GM, UAW hop­ing for Sonic boom in small-car mar­ket

The Washington Post Sunday - - BUSI­NESS - who­riskeyp@wash­post.com

ex­actly a small car.”

Obama’s in­ter­est in push­ing the na­tion’s au­tomak­ers to build more fuel-ef­fi­cient cars was clear as far back as May 2007, when he chas­tised a group of auto ex­ec­u­tives in a Detroit speech, de­scrib­ing fuel-ef­fi­cient ve­hi­cles as the long-ne­glected so­lu­tion to their trou­bles.

“For years, while for­eign com­peti­tors were in­vest­ing in more fuel-ef­fi­cient tech­nol­ogy for their ve­hi­cles, Amer­i­can au­tomak­ers were spend­ing their time in­vest­ing in big­ger, faster cars,” Obama said. “And when­ever an at­tempt was made to raise our fuel-ef­fi­ciency stan­dards, the auto com­pa­nies would lobby fu­ri­ously against it, spend­ing mil­lions to pre­vent the very re­form that could’ve saved their in­dus­try.”

In its res­cue of Chrysler and GM, the Obama ad­min­is­tra­tion has said that it would op­er­ate them solely as the own­ers of com­mer­cial en­ter­prises would. In other words, that the com­pa­nies would re­main com­mer­cial, not po­lit­i­cal, en­ter­prises.

Yet from the out­set, the ad­min­is­tra­tion has taken steps to en­cour­age both com­pa­nies to make small cars in the United States, set­ting goals for small-car pro­duc­tion that have po­lit­i­cal al­lure as well as busi­ness logic.

In sav­ing Chrysler, the United States gave Fiat, the com­pany’s new man­agers, a fi­nan­cial in­cen­tive. Un­der the terms of the deal, Fiat would se­cure an ad­di­tional 5 per­cent stake in the com­pany if it man­ages, at a U.S. plant, to build a car that achieves 40 miles per gal­lon.

Like­wise, in res­cu­ing and tak­ing a ma­jor­ity stake in GM, the gov­ern­ment called for the com­pany to build a small car on U.S. soil.

“ The new GM will also pur­sue a com­mit­ment to build a new small car in an idled UAW fac­tory,” the White House an­nounced at the time.

Tiny profit mar­gins, too

GM’s de­sire to build the small car emerged long be­fore the fed­eral gov­ern­ment took its own­er­ship stake, ac­cord­ing to com­pany and union of­fi­cials. GM man­age­ment and the UAW had been work­ing at least since 2007 — be­fore the fi­nan­cial sys­tem crashed — to­ward the goal, they said.

“ The ques­tion was, ‘Can we make a small car com­pet­i­tively in the U.S.?’ ” said Diana Trem­blay, GM’s vice pres­i­dent of man­u­fac­tur­ing and la­bor. “If we can’t, it re­ally lim­its us in the fu­ture if you look at gas prices. Both sides took it on then as a chal­lenge.”

The main hur­dle is that the profit mar­gins on small cars are tiny, of­ten just a frac­tion of what man­u­fac­tur­ers make on larger ve­hi­cles such as sedans and sport-util­ity ve­hi­cles.

“It’s just re­ally hard to make any money on any­thing smaller than a big car,” said Kristin Dz­iczek, an an­a­lyst at the Cen­ter for Au­to­mo­tive Re­search in Michi­gan. “ The mar­gins are very, very thin.”

To build the Sonic, both the union lead­ers and the com­pany are tak­ing risks.

Gen­eral Mo­tors, de­spite the busi­ness logic that of­ten lands small-car pro­duc­tion in for­eign lo­cales with lower la­bor costs, put up $600 mil­lion to re­tool the plant in Orion, which it had shut down in Novem­ber 2009.

