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