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GM’s challenge: Automaker not known for cars

Image: 2008 Chevrolet Cobalt
Chevrolet plans to replace the clunky Cobalt small car, shown here, with the sleek Cruze that is powered by a 1.4-liter turbocharged four-cylinder engine that will allow it to get around 45 miles per
/ Source: The Associated Press

People want small cars that get great gas mileage. General Motors Corp. is known for making top-notch trucks and sport utility vehicles. The company's survival now hinges on the difficult task of convincing buyers that its upgraded cars are just as good as its trucks and worth some extra cash.

That's essentially the business plan for the reconstituted GM, the one that is trying to make it in a U.S. market where people no longer want $42,000 Chevrolet Tahoes that get only 14 miles per gallon in the city.

Yes, the plan still includes selling a lot of pickups and SUVs, but nowhere near the volume of past years when GM could count on pocketing upward of $10,000 on every big vehicle.

Instead, the revenue to sustain the nearly century-old industrial giant will have to come from cars, which have typically made only hundreds of dollars in profits. Better cars, and lots of them.

"We just need to do it really well," President and Chief Operating Officer Fritz Henderson said in an interview. "Let's do cars that people love, even if they're small, and if you do that, you're going to get better pricing."

The change has come quickly. Faced with high gas prices and a weak economy, GM's sales fell 16 percent for the first half of the year, with trucks off 21 percent and cars down nearly 9 percent. GM has lost billions of dollars during the last three years. The company on Tuesday announced a combination of cuts, borrowing and asset sales that would raise $15 billion to weather the recent slump in U.S. auto sales and the rapid shift from trucks to cars.

Henderson, who concedes that GM has some repair work to do on its car brand image, says the change will have to come one or two models at a time. It will follow the path of the new Chevrolet Malibu, which saw sales jump 46 percent in the first half of the year and average sale prices rise $4,000 over previous Malibu models due to improved quality, styling and options.

"One product launch does not a success make," Henderson said. "It's how do you build on that? But I think it gave us some confidence that if we get the car right and we get the promotion right, we can make progress and we can actually bring people back to the car."

GM has big plans for cars and car-based crossover vehicles. Nearly every brand, including Cadillac, will be getting a small car soon. Eighteen of the 19 vehicles GM is launching between now and 2010 are cars or crossovers.

One model, the sleek new Chevrolet Cruze due out in 2010, is the replacement for the clunky Chevrolet Cobalt small car. GM plans to power the Cruze with a 1.4-liter turbocharged four-cylinder engine, allowing it to get around 45 miles per gallon.

Currently, GM sells the pedestrian Cobalts for an average of $12,000, while Honda Motor Co. gets $19,000 for its popular Civic compact, Henderson said.

John Wolkonowicz, an auto analyst with the consulting company Global Insight, said GM could easily command $22,000 for the Cruze because of its sophisticated, European-style suspension and its nice styling and amenities. But it will only cost GM about $2,000 more to make those changes over the current Cobalt, leaving substantial room for profits, he said.

Henderson said those kinds of changes, together with expense cuts, streamlined marketing and increases in small-car production, should help GM make a good chunk of cash even on smaller vehicles.

"I think the equation in small cars is to close the price gap versus the market segment leaders and drive more volume," Henderson said. "You're significantly improving aggregate profitability."

GM Vice Chairman Bob Lutz said car prices also will rise because of demand, while truck and SUV prices will likely fall.

History bears that out. Wolkonowicz says the Chevrolet Suburban SUV cost about the same as a Caprice sedan in 1985, when demand for SUVs was low, but the Suburban's list price is now more than double that of the Chevrolet Impala sedan. And just a few years ago, Toyota Motor Corp. was offering incentives on its money-losing Prius hybrid, but now it can't keep up with demand, said Global Insight analyst Rebecca Lindland.

"The reason we made no money on small cars is because — hello — nobody wanted them," Lutz said. "At $1.75 and $2.25 (per gallon), everybody was happy with full-size utilities with V-8 engines. Now that's shifting, so the profitability is going to go down on trucks and the profitability on cars is going up."

Lutz pointed out that in Europe, where GM is profitable selling small cars, average transaction prices per vehicle run close to $37,000. GM's U.S. lineup will look increasingly like its European one in the coming years, he said.

"It's a pretty radical shift," he said.

Still, some analysts warn that GM has a rough road ahead. Moody's Investors Service said late Tuesday it was reviewing GM's ratings for a possible downgrade because of the cash the company will need to shift away from trucks and SUVs.

"Establishing an adequate level of profitability throughout a car portfolio that has historically been priced at a significant discount relative to competing models from Asia will be a difficult and long-term undertaking," Moody's Senior Vice President Bruce Clark said in a statement. "GM will likely face a sizable cash burn until it gets this part of the equation right."

GM has also bungled previous attempts to win over car buyers. The company rolled out its Saturn brand of small cars in 1990 to fight the imports. While the models developed a loyal following, analysts believe the brand has never made money.

GM's old business model of making money on trucks and SUVs and losing it on cars was leading the company to disaster, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

But recent cost-cutting through global engineering and manufacturing and the historic lower-cost labor contract reached last year with the United Auto Workers have given it the means to change.

GM, he said, will have cut $4,000 to $5,000 from the cost of an average vehicle between 2005 and 2010, when the UAW contract takes full effect, allowing it to plow more money into better-quality cars.

"Now you have enabled them to be profitable across all vehicle segments," Cole said. "In a sense, it's really a reversal of a death spiral, and that's what they were on."