Business November 2010

Can GM Get Its Groove Back?

Buyers remain wary, and Washington is unlikely to recover all its bailout cash. But the colossus has slashed costs and spiffed up its cars—and is rejoining the global race.
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Factories are shuttering across the Rust Belt, but at the General Motors plant in Lansing, Michigan, the assembly lines are still rolling. This plant is supposed to showcase the “new GM”: no sullen human cogs tightening bolts on an endless stream of indifferent cars, but small autonomous teams working together to produce top-quality automobiles. A massive, multi-building affair with a gleaming white exterior, the facility has been recently refurbished. It looks like what a car dealership might want to be when it grows up.

Then you go inside, and you are peering into the innards of the American auto industry. For as many times as I am reminded about the facility’s new bells and whistles and environmental certifications, this still looks a lot like the old GM. A stamping machine the size of a summer cabin turns sheets of metal into body parts. Incomplete autos with their gray-metal bones half exposed roll down the line, one every 72 seconds. At regular intervals, robot arms seem to jump out of nowhere, unerringly delivering dozens of precision spot welds in a few seconds. Workers step out onto the line with the rapid-but-casual grace that comes from long repetition, tighten here and fill there, then step back to let the next car roll forward.

It’s all a bit magical. Watching raw materials turn into familiar objects always is—but especially so in an auto plant, where the sheer scale both captures and defies the imagination. Perhaps it was that magical mood that made me look at the Buick Enclaves rolling off that assembly line and think: Hey, I wouldn’t mind owning one of those. Since I’m an unrepentant latte-sipping coastal urbanite, that’s a rather novel thought.

But the Enclave, GM’s luxury crossover sport-utility vehicle, is a pretty good car. It is, I am unashamed to say, very attractive. It also gets good marks for performance, noise reduction, and safety. And Buick seems to have a lot of happy customers. This year, Buick and Lincoln-Mercury topped the American Customer Satisfaction Index—the first time that American carmakers have occupied the two top spots. Cadillac was just two points behind.

If it weren’t for the $50 billion we’ve given GM over the past two years, this plant might well be dark, the machines silent, the workers scattered. I opposed the bailouts, at the time; I couldn’t see how the chance of a slightly worse recession merited the government’s giving $50 billion to a company that had been steadily, even willfully, marching toward disaster for decades. But since we went and bailed out the auto companies anyway, I went to Detroit to find out what our $50 billion bought us—and whether we had any hope of getting that money back.

According to former “Car Czar” Steven Rattner, writing in his recently released Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry, when President Obama sat down to talk about the automakers, he asked, “Why can’t they make a Corolla?” For many people, that question seems to cut to the heart of the decline of American auto manufacturing. Why can’t GM make a decent, affordable, small car?

The truth is, GM can make good small cars. It does make good small cars. The company’s Opel division has regularly been on the list of the top-selling European (read: small) cars. The problem is, success in Europe hasn’t translated to the United States, which is GM’s core market.

Stephen Girsky, who became an adviser to the autoworkers when the financial crisis hit the auto industry, and now is a vice chairman at GM and sits on its board, argues that the reason American auto manufacturers haven’t produced the elusive American Corolla is that there’s no market for it—or at least, not at a price point that the old GM was able to meet. He mentions the Fiat 500, the smash-hit economy car that is supposed to save Chrysler. “In Europe, that car sells for 15,000 euros. I’m not sure it could get 15,000 dollars here. It won’t sell for that much money.” Nonetheless, even Girsky agrees that if GM can’t make a profit on cars, rather than only on the trucks that have provided its sporadic margins for the last two decades, the company can’t make it.

Of course, Toyota makes money on small cars in America. But Detroit’s legacy costs have all but guaranteed that it can’t follow suit. For decades, U.S. auto companies have been struggling with the lavish deals on wages and benefits that they made with the United Auto Workers back in the days before foreign competition broke down the Big Three’s cozy oligopoly. David Cole of the Center for Automotive Research estimates that this left GM with a “cost penalty” of more than $1,000 per car between its production costs and the competition’s.

With the union clinging fiercely to its benefits, management could take the money out of only one place: the cars. As Cole says, “You’ve got this sunk cost, and your competitors are setting the price” in the small-car market. “What do you do? You start pulling features out or using cheaper materials.”

That meant that at any given price point, they had to offer lower quality than their competitors—especially in the smallest, cheapest cars, for which the cost penalty was so large in proportion to the total cost. No wonder the Big Three were so focused on trucks and SUVs, where they could more easily fold legacy costs into higher selling prices.

With GM’s government-backed bankruptcy in June 2009, all of this has changed. Though critics worried that government ownership would hamstring the company’s efforts to close plants and cut jobs, the administration was surprisingly businesslike. In Rattner’s telling, when auto-task-force member Ron Bloom brought up the loss of tens of thousands of autoworker jobs, Chief of Staff Rahm Emanuel responded succinctly: “Fuck the UAW.”

GM has closed 13 plants and shed 25,000 union jobs, bringing its total number of hourly employees to just 53,000 in the United States. It has also turned retiree health costs over to the union, closed dealerships, reduced debt. All in all, Cole estimates that the reorganization let GM reduce its costs by $4,000 to $6,000 per car, with $1,000 of that coming just from debt reduction. “Now, instead of a cost disadvantage, you have a cost advantage.”

Cole says that GM is already using that advantage to deliver higher quality, even in the small-car market. He points to the latest Chevy Cruze, the company’s answer to the Corolla and the Civic. With a sophisticated new rear suspension, spacious interior, and small-but-important amenities like better noise reduction, it’s arguably a better car than its Japanese competitors. As Jack Baruth, a reviewer on thetruthabout, recently wrote, “It’s well-positioned against the Civic and Corolla. I believe that it beats both of those cars in significant, measurable ways.”

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Megan McArdle is The Atlantic’s business and economics editor, and the editor of the business channel at

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