Expansion of GM Arlington plant may signal big changes

The Dallas Morning News

ARLINGTON, Texas—General Motors' proposed $1.29 billion expansion of the Arlington plant—the factory's biggest addition ever—may contain far more than just new paint and body shops.

Although GM has not approved it and won't discuss it, the project's huge cost suggests that GM wants to thoroughly prepare the plant for continued high demand for its big, highly profitable SUVs—even if fuel prices go back up.

“I can't get my head around the $1.2 billion,” said Ron Harbour, senior partner in charge of automobile manufacturing for New York-based Oliver Wyman. “You can do a body shop for $250 million and a paint shop for $250 million. What else are they including?”

GM said last month that it plans to invest $5.4 billion in U.S. manufacturing over the next three years. It hasn't confirmed its plans for the Arlington plant, only that it sought tax abatement for a possible future expansion—and got it from the city of Arlington, which is near Dallas.

According to city records, the proposed project would add 1.2 million square feet to the plant's approximately 3 million square feet over a three-year period.

It calls for $986 million in new equipment and $307 million for physical improvements.

At $1.29 billion, the Arlington expansion would account for 22 percent of GM's total plant upgrades over three years.

Sales of the plant's three main SUVs—the Chevrolet Tahoe, GMC Yukon and Cadillac Escalade—rose an impressive 35 percent in the first quarter of this year. The plant can build about 300,000 vehicles a year, and new paint and body shops could substantially improve output.

But some analysts wonder how far GM is willing to go to keep pushing production up.

One possibility would be a new body shop that can produce aluminum SUV bodies, which would decrease the weight of the current steel vehicles and improve fuel economy.

Ford, which already builds aluminum-body pickups, may convert its full-size Expedition SUV to aluminum as well, according to some reports.

In addition, GM could be counting on a new class of engines—like Ford's EcoBoost V-6 or Ram's diesel V-6—to improve the fuel economy of the SUVs built at Arlington.

“We're in a new era of gas prices and oil supply,” said George Hoffer, a business professor at the University of Richmond who follows the auto industry. “That's why I think there is a solid market for these vehicles, and I don't see any administration—even a left-leaning one—doing anything to preclude their production.”

The proposed expansion would probably be completed in time for the plant to begin building redesigned 2019 model SUVs.

GM dominates the full-size SUV segment with a near 80 percent share. Moreover, Arlington's hot-selling SUVs generate about 30 percent of the company's profits, United Auto Worker officials said.

“Is this (proposed expansion) a risk or is it a requirement, given their dominance of the segment?” said Mike Jackson, director of vehicle production forecasting at IHS Automotive in Michigan. “GM needs to ensure their position.”

THE CENTRAL QUESTION

The central question is why spend $1.2 billion to expand production of a high-risk vehicle?

Unlike pickups, which are often used as work vehicles and viewed more as tools, no one needs a 3-ton SUV, particularly if gas rises past $4 a gallon.

With the current three-shift setup, the Arlington plant could simply lay off a shift if SUV sales plummet again.

Johnny Pruitte, president of UAW Local 276 at the plant, said he was “caught by surprise” when GM acknowledged in early April that it was considering the expansion.

Likewise, Brian Sweeney, vice president of Chevrolet, expressed confidence in a recent interview that SUV sales will stay high.

Two years ago, GM spent about $200 million for a new stamping facility at the Arlington plant that punches out steel body parts such as hoods, fenders and doors.

It also invested $331 million to retool the factory to continue building current-generation Tahoe, Yukon and Escalade SUVs.

But the new proposed project is considerably more expensive than any of the expansions at Arlington in the last 15 years, including a 750,000-square-foot body shop that was built for $500 million in 2000-01.

2 SUV FACTORIES

Before 2010, GM had two plants building its profitable SUVs—Arlington and a similar-facility in Janesville, Wis.

After full-size SUV sales plummeted 50 percent over a three-year period—eroded by recession and high fuel prices— GM closed the Janesville plant.

Today the Arlington plant is the company's only full-size SUV factory.

“Manufacturers have a lot fewer plants today than they did before the recession,” said Kristin Dziczek, director of the industry and labor group at the Center for Automotive Research in Michigan. “You have to squeeze as much production as you can from the plants you've got.”

Full-size SUV sales never fully recovered, but there's enough demand to keep the 4,200 employees at Arlington busy around the clock.

Three shifts of workers build about 1,200 SUVs a day, often pulling eight-hour overtime shifts on Saturdays.

A big expansion could even include adding the flexibility to build pickups as well as SUVs, some observers said.

It's a big number, but the cost of the Arlington expansion project didn't strike Dziczek as particularly unusual.

“The paint shop there is 15 years old and could probably benefit from a lot of the new technology, which is expensive,” she said. “I guess it depends on what you're trying to do—and we don't know.”

But Jackson of IHS Automotive thinks the cost is “absolutely” high for a conventional expansion.

“For the purposes of understanding this, you have to think long-term,” he said. “GM needs to develop a strategy that protects its profitability, and this appears to be part of it.”