GM's recovery depends on winning over car buyers

[neshapop]

http://news.yahoo.com/s/ap/20080717/...ge/gm_survival

By DEE-ANN DURBIN and TOM KRISHER, AP Auto Writers
Thu Jul 17, 12:14 AM ET


DETROIT - People want small cars that get great gas mileage. General Motors Corp. is known for making top-notch trucks and sport utility vehicles. The company's survival now hinges on the difficult task of convincing buyers that its upgraded cars are just as good as its trucks and worth some extra cash.
That's essentially the business plan for the reconstituted GM, the one that is trying to make it in a U.S. market where people no longer want $42,000 Chevrolet Tahoes that get only 14 miles per gallon in the city.

Yes, the plan still includes selling a lot of pickups and SUVs, but nowhere near the volume of past years when GM could count on pocketing upward of $10,000 on every big vehicle.

Instead, the revenue to sustain the nearly century-old industrial giant will have to come from cars, which have typically made only hundreds of dollars in profits. Better cars, and lots of them.

"We just need to do it really well," President and Chief Operating Officer Fritz Henderson said in an interview. "Let's do cars that people love, even if they're small, and if you do that, you're going to get better pricing."

The change has come quickly. Faced with high gas prices and a weak economy, GM's sales fell 16 percent for the first half of the year, with trucks off 21 percent and cars down nearly 9 percent. GM has lost billions of dollars during the last three years. The company on Tuesday announced a combination of cuts, borrowing and asset sales that would raise $15 billion to weather the recent slump in U.S. auto sales and the rapid shift from trucks to cars.

Henderson, who concedes that GM has some repair work to do on its car brand image, says the change will have to come one or two models at a time. It will follow the path of the new Chevrolet Malibu, which saw sales jump 46 percent in the first half of the year and average sale prices rise $4,000 over previous Malibu models due to improved quality, styling and options.

"One product launch does not a success make," Henderson said. "It's how do you build on that? But I think it gave us some confidence that if we get the car right and we get the promotion right, we can make progress and we can actually bring people back to the car."

GM has big plans for cars and car-based crossover vehicles. Nearly every brand, including Cadillac, will be getting a small car soon. Eighteen of the 19 vehicles GM is launching between now and 2010 are cars or crossovers.

One model, the sleek new Chevrolet Cruze due out in 2010, is the replacement for the clunky Chevrolet Cobalt small car. GM plans to power the Cruze with a 1.4-liter turbocharged four-cylinder engine, allowing it to get around 45 miles per gallon.

Currently, GM sells the pedestrian Cobalts for an average of $12,000, while Honda Motor Co. gets $19,000 for its popular Civic compact, Henderson said.

John Wolkonowicz, an auto analyst with the consulting company Global Insight, said GM could easily command $22,000 for the Cruze because of its sophisticated, European-style suspension and its nice styling and amenities. But it will only cost GM about $2,000 more to make those changes over the current Cobalt, leaving substantial room for profits, he said.

Henderson said those kinds of changes, together with expense cuts, streamlined marketing and increases in small-car production, should help GM make a good chunk of cash even on smaller vehicles.

"I think the equation in small cars is to close the price gap versus the market segment leaders and drive more volume," Henderson said. "You're significantly improving aggregate profitability."

GM Vice Chairman Bob Lutz said car prices also will rise because of demand, while truck and SUV prices will likely fall.

History bears that out. Wolkonowicz says the Chevrolet Suburban SUV cost about the same as a Caprice sedan in 1985, when demand for SUVs was low, but the Suburban's list price is now more than double that of the Chevrolet Impala sedan. And just a few years ago, Toyota Motor Corp. was offering incentives on its money-losing Prius hybrid, but now it can't keep up with demand, said Global Insight analyst Rebecca Lindland.

"The reason we made no money on small cars is because — hello — nobody wanted them," Lutz said. "At $1.75 and $2.25 (per gallon), everybody was happy with full-size utilities with V-8 engines. Now that's shifting, so the profitability is going to go down on trucks and the profitability on cars is going up."

