After Deep Cuts, GM Expects To See Profits on Small Cars

By NEAL E. BOUDETTE = September 14, 2006

Link to Original Article @ Wall Street Journal.com

DANA POINT, Calif. -- The deep structural cost cuts General Motors Corp. put in place this year should enable the auto maker to finally make money on small cars, the company's vice chairman said.

For years, most if not all compact cars made by GM and its Detroit rivals Ford Motor Co. and DaimlerChrysler AG's Chrysler Group have lost money, in large part because of the extra costs they carry to pay for health care and pensions for thousands of retired hourly workers.

But GM last year reached an agreement with the United Auto Workers to slash health care costs, and this year offered buyouts that will cut its unionized workforce by about a third by the end of the year.

Those savings and others stemming from planned plant closures and other measures will lower GM's fixed costs by about $9 billion next year, the company has said.

That's enough to enable GM to begin making money on small cars, Vice Chairman Robert Lutz said in an interview in southern California.

Until the cost cuts were put in place, GM's North American operations had fixed costs of about $40 billion a year -- the equivalent of about $8,000 for every car GM North America made, Mr. Lutz said.

"All our small cars were unprofitable" with costs at that level, he said.

He declined to say how much GM North America's per-car fixed costs will be once the 9 billion in cost reductions kick in next year. But he said the savings will change the profit picture on GM's small cars.

The Chevrolet Cobalt, he said, is already generating profits. "We now make money on that car," he said. The Cobalt, a compact sedan, has also been helped by increased demand while gasoline price hovered above $3 a gallon this summer. GM also changed its pricing strategy to reduce rebates and other incentives that eat into its margins.

The Cobalt is now selling without any major cash incentives, Mr. Lutz said. That also helps the car turn a profit.

The three Detroit car makers used to offset their losses on small cars with oversized profits on sports utility vehicles and pick up trucks. But sales of SUVs and trucks have sagged and incentives on them have increased, pushing all three car makers into financial difficulty and forcing them to find ways to make money on cars.

That is an excellent measure of the health of the company. Good to see that the Cobalt is now turning a profit.

Very cool.. Keep up the good work, GM!

This is good news for the next Cobalt because now, GM will have the extra dough to spend on it, thus making it truly competitive. Not to say that this version isn't, but they did cut costs in a few corners from making the car more expensive then it already was.

Great news!

I'm soooo happy about this. Now I'll be

This is great news!!

WONDERTASTIC!

If they get rid of more overhead they will make even more money per car.

fantastic!

After Deep Cuts, GM Expects To See Profits on Small Cars

For years, most if not all compact cars made by GM and its Detroit rivals Ford Motor Co. and DaimlerChrysler AG's Chrysler Group have lost money, in large part because of the extra costs they carry to pay for health care and pensions for thousands of retired hourly workers.

I just finished reading Lutz's book called "Guts" and if I remember correctly, Bob stated thast Chrysler did not lose money on the Neon. The above statement seems to be a blanket statement i regards to the big three.

I just finished reading Lutz's book called "Guts" and if I remember correctly, Bob stated thast Chrysler did not lose money on the Neon. The above statement seems to be a blanket statement i regards to the big three.

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FTFA

For years, most if not all compact cars made by GM and its Detroit rivals Ford Motor Co. and DaimlerChrysler AG's Chrysler Group have lost money

It shows that new product is the key. The saying 'an old car's tooling is paid off, so we should make $$ on them' is a myth. Unsold antiques like Cavalier and Astro cost more $$ to sell then quick selling new models like Cobalt, etc...

Unsold antiques like Cavalier and Astro cost more $$ to sell then quick selling new models like Cobalt, etc...

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This is TRUE.

I don't understand how healthcare costs factor in to whether a certain car was making money or not. Either the model is being sold for a profit or it's not. I would think that costs like healthcare would be spread out over the entire lineup.

This is TRUE. 

I don't understand how healthcare costs factor in to whether a certain car was making money or not.  Either the model is being sold for a profit or it's not.  I would think that costs like healthcare would be spread out over the entire lineup.

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Because each Cavalier sold had a $1500 healthcare albatross around it's neck. Since they were selling for around $13000 new, that didn't leave much room for profit.

Each Deville on the otherhand still had that same $1500 albatross, but there was still room for profit.*

*used just as an example.... dunno for sure the Deville is profitable.

FTFA

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I understood that part, what I was getting at was that the"if not all compact " could have been left out.

Not suprised...

Now they need to make money on those new trucks...

So, does this mean that all the cars are now profitable? Simple deduction. Each car has the same, or at least very similar, fixed employee costs per vehicle. Therefore, if the lowest cost cars are profitable the higher cars must be, too. Right?

Hmm, does this mean that by buying the Cobalt previously, I've actually hurt the company?

To answer my own question, by purchasing the car, I have reimbursed GM for most of the cost of building that car. If the car never sold, it would have been a net loss of $18-20,000 for GM.

If they didn't want me to buy it, they wouldn't have built it.

It's good to hear that GM can make a profitable small car. I think this is the first time in its history that it could do so.

This is great news. I think all that talk about GM pulling out of the small car business a few years ago was a bit premature. By and large they got this one right.

Hopefully this will be incentive for GM to continue to sink some serious money into the car as opposed to letting it die on the vine like the Cavvy. I'm looking forward to the 2008 MCE.

Hmm, does this mean that by buying the Cobalt previously, I've actually hurt the company?

To answer my own question, by purchasing the car, I have reimbursed GM for most of the cost of building that car.  If the car never sold, it would have been a net loss of $18-20,000 for GM.

If they didn't want me to buy it, they wouldn't have built it.

It's good to hear that GM can make a profitable small car.  I think this is the first time in its history that it could do so.

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Plus, the more cars sold, the more that fixed costs are spread out, so the more profit (or less loss) the company takes per vehicle. If all the volume cars dissapeared, they'd have that much more fixed cost resting on the high-margin cars, maybe so much that they wouldn't make money...

It's more about accounting than actual vehicle cost.

I just finished reading Lutz's book called "Guts" and if I remember correctly, Bob stated thast Chrysler did not lose money on the Neon.

I loved my old Neon, but take a peek at the dashboard assembly or door panel structure and you'll quickly understand how that was possible. :AH-HA_wink:

I loved my old Neon, but take a peek at the dashboard assembly or door panel structure and you'll quickly understand how that was possible.  :AH-HA_wink:

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yep.