends as we leverage our extensive car product development capability in Europe, Korea, and other locations to accelerate the shift in our U.S. product portfolio.”
Ford Motor Co. (F) is attempting the same global platform approach with the introduction of its new subcompact Ford Fiesta vehicles, due to hit the U.S. in 2010. The Fiesta is already on sale in Europe.
Americans stunned by record gas prices have begun clamoring for fuel-efficient small cars, and major auto makers are struggling to meet demand.
Small car sales were up 11% through July, while overall U.S. auto sales were down 11%. GM is adding a third shift at the Lordstown factory to meet demand for the Cobalt, which is currently built there. Ford, Toyota Motor Corp.(TM) and Honda Motor Co. (HMC) also are scrambling to meet soaring demand for cars like the Ford Focus, Honda Civic and Toyota Corolla.
“The small car was never aspirational until three months ago, and with that change comes that opportunity to potentially make money on small cars,” said analyst Rebecca Lindland of Global Insight Inc.
To succeed, she said, GM must fight the perception that its cars are subpar compared to offerings from Toyota and Honda.
“They continue to suffer from the perception that they don’t make a quality vehicle,” she said.
- By Sharon Terlep, Dow Jones Newswires; 248-204-5532; sharon.terlep@dowjones.com.
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(END) Dow Jones Newswires
August 20, 2008 18:37 ET (22:37 GMT)
Copyright (c) 2008 Dow Jones & Company, Inc.
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