Lutz pointed out that in Europe, where GM is profitable selling small cars, average transaction prices per vehicle run close to $37,000. GM's U.S. lineup will look increasingly like its European one in the coming years, he said.

"It's a pretty radical shift," he said.

Still, some analysts warn that GM has a rough road ahead. Moody's Investors Service said late Tuesday it was reviewing GM's ratings for a possible downgrade because of the cash the company will need to shift away from trucks and SUVs.

"Establishing an adequate level of profitability throughout a car portfolio that has historically been priced at a significant discount relative to competing models from Asia will be a difficult and long-term undertaking," Moody's Senior Vice President Bruce Clark said in a statement. "GM will likely face a sizable cash burn until it gets this part of the equation right."

GM has also bungled previous attempts to win over car buyers. The company rolled out its Saturn brand of small cars in 1990 to fight the imports. While the models developed a loyal following, analysts believe the brand has never made money.

GM's old business model of making money on trucks and SUVs and losing it on cars was leading the company to disaster, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

But recent cost-cutting through global engineering and manufacturing and the historic lower-cost labor contract reached last year with the United Auto Workers have given it the means to change.

GM, he said, will have cut $4,000 to $5,000 from the cost of an average vehicle between 2005 and 2010, when the UAW contract takes full effect, allowing it to plow more money into better-quality cars.

"Now you have enabled them to be profitable across all vehicle segments," Cole said. "In a sense, it's really a reversal of a death spiral, and that's what they were on."

[Buickman]

exactly why it's time for Return to Greatness.

[johnstarnes]

But no Beat or Trio for possibly 4 years?...........

[Jkujo]

"The reason we made no money on small cars is because — hello — nobody wanted them," Lutz said. "At $1.75 and $2.25 (per gallon), everybody was happy with full-size utilities with V-8 engines. Now that's shifting, so the profitability is going to go down on trucks and the profitability on cars is going up."

Lutz pointed out that in Europe, where GM is profitable selling small cars, average transaction prices per vehicle run close to $37,000. GM's U.S. lineup will look increasingly like its European one in the coming years, he said.

You know if GM can make cars as good as the big SUVs the past 15 years... They might just be on to something. I totally agree that the price of a car is going to go up and the price of an SUV will start to decline or stay the same. That's economics 101, but I had no idea that the average price for a small car in Europe is equivalent to $37k in the US. That is just astounding.

[Sinner]

Originally Posted by Jkujo

That's economics 101, but I had no idea that the average price for a small car in Europe is equivalent to $37k in the US. That is just astounding.

There's more luxury items in small cars over there. They aren't seen as small econoboxs as they are here, add to that the fact most are diesel powered and it's not too hard to see how they pay more for a small car than we do for a mid/large size car.

[bmarkdc]

Another thing they need to do is get younger people back to their side, and I think they can do that with some of their sports cars. I am 38 but I was hanging with my cousin and his friends who were 22 and they were all talking about the New Camaro. Getting cars like that at least spurs interest, and gets people in the show room. Myabe they can't afford the Camaro, but they go look at it and see one of new Cruzes (when they come out) and get that instead/

[69nova]

I just love people. I watch the Mecun auto auction on Saturday nights and smile at these old farts that play homage to the cars of yester year. Yes, I know most of it is speculation buying and somebody is going to be left standing with egg on their face after paying some ridiculous price for a 50 year old car that suddenly lost 80% of what he paid for it. I am 61 and consider myself a car guy and have maintained a rebuilt the motors in my car and must say one thing. The cars of yester year were simpler in nature and the muscle cars exuded raw power but the bottomline is that they are all junk compared to the engineering in today's vehicles. Want something to get ALL the people into your show room? A car that won't cost an arm and a leg and will get mileage in the 50mpg range.

