GM’s challenge: Automaker not known for cars

updated 7:16 p.m. ET July 16, 2008

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.

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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.

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