WILMINGTON, Del. General Motors Corp. officially blew up its old business model Tuesday, closing four pickup truck and sport utility vehicle factories, announcing a new small car that could get 45 miles per gallon and shedding 10,000 jobs in the process.
Now the world's largest automaker by sales needs to figure out how it can sell enough cars to make money in a shrinking U.S. market and stay ahead of the bill collectors.
The automaker said it would idle pickup and SUV factories in Janesville, Wis.; Oshawa, Ontario; Moraine, Ohio; and Toluca, Mexico, as it tries to deal with a shift to smaller vehicles brought on by $4 per gallon gasoline. GM also took aim at the Hummer, one off the largest vehicles on U.S. highways, saying it would either be sold or get a remake.
GM said the truck plant cuts, which will reduce capacity to produce pickups and large SUVs by about 35 percent, will save the company $1 billion per year, and when combined with earlier measures, by 2011 will save $15 billion over 2005 costs.
GM's moves, which come after a series of restructuring measures since 2005, are the result of a huge shift in U.S. consumer preferences for small cars and crossovers during the past two months.
"We at GM don't think this is a spike or temporary shift," Chief Executive Rick Wagoner said. "We believe that it is, by and large, permanent."
The automaker now will have to parlay its strong overseas sales and the lower North American costs into a profit by selling cars in the $15,000 to $20,000 range, half the price of its high-profit SUVs and pickup trucks.
"The new cars, they tend to price those accordingly," said Pete Hastings, senior analyst with Memphis, Tenn.-based Morgan Keegan & Co. "They tend to make money, just not as much money compared to the nice margins on the SUVs and large trucks."
Hastings is confident GM can pay bills and make money with its new North American cars, but that will be hard unless the U.S. economy recovers.
"I don't think they can get to profitability quickly if the economy stays where it is," he said.
GM lost $3.3 billion in the first quarter and burned through $3.4 billion in cash from January through March. Its May sales were down 28 percent compared with last May.
The pace of the cash burn may force GM back to the capital markets for more borrowing, Hastings said, although the company has said it has sufficient cash to withstand a downturn.
"They've got a lot of liquidity now," Hastings said. "They are burning through it faster than they thought they would earlier in the year."
GM ended the quarter with $23.9 billion in cash and $7 billion in credit facilities.
Just before the company's annual shareholders' meeting in Wilmington, Del., Wagoner also announced the automaker will build a new generation small car starting in mid-2010 at a factory in Lordstown, Ohio, that now makes the Chevrolet Cobalt.
In the past, costs generally were too high for Detroit automakers to turn a profit on small U.S.-built cars. But Wagoner said GM has lowered costs enough with new labor contracts and other measures to turn a profit.
"The direct answer is we need to," Wagoner told reporters. "We believe we can build a car there profitably."
In addition to costs, GM will have to make sure it has a competitive car that consumers will buy.
"I can assure you that is getting a tremendous amount of attention," he said.
The new car likely would be priced higher than the Cobalt, which runs in the mid-teens depending on how it's equipped. It would hit showrooms in the second half of 2010 and be powered by a 1-liter to 1.4-liter four-cylinder gasoline engine to be built at a factory in Flint. GM said that with a manual transmission it would get nine miles per gallon more than the current Cobalt, which gets up to 36 mpg on the highway.
Wagoner also announced that the board of directors has approved production of the Chevrolet Volt plug-in electric car, which GM plans to bring to showrooms by the end of 2010.
Fully charged, the Volt could drive about 40 miles without using any gasoline, and a small conventional engine would recharge the vehicle, extending its range and allowing it to get the equivalent of 150 miles per gallon.
Wagoner also said the iconic Hummer brand will be reviewed and potentially sold or revamped due to high fuel prices.
News of the job cuts was devastating to communities that house the factories, but hourly workers likely will move to other plants to replace 19,000 who will leave the company this year under early retirement and buyout offers.
However, the misery isn't over. Wagoner said GM is working on consolidating engine, transmission and other parts operations to go with the assembly plant cuts.
The actions add to a string of plant closures by the Big Three in the last several years. GM, Ford Motor Co. and Chrysler LLC have announced the shutdown of 35 plants since 2005, according to Sean McAlinden, chief economist with the Center for Automotive Research in Ann Arbor. Along with 35 additional closures at GM and Ford's chief suppliers, Delphi Corp. and Automotive Components Holdings LLC, he said the total hourly and salaried jobs eliminated comes to 149,000.
In that same period, foreign automakers have built or announced plans to build five U.S. assembly plants, he said. In 2007, foreign auto companies employed 113,000 people in the U.S., a number McAlinden projects will rise to 152,000 by 2011.
The Oshawa truck plant, which builds the Chevrolet Silverado and GMC Sierra pickups, likely will be shuttered next year. The Moraine plant near Dayton will stop making Chevy TrailBlazer and other mid-size SUVs in 2010 "or sooner if demand dictates," Wagoner said.
In Janesville, the plant that builds medium-duty trucks and big SUVs like the Chevrolet Tahoe, will cease production starting at the end of 2009, finishing in 2010 or sooner if demand stays weak. In Toluca, production of medium-duty trucks will end by the end of 2008, Wagoner said.
The announcement was an economic blow to Janesville, which has long been entwined with auto making.
"There were some tears and a lot of people were kind of ticked off, but it's part of the business," said Scott Lambert, 39, who has worked at the plant for 13 years.
He said he was headed to buy an atlas to figure where other GM plants were that might be hiring.
Canadian Auto Workers President Buzz Hargrove said GM's decision to close its Oshawa truck plant betrays the labor agreement reached two weeks ago. He said the union will consider all options, including a strike.
GM committed to keep the plant of 2,600 people open throughout the three-year agreement, Hargrove said.
GM President and Chief Operating Officer Fritz Henderson said GM is planning for gasoline prices to stay around $4 per gallon for the foreseeable future, "with a bias upwards."
When asked if GM should have moved more quickly to smaller vehicles, Henderson said he doesn't spend time looking in the rearview mirror.
"There's not much I can do about what I didn't do in the past," he said.
Shares of GM rose 14 cents to $17.58 in trading Tuesday.