GM goal: Big small-car profits

CEO Rick Wagoner, flanked by COO Fritz Henderson, left, and Vice Chairman Bob Lutz, outlines GM's plans. Photo credit: REUTERS
DETROIT — General Motors wants to charge big prices for small cars.

At the press conference last week to announce new plans for cutbacks and cash-raising, GM executives said it would be easy — raise prices to match the growing demand for small and mid-sized cars and crossovers.

But that business model has pitfalls.

"That presumes there's no competition," says Doug Scott, senior vice president of consultant GfK Automotive in suburban Detroit. "The Ford Focus is out there now, and the Accord and Camry. It's going to take a marketing budget to tell people why they need to pay a little more for your car."

And GM is cutting its marketing budget by $1 billion, along with slashing its capital expenditures by $1.5 billion and holding its engineering costs at the present level for the next couple of years.

So GM faces a balancing act. With less development money, it must build small cars that command higher transaction prices. Then, with a lower ad budget, it must persuade American car buyers to choose its products.

As GM sales boss Mark LaNeve told Automotive News, "That's challenging, and it'll be even more challenging now."

GM's turnaround plan
• Suspend cash dividend and save about $141 million a quarter
• Cut salaried employment cash costs more than 20%
• Cut truck capacity by 300,000 units through 2009
• Cut sales and marketing spending and hold engineering spending
• Hold capital spending to $7 billion annually in 2009
• Cut U.S. and Canada headcount in 2008

• Effective Jan. 1, eliminate health care coverage and increase pensions for U.S. salaried retirees over age 65
• Give no base compensation raises for U.S. and Canada salaried employees and no annual discretionary cash bonuses for executives
• Defer $1.7 billion of its payment into the UAW VEBA trust until 2010
• Raise at least $4 billion to $7 billion through financing and asset sales, which could include sale of Hummer

Car competition

For one thing, GM has less credibility with car buyers than with truck buyers. As of June 30, GM had a 13 percent share of the small car market, says John Casesa, a partner in Casesa Strategic Partners in New York. Meanwhile, he says, GM held a 50 percent share of the SUV market.

Casesa says GM can generate revenue from cars because demand is likely to outstrip supply. So GM's car plants will be busy. But, Casesa says: "It's unlikely the company's returns in small cars will ever match the returns they made in large SUVs and pickups. The reason? The small car business has far more competitors, and GM has a much lower market share in it."

If gasoline prices continue to rise, GM's leaders believe it can command higher prices for its cars.

"At historically $6 a gallon, now $9 or $10 a gallon in Europe, the European equivalent to a Ford Focus, Volkswagen Jetta or Chevrolet Cobalt carries an (average transaction price) of $35,000, $36,000, $37,000," says Bob Lutz, GM's vice chairman of product development.

Lutz says the way to re-enter the segment is with superior product. For example, GM's Cobalt replacement, the Cruze, likely will sticker for a few thousand dollars more than the current Cobalt.

Global design

Chevrolet dealers say some consumers will pay the starting sticker price of $22,995, including shipping, for a Cobalt SS.

"It's a hot rod, but it's good on gas," says Gordon Stewart, a suburban Detroit dealer who owns four Chevrolet dealerships in the South and Midwest. "We're getting kids in that that we hadn't seen before."

Dealer John Voss, of Dayton, Ohio, says Chevrolet Impala and Malibu sedans are selling well, but he's not getting sticker price.

"If you raise the prices 20 percent, there's going to be a resistance, particularly if the imports don't do that," says Voss, owner of Voss Chevrolet.

GM's global product development process means that it can design better small cars by doing work in countries that value small cars, says Ed Welburn, GM's global design chief.

"In North America, we never did a good small car," Welburn told Automotive News. "Today, we are able to draw on resources of design centers in Korea, Brazil and Europe who really know how to do small cars."

But the glory days, when profits from big trucks helped maintain GM as a corporate goliath, could be over.

"What they're outlining — this mix shift that we're seeing — is going to force them to be smaller," Casesa says. "It will force them to take more cost out of the business. They're going to have to do more than simply shift the mix to get the returns back up and I don't know if they can get there." 

Alysha Webb contributed to this report

You can reach Jamie LaReau at (Unknown address)

ATTENTION COMMENTERS: Automotive News has monitored a significant increase in the number of personal attacks and abusive comments on our site. We encourage our readers to voice their opinions and argue their points. We expect disagreement. We do not expect our readers to turn on each other. We will be aggressively deleting all comments that personally attack another poster, or an article author, even if the comment is otherwise a well-argued observation. If we see repeated behavior, we will ban the commenter. Please help us maintain a civil level of discourse.

Email Newsletters
  • General newsletters
  • (Weekdays)
  • (Mondays)
  • (As needed)
  • Video newscasts
  • (Weekdays)
  • (Weekdays)
  • (Saturdays)
  • Special interest newsletters
  • (Thursdays)
  • (Tuesdays)
  • (Monthly)
  • (Monthly)
  • (Wednesdays)
  • (Bimonthly)
  • Special reports
  • (As needed)
  • (As needed)
  • Communication preferences
  • You can unsubscribe at any time through links in these emails. For more information, see our Privacy Policy.