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Can U.S. automakers build a small car in this country? GM thinks so.

By Peter Whoriskey
Washington Post Staff Writer
Friday, January 21, 2011; 11:55 PM

This summer, a General Motors plant in Orion, Mich., will begin cranking out some very small cars.

The Chevrolet Sonics, as they will be known, are by themselves hardly a breakthrough. There are tens of thousands of cars this tiny on the road - among them the Honda Fit, the Toyota Yaris and the Ford Fiesta.

What will set the Sonic apart from its rivals and make it one of the most closely watched experiments in the industry, however, is that it will be the smallest car currently mass-produced in the United States.

Ever since an invasion decades ago of small, cheap cars from overseas set in motion the near-death spiral of the Detroit Three, the task of building an appealing small car has beguiled the domestic auto industry, workers and management alike. Or, as then-Sen. Barack Obama asked, shortly after his election as president, about the U.S. companies, "Why can't they make a Corolla?"

Conventional wisdom has long held that U.S. wages were too high to make small cars profitably in the country. Indeed, for years manufacturers made their money on big trucks and sedans. The little guys just didn't matter.

The Sonic is the industry's rebuttal, a fuel-efficient subcompact that General Motors is putting up against fierce competition. For the Obama administration, moreover, which rescued General Motors and declared the manufacture of a small car here a stipulation of the bailout, its emergence is a measure of vindication.

"It's a huge breakthrough," said Bob King, president of the United Auto Workers, which made significant wage concessions to land the Sonic deal. "It's important to show we can build any size car in the U.S."

Steve Girsky, GM's vice chairman for business strategy, acknowledges that the company could have built the Sonic in Mexico where, as it happens, Ford makes the equally small Fiesta.

"We wanted to make a run at making a small car here," Girsky said at the Detroit auto show.

But if they build them, will Americans buy them?

The idea of making a small, fuel-efficient vehicle here is politically appealing, but it might not square with the fickle tastes of consumers. Whether they'll jump on board remains an open question and, critics say, could highlight the risks of the government's ownership in GM following its bailout, which gave the United States a 61 percent stake, potentially pitting commercial motives against political ones.

Consumer tastes for large or small cars fluctuate with oil prices. In May 2008, when gas prices across the country were nearing peaks, the best-selling car in the United States was the Honda Civic. But prices have subsided, and along with them, consumer interest in small cars. U.S. enthusiasm for small cars lags well behind that of Europeans, who long ago adapted to staggering fuel prices.

"These are super-small cars," Jeremy Anwyl, chief executive of Edmunds.com, the automotive Web site, said of the Sonic. "What was the best-selling car in the U.S. last month? The Ford F-150. Not exactly a small car."

The president's interest in pushing the nation's automakers to build more fuel-efficient cars was clear as far back as May 2007, when he chastised a group of auto executives at a Detroit speech, describing fuel-efficient vehicles as the long-neglected solution to their troubles.

"For years, while foreign competitors were investing in more fuel-efficient technology for their vehicles, American automakers were spending their time investing in bigger, faster cars," Obama said. "And whenever an attempt was made to raise our fuel-efficiency standards, the auto companies would lobby furiously against it, spending millions to prevent the very reform that could've saved their industry."

In its rescue of Chrysler and General Motors, the Obama administration has said that it would operate them solely as the owners of commercial enterprises would. In other words, that the companies would remain commercial, not political, enterprises.

Yet from the outset, the administration has taken steps to encourage both companies to make small cars in the United States, setting goals for small-car production that have political allure as well as business logic.

In saving Chrysler, the United States gave Fiat, the company's new managers, a financial incentive. Under the terms of the deal, Fiat would secure an additional 5 percent stake in the company if it manages, at a U.S. plant, to build a car that achieves 40 miles per gallon.

Likewise, in rescuing and taking a majority stake in GM, the government called for the company to build a small car on U.S. soil.

"The new GM will also pursue a commitment to build a new small car in an idled UAW factory," the White House announced at the time.

GM's desire to build the small car emerged long before the federal government took its ownership stake, according to company and union officials. GM management and the UAW had been working at least since 2007 - before the financial system crashed - toward the goal, they said.

"The question was, 'Can we make a small car competitively in the U.S.?' " said Diana Tremblay, GM's vice president of manufacturing and labor. "If we can't, it really limits us in the future if you look at gas prices. Both sides took it on then as a challenge."

The main hurdle is that the profit margins on small cars are tiny, often just a fraction of what manufacturers make on larger vehicles such as sedans and SUVs.

"It's just really hard to make any money on anything smaller than a big car," said Kristin Dziczek, an analyst at the Center for Automotive Research in Michigan. "The margins are very, very thin."

To build the Sonic, both the union leaders and the company are taking risks.

General Motors, despite the business logic that often lands small-car production in foreign locales with lower labor costs, put up $600 million to retool the plant in Orion, which it had shut down in November 2009.

The United Auto Workers, meanwhile, agreed to much lower base wages. About 500 of the plant's 1,400 workers will make about half the typical union wage of $28 an hour.

Not everyone is happy.

"It's just greed," said Greg Granberry, who worked at the GM plant until it closed and would be offered a new job at the lower wage. "It's corporate. At the same time they're doing this, they're asking the government to take the caps off of executive bonuses. Tell me what sense that makes."

Even King, who supports the deal, questions whether the lower "entry-level" wage represents a long-term solution.

"I want all of our members to have a good middle-class income and to be able to buy the cars they're building," he said. "That's not true of someone making the entry level today."

But without the deal, he noted, the Orion plant would have remained closed, leaving 1,500 potential jobs on the sidelines.

"The 900 people making $28 at the plant wouldn't have a job at all," he said "It was a win for the community. It was win for the company. And it was a win for the UAW."

In truth, however, the savings provided by the labor concessions are relatively small, and the fact that the union had to make concessions reflects just how tight those margins are.

It takes about 18 hours of labor to build a small car at a U.S. plant, according to industry figures.

The typical union wages, at about $57 an hour including the costs of pensions and health insurance, would add up to about $1,026 in labor costs per car.

With the union concessions, the average compensation in the plant comes down to just over $47 an hour. As a result, the labor cost per car would be $853.

All in all, that's a savings of about $173 per car from the union concessions. By comparison, the Sonic is expected to sell in the same range as its competitors, which are built with cheaper labor in foreign plants and sell for about $15,000.

"It's not just labor costs that we had to save on," Tremblay said. To make the Sonic profitable, the company had to drive down its costs from suppliers and find savings in engineering and materials.

It was worth it, she said, because "we felt that if we can prove that we can do this. We thought we could prove that we could make anything in the U.S."

But making the Sonic cheaply is just one step in the project. The fate of the effort ultimately will be settled in the marketplace.

While low gas prices have suppressed consumer appetites for fuel-efficient cars, GM officials said they expect fuel prices to rise. They also believe that growing consumer demands for affordability will drive more customers to subcompacts.

Moreover, they said, the Sonic has been designed to overcome the reputation of subcompacts as stripped-down buggies meant only for those unwilling to pay for more sophisticated style and engineering.

GM is hoping to gain entry into the marketplace with improved design and better materials. It's added insulation to make it quieter, and the car comes standard with 10 air bags and other safety features.

"It has a snarl - a little bit of personality," said Margaret Brooks, product director of small-car marketing for Chevrolet, sizing up GM's potential success. "It's going to debunk everybody's beliefs about what a small car can be. And it's made in the U.S."

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