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GM invests $500 mln, bets small car can make money

General Motors Corp on Thursday said it would invest $500 million to build a new fuel-efficient, small car the automaker says will show it can make money in head-to-head competition with its Japanese rivals as it fights to return to profitability.

The new Chevrolet Cruze, which also will be sold in Europe and Asia, will be built at GM’s Lordstown, Ohio assembly plant, a facility once threatened with closure that also makes the suddenly hot-selling Chevy Cobalt and the Pontiac G5. “We are here to stay, and today’s announcement is the latest evidence of our commitment,” General Motors CEO Rick Wagoner said at an event to mark the investment.

Wagoner, who unveiled a full-scale model of the Cruze at the Lordstown plant, said the new compact would get “significantly” better mileage than the most efficient Cobalt it replaces -- pushing it toward 40 highway miles per gallon. That gain, he said, would allow GM to move closer to meeting new federal fuel economy standards and to hike sticker prices. Raising prices on the car would allow GM to make money on its launch, something it has not done with the Cobalt.

Cobalt sales have jumped 16% this year, making the small car a standout bright spot in a GM line-up that still tilts heavily toward the SUVs and trucks that American consumers are abandoning in the face of high gas prices. The new investment marked a dramatic reversal of fortune for 4,600 workers at GM’s sprawling Lordstown, Ohio plant who had been told just two years ago their jobs could be lost under a GM plan to send small car production to Mexico. But a cost-cutting labor contract that United Auto Workers union officials negotiated with GM and the boom in small car sales saved the Lordstown plant, GM and union officials said.

Lloyd Mahaffey, a UAW regional UAW official, said the 2007 contract had been unpopular but said the concessions offered by union leaders had paved the way for new GM investment. "They set the stage by negotiating a labor agreement that’s competitive with any in the United States," he said.

 

CAN SMALL BE PROFITABLE?

The 42-year-old Lordstown plant will build the Cobalt until April 2010 when the Cruze is scheduled to go into production. The plant will get $350 million of the new investment. A third shift at the Lordstown plant was added in early August, adding 1,400 jobs to the payroll. “Our dealers are asking for many more Cobalts than we can build,” Ed Peper, who heads the Chevy brand in North America said. In a sign of the stakes for GM, plant officials kept the Cobalt line running at full speed during the Cruze unveiling. Visitors had to step between finished cars moving down the line for inspection to get into the event.

Despite the boom for the Cobalt, which starts at about $15,000, GM still loses money on the car after considering engineering costs and other overhead, Wagoner told reporters. But he said GM has been able to raise prices by an average of 20% for the mid-size Chevy Malibu sedan, an award-winning launch that will be the template for the Cruze. “The Cobalt is a strong car, but the Cruze is going to be bigger. It will offer better fuel economy and more features, and so we hope we can see some opportunity on pricing.” GM needs a hit.

The automaker is aiming to cut costs by $10 billion by the end of 2009 in order to shore up liquidity and demonstrate it has the cash to ride out the brutal downturn in US auto sales. The automaker began offering employee-level discounts this week on almost all of its 2008 cars and trucks in an effort to boost sales and run down inventory. But Wagoner said the US auto market remained “unsteady” and it was too early to forecast the success of its new incentive offer.

Wagoner also said GM had not yet begun formal negotiations to sell its Hummer SUV brand, part of a plan to raise up to $4 billion over the next year and a half through asset sales. In addition to asset sales, GM is looking to borrow up to $3 billion as it invests in new fuel-saving small cars and the all-electric Chevy Volt. But Wagoner acknowledged that the debt markets had not been conducive to borrowing on the scale GM needs, one reason it is seeking out federal loan guarantees for investment in new fuel-saving technologies. “With the capital markets, we’ve had fits and starts of opportunities but they haven’t opened up robustly. I hope that happens soon, but we can’t bet on that,” he said.

In the meantime, he said, GM is readying 18 new cars and crossovers as it shifts into an area of the market dominated by Toyota, Honda Motor Co and others. “There are some excellent cars from our Japanese competitors,” he said. “They set an excellent benchmark and with every new car, we’re going to be going after them.” (Reuters)