The United Auto Work­ers, mean­while, agreed to much lower base wages. About 500 of the plant’s 1,400 work­ers will make about half the typ­i­cal union wage of $28 an hour. Not ev­ery­one is happy. “It’s just greed,” said Greg Gran­berry, who worked at the GM plant un­til it closed and would be of­fered a new job at the lower wage. “It’s cor­po­rate. At the same time they’re do­ing this, they’re ask­ing the gov­ern­ment to take the caps off of ex­ec­u­tive bonuses. Tell me what sense that makes.”

Even King, who sup­ports the deal, ques­tions whether the lower “en­try-level” wage rep­re­sents a long-term so­lu­tion.

“I want all of our mem­bers to have a good mid­dle-class in­come and to be able to buy the cars they’re build­ing,” he said. “ That’s not true of some­one mak­ing the en­try level to­day.”

But with­out the deal, he noted, the Orion plant would have re­mained closed, leav­ing 1,500 po­ten­tial jobs on the side­lines.

“ The 900 peo­ple mak­ing $28 at the plant wouldn’t have a job at all,” he said “It was a win for the com­mu­nity. It was win for the com­pany. And it was a win for the UAW.”

‘It has a snarl’

In truth, how­ever, the sav­ings pro­vided by the la­bor con­ces­sions are rel­a­tively small, and the fact that the union had to make con­ces­sions re­flects just how tight those mar­gins are.

It takes about 18 hours of la­bor to build a small car at aU.S. plant, ac­cord­ing to in­dus­try fig­ures.

The typ­i­cal union wages, at about $57 an hour in­clud­ing the costs of pen­sions and health in­sur­ance, would add up to about $1,026 in la­bor costs per car.

With the union con­ces­sions, the av­er­age com­pen­sa­tion in the plant comes down to just over $47 an hour. As a re­sult, the la­bor cost per car would be $853.

All in all, that’s a sav­ings of about $173 per car from the union con­ces­sions. By com­par­i­son, the Sonic is ex­pected to sell in the same range as its com­peti­tors, which are built with cheaper la­bor in for­eign plants and sell for about $15,000.

“It’s not just la­bor costs that we had to save on,” Trem­blay said. To make the Sonic prof­itable, the com­pany had to drive down its costs from sup­pli­ers and find sav­ings in en­gi­neer­ing and ma­te­ri­als.

It was worth it, she said, be­cause “we felt that if we can prove that we can do this. We thought we could prove that we could make any­thing in the U.S.”

But mak­ing the Sonic cheaply is just one step in the project. The fate of the ef­fort ul­ti­mately will be set­tled in the mar­ket­place.

Although low gas prices have sup­pressed con­sumer ap­petites for fuel-ef­fi­cient cars, GM of­fi­cials said they ex­pect fuel prices to rise. They also think that grow­ing con­sumer de­mands for af­ford­abil­ity will drive more cus­tomers to sub­com­pacts.

More­over, they said, the Sonic has been de­signed to over­come the rep­u­ta­tion of sub­com­pacts as stripped-down bug­gies meant only for those un­will­ing to pay for more so­phis­ti­cated style and en­gi­neer­ing.

GMis hop­ing to gain en­try into the mar­ket­place with im­proved de­sign and bet­ter ma­te­ri­als. It has added in­su­la­tion to make it qui­eter, and the car comes stan­dard with 10 air bags and other safety fea­tures.

“It has a snarl — a lit­tle bit of per­son­al­ity,” said Mar­garet Brooks, prod­uct di­rec­tor of small-car mar­ket­ing for Chevro­let, siz­ing up GM’s po­ten­tial suc­cess. “It’s go­ing to de­bunk ev­ery­body’s be­liefs about what a small car can be. And it’s made in the U.S.”

IL­LUS­TRA­TION BY DAVID PLUNKERT FOR THE WASH­ING­TON POST; FORD FI­ESTA PHOTO COUR­TESY OF FORD; FIAT 500 PHOTO COUR­TESY OF CHRYSLER

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