[44 mpg by 2010]

Thoughtful write-up.

Although, as of 7/17/08, GM does have 4 vehicles MY2009 that are rated 30 mpg(US) combined average with NONE in MY2008. The sad part of the story is that GM has NO vehicles in the US rated above 30 mpg(US) combined average as of this date that I can find.
http://www.fueleconomy.gov/feg/2008b....jsp?year=2008 http://www.fueleconomy.gov/feg/2008b....jsp?year=2009
http://www.fueleconomy.gov/feg/byMPG.htm


Have you ever looked at the fuel economy of the US Saturn Astra 4 door HB? It is rated 27 mpg combined average.
http://www.fueleconomy.gov/feg/2008c...f.jsp?id=25169

It would be interesting to see what the Saturn Astra sales would be in the CURRENT US market ... IF ... it carried the same fuel economy of the UK gasoline cousin at 32 mpg(US) combined cycle. That is the same as the Ford FWD Hybrid Escape/Mariner/Tribute without need of hybridization.
http://www.vcacarfueldata.org.uk/sea...s.asp?id=20268

OR ... the same fuel economy as the 1.4 liter at 38.5 mpg(US) combined cycle. That is getting close to the Civic Hybrid.
http://www.vcacarfueldata.org.uk/sea...s.asp?id=20257

OR ... say, the same fuel economy as the 1.7 liter CDTi 16v turbo diesel at 47 mpg(US) combined cycle. That is better fuel economy than the Prius.
http://www.vcacarfueldata.org.uk/sea...s.asp?id=20267

If the above makes you curious, try searching for GM and Vauxhall vehicles getting 51 mpg(Imperial) [42 mpg(US)] combined cycle and above on this link. I think you will be surprised and either disappointed OR possibly even angry.
http://www.vcacarfueldata.org.uk/sea...lConSearch.asp

As a US consumer, I feel that the Det3 have not offered ME and the US consumer fuel conserving vehicles. And, with NO visible plans from GM for very high mpg offerings before possibly 2010 and more probably 2011. The consumer is left with little hope for help from either GM (or Ford for that matter).

I think that is one of the reasons I am seeing more Sprints and Metros showing up in my area. For those that don't remember, these are high mpg machines from the late 80s and early 90s. I guess these consumers are setting up for the long haul ... to wait for high mpg machines ... regardless who they come from!

This suggests further AND DEEPER depression of automotive sales for 2009 and beyond ... UNTIL the 40mpg(US) combined average and above machines arrive!

This will also further depress resale values ... EXCEPT for high mpg vehicles which will continue to increase even further. An example is '90 vintage CIVICs have more than doubled (possibly tripled) in value over the last 3 years

Management has pilotted this ship into the iceberg. The hull is breached and filling fast! The challenge is whether the captain and those in the pilot house and chart room can make the proper decisions in a timely manner to make port safely and deliver the "goods". Or is it the Valdez ... possibly even the Titanic?

Our thoughts and prayers go with those in the domestic auto industry. We wish them the best.

Unfortunately, at this time the average consumer is struggling for his/her economic survival as well so the level of understanding, patience, and forgiveness may be limited.

[44 mpg by 2010]

Originally Posted by Jkujo

... but I had no idea that the average price for a small car in Europe is equivalent to $37k in the US. That is just astounding.

Here is a case in point: the Saturn Astra (Belgian built?) sells for about US$ 33,000 in the UK.

But it sells for less than $18,000 in the US.

This raises the question of what profit margin would exist of an Astra built in the US and exported to the UK? Sounds a lot like US$15,000 to me! Isn't that more than the margin projected for domestic large vehicles?

I may be wrong ... IF SO ... please show me.

BTW, here is a quick source for UK pricing.
http://www.autocar.co.uk/SpecsPrices...AndPrices.aspx

[pinyon]

One model, the sleek new Chevrolet Cruze due out in 2010, is the replacement for the clunky Chevrolet Cobalt small car.

