GM parks the SUVs, squeezes into compacts

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On a day of reckoning for the American way of building and driving cars and trucks, General Motors announced a bold attempt Tuesday to wean itself from a dependency on large SUVs and pickups, declaring that gasoline prices won't retreat and the company must sell more small cars, some battery powered.

The dramatic announcement amounts to a rejection of longtime Detroit economics, which dictates that bigger is better because larger vehicles are more profitable.

GM won't abandon pickup trucks or SUVs, but needs to make far fewer, so it will close four plants, including the factory in Janesville, Wis. That assembly line, built in 1919, makes the massive Chevrolet Suburban, a status symbol less than a decade ago now languishing on sales lots because it gets just 15 miles to the gallon in city driving.

GM, on a path to ceding the global sales lead to Toyota, will replace some truck production with a new, high-mileage Chevrolet small car built in Lordstown, Ohio, starting in mid-2010. GM also announced it will be ready to sell the electric-powered Chevy Volt by the end of 2010, signaling the company's confidence in mastering battery technology that could allow the car to travel far more than 50 miles on a gallon of gas.

Once earned huge profitsAutomakers earned huge profits on the production of each big vehicle and stayed with the market even as demand cooled when gasoline prices inched past $3 per gallon. But with oil costs well over $100 a barrel and gas selling above $4, GM is acknowledging that consumers have reached a tipping point in buying behavior and won't go back to spending lavishly on big vehicles.

"We at GM don't think this is a spike or a temporary shift," said Rick Wagoner, GM's chief executive.

Wagoner also said the future of the company's Hummer franchise is in review, with an overhaul of the military-style vehicle lineup or a complete or partial sale of the division possible.

Sales of larger vehicles, weakening for several years, have nose-dived in the past two months. GM said Tuesday that pickup and SUV sales dropped nearly 37 percent in May, while Ford's were off 26 percent. Ford's U.S. sales chief Jim Farley said small and midsize cars made up 47 percent of sales in May, up from 34 percent—or 1.5 million—in February.

"May was a watershed month," Farley said. "We are, as an industry, catching up with the breathtaking choices customers are now making."

The American auto industry has been down this road before, caught off guard by market changes in the 1970s and 1980s in the wake of the Arab oil embargo and Iranian revolution, when Japanese imports started luring buyers from gas-guzzling V-8-powered sedans. By 1980, the Big 3 were vowing to recapture lost ground with smaller, fuel-efficient cars, but quality problems ensued.

Lost market shareBy the time Detroit got competitive again with Japan, the Big 3 had lost a significant amount of market share, but found a new source of earnings growth in supersized SUVs, minivans and four-door pickup trucks. With those markets now in tatters, questions again are being asked about whether GM, Ford and Chrysler moved fast enough to notice shifting tastes.

"GM has taken some big steps, so it's not too little; we just have to hope it's not too late," said auto analyst Joe Phillippi. "I'm surprised GM didn't have the foresight to see the higher prices coming and that we aren't going back to $2-a-gallon gas prices—not soon and not ever."

The Big 3 already were in painful retrenchment. All three American companies are shedding workers, closing plants and cutting production to find a profitable level of doing business.

GM had telegraphed that big changes were coming Tuesday, the day of its annual meeting, but the details shocked. The company said it would cease production over time at truck plants in Oshawa, Canada; Toluca, Mexico; Moraine, Ohio; and Janesville. Janesville will stop making medium-duty trucks by the end of 2009, and the Tahoe, Suburban and Yukon SUVs in 2010 or sooner.

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.

The Janesville closing will eliminate about 2,200 jobs, but many workers hope to latch on at other GM facilities, which could have openings when the latest round of 19,000 early-retirement seekers is complete.

"By no fault of our own, the market has shifted to small, fuel efficient vehicles," Local 95 President Brad Dutcher said. The union will try to persuade GM to find a new product for Janesville, but the plant would need to be retooled at a cost of hundreds of millions. "That's a huge expense," he said. "I don't want to give false hope to our members."

Shift in demandThe biggest shift for GM is acknowledging suburban homeowners don't want big SUVs and pickups anymore.

"Making money selling small cars is going to be a problem because the revenue you take in on a small car is close to the cost of building a small car," said Jim Hossack, vice president of AutoPacific. "So how do you make money? You raise the price of small cars."

Hossack also expected more GM cars to be sourced from South Korea and other overseas markets.

Wagoner, at the annual meeting, said GM has lowered costs enough with new labor contracts and other measures to turn a profit on more smaller cars. He also committed to building the Volt, which can run for 40 miles on a battery plugged into a home socket.

Tribune news services contributed to this report. rpopely@tribune.com

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