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Key to GM success lies in profits from new model

Published: Wed, June 4, 2008 @ 12:00 a.m.

By Don Shilling

GM is pegging its profits to a common small-car design that will be used worldwide.

General Motors plans to make something else besides a new compact car in Lordstown — profits.

Rick Wagoner, GM chief executive, said Tuesday a fresh design will increase sales while a new labor contract will reduce costs. By combining the two, GM hopes to end a long streak of losing money on cars made at Lordstown.

“We believe we can build a car there profitably,” Wagoner said at a press conference after GM’s annual meeting.

Joe Langley, market analyst with CSM Worldwide in Michigan, said he thinks GM can succeed on its financial goals.

“This car wouldn’t be going forward if they couldn’t make money,” he said.

Industry analysts have said that GM hasn’t been making money on the Chevrolet Cobalt, which has been produced in Lordstown since 2004. For years before that, GM had said it was losing money on a previous Lordstown product, the Chevrolet Cavalier.

Langley noted that GM’s profit projections for the new car are based on a shift in production strategy. Instead of limiting the new car to North America, GM will be producing the same model at plants in other parts of the world, such as Europe and South America.

GM said this will be the first time it has placed a car with a global platform in the U.S. A platform contains the underbody parts of the car.

Making one model for worldwide use, instead of specific models for each market, cuts development costs and lowers the cost of production because the plants are using the same parts, Langley said.

Automotive News reported, for example, that the engine for the new Lordstown car was developed in Europe and has been used on models produced there. The engine for the Lordstown car will be built at a plant in Flint, Mich.

Auto Week recently reported that the car is being developed by GM’s South Korean unit, GMDAT, with plenty of input from North American and European engineers.

Wagoner said the new labor contract with the United Auto Workers also was important to cutting costs and increasing the likelihood of small-car profits.

GM and the UAW reached a national labor contract last year that called for new hires working in jobs off the assembly line to be paid about half the regular pay rate of $28 an hour. A buyout offer has about a quarter of GM hourly employees leaving the company this summer.

Getting costs down is just one side of the story, however, Wagoner said. GM also has to make a car that will sell, he said.

“We have to get both of those right, and we think we have both of those right,” he said.

Increasing purchase prices of cars also is important to GM making profits, added Fritz Henderson, GM chief operating officer.

That can happen because consumers want fuel-efficient vehicles and will pay for them in an era of high gas prices, he said. GM has been relying on profits from SUVs and trucks, but the withering of that market means the company must look for higher revenues from its cars, he said.

Greg Gardner, an analyst with Harbour Consulting in Michigan, said GM has to move away from relying on rebates to create sales.

“You’ve got to have a car that people really want, and they have to be willing to pay close to full sticker price,” he said.


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