Not a bad article but is the Cobalt really that bad? It may lack interior refinement but this was just a typical jab. Of course maybe this kind of press is ultimately good. People might look more favorably on the new model if it's executed properly.

[throwback]

"The reason we made no money on small cars is because — hello — nobody wanted them," Lutz said. "At $1.75 and $2.25 (per gallon), everybody was happy with full-size utilities with V-8 engines. Now that's shifting, so the profitability is going to go down on trucks and the profitability on cars is going up."

This is a lie! How is it Honda has made record profits year over year for 10 straight years mostly selling cars? The reason GM made no money was because they choose to build the cheapest small cars they could. Then they decided not to update the cars (Cavalier I am talking about you) for like 8 years. Why would anyone buy a Cavalier over a Corolla or a Civic during that period? Hey Bob, Americans will buy the best product available, if we had the Corsa instead of the Aveo GM would make money on small cars. Build it in Mexico to keep the price down. Ohh that's right, in your infinite wisdom GM's small cars don't meet US standards because gas prices where never supposed to go up. I'm tired of the excuses leaders are supposed to have vision, are there no visionaries in GM?

[RamJet502]

I can't believe they were making $10K profit on trucks and SUVs. There's no way they can make that kind of profit on cars, maybe that's why the Volt is going to be so pricey.

[skylark68]

Originally Posted by 69nova

I just love people. I watch the Mecun auto auction on Saturday nights and smile at these old farts that play homage to the cars of yester year. Yes, I know most of it is speculation buying and somebody is going to be left standing with egg on their face after paying some ridiculous price for a 50 year old car that suddenly lost 80% of what he paid for it. I am 61 and consider myself a car guy and have maintained a rebuilt the motors in my car and must say one thing. The cars of yester year were simpler in nature and the muscle cars exuded raw power but the bottomline is that they are all junk compared to the engineering in today's vehicles. Want something to get ALL the people into your show room? A car that won't cost an arm and a leg and will get mileage in the 50mpg range.

I gotta disagree with you on this one. Yeah, there were some crappy cars built in the '50s through the '70s but there were some good ones too that the average joe could keep running with a few tools. Today's cars have to be taken to the dealership for quite a few things. The average buyer with a fair amount of knowledge of automobiles cannot fix a lot of the things that go wrong with them today. If the cars built during the first musclecar era were all junk there wouldn't be nostalgia for them today. Granted, handling was not a big concern for '60s American cars, so obviously newer cars have benefited from that research but that does NOT make the old cars junk. Some of the most reliable cars ever made were built in the '60s. There were more things to maintain (greasing up ball joints, etc., changing points, setting idle speed/mixture, timing) but if you knew how to keep them in tune they will last forever.

Back to the thread - The Camaro will be an impressive halo car for younger buyers. This car alone will get people back into Chevrolet dealerships so they will see the changes that they have made since just a few years ago in cars.

[throwback]

Originally Posted by skylark68

Back to the thread - The Camaro will be an impressive halo car for younger buyers. This car alone will get people back into Chevrolet dealerships so they will see the changes that they have made since just a few years ago in cars.

I hope you are right but everything I read says young buyers (16-21) are more interested in technology and less in performance, when it comes to cars. I think SYNC is doing wonders for the Focus. As an old hot rodder this fills me with gloom. Fortunately my eight year old is interested in the mechanical side of cars, although he loves computers also. I plan to build a car with him starting next year, I want him to appreciate the beauty of a simple hot rod. Although I will probably have to add an MP3 player.

[prototype66]

"One product launch does not a success make," Henderson said
I wish people would stop saying that stupid line. It is SOOOOO over used!I tell ya , I love the 59-72 era cars but today I would buy a Cruze or even one of the Triplets but not bringing them here kills that idea! A Malibu would be great but after it sheds a few hundred Lbs (or just gets better MPG)
I guess I'll get a scooter until Volt gets here.