General Motors Corp. today announced it will spend $5 billion over the next three to five years to create a new company that it claims will revolutionize the world auto industry.

GM Chairman Roger B. Smith told a news conference that the new company -- to be called Saturn Corp. -- will be an independent, wholly owned GM subsidiary designed to produce and market up to 450,000 front-wheel-drive subcompact cars a year.

The site of the new plant is still to be determined, but GM officials speculate the company could be producing cars as early as 1988.

"This is truly an historic occasion," Smith said. He said that the Saturn project, under study for nearly three years, is the company's 'clean-sheet' effort to find a new and more cost-effective way to produce small cars in the United States.

A top official of the United Auto Workers union called the new corporation "critical" to the future of the U.S. auto industry. Any new labor contract with Saturn is apt to be as revolutionary as the new factories. The UAW already has talked to GM about a completely new system of compensation to help keep costs competitive with Japan's.

Saturn Corp. will be as important for its production processes as it will be for the product itself, according to Smith and other GM officials. "We believe Saturn will use less material, energy, manpower, inventory, floor space and even less capital investment than any project of comparable capacity," said GM Vice Chairman Howard H. Kehrl.

GM officials said the new corporation would be a model of advanced technology and management that would set new standards for automotive production worldwide. They acknowledged that the new technologies would be combined with what they considered the best aspects of Japanese auto production.

The new company also will establish a new retailing and franchise system, Smith said. The new company therefore will bypass GM's existing network of approximately 10,000 dealers unless they want to set up separate showroom operations.

Saturn also will mark the first time since 1918 that a new divisional nameplate will be added to the GM lineup, which currently includes Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac.

However, Smith cautioned that the company does not necessarily have to be established in this country -- although he said that the United States is the most likely location at the moment.

The final decision on where Saturn will take root will be left primarily to Joseph J. Sanchez, who currently serves as vice president and general manager of GM's Oldsmobile division, but who has been chosen as Saturn Corp.'s first president.

Smith said that GM's board of directors, which approved the creation of the new company at a regularly scheduled meeting in New York on Monday, has placed no restraint on Sanchez in choosing a site for the Saturn manufacturing complex. Nor has the board in any other way limited Sanchez to what he can do to get Saturn rolling, Smith said.

"One thing we're not going to do is to handicap him with a lot of pre-ordained conditions. We want him to have the best chances for success possible. He has a clean sheet," Smith said.

He said that site selection "will be very crucial, because we've got to try to get every single possible cost out of this car."

GM and other domestic auto manufacturers are faced with a huge production-cost imbalance and competition with the Japanese, who for years have managed to turn out high-quality small cars at unit costs ranging from $1,500 to $2,000 less than their American counterparts. Eliminating that discrepancy is the prime target of the Saturn project, Smith said.

Accordingly, Smith and other GM officials said that the Saturn project will rely heavily on computerized, fully automated production techniques. The car -- a front-wheel-drive vehicle with a 1.9-liter, 4-cylinder engine -- will be "reverse designed." That means that the car will be designed to take advantage of the efficiencies of the new factories where it will be produced, instead of the current method of building and tooling factories to meet the engineering specifications of a new car.

GM officials did not offer very many specifics on the new franchise system in which Saturn cars would be sold. However, they said that the current GM dealers -- particularly those who have the highest customer service ratings -- will be the first eligible to market the new cars. Also, it is likely, for example, that even if a Buick dealer gets a Saturn dealership, he will have to sell the Saturn car in a separate showroom, according to GM officials.

Nor were many specifics offered on the kind of relationship that the new Saturn management would have with the United Auto Workers union. But Smith said that Saturn officials will draw on the experiences of the new United Motor Manufacturing Inc., a GM-Toyota Motor Corp. joint venture that recently began producing subcompact cars in Fremont, Calif. NUMMI, which has yet to reach a formal agreement with the UAW, is trying to put a system in place that will rely mostly on so-called quality circles and worker groups in teams that have sweeping authority to monitor product quality and production performance in their plant areas.

All of Saturn Corp.'s business and management systems will be designed by Electronic Data Systems, a Dallas-based computer services company that GM acquired last year for $2.55 billion.

GM's investment will consist of $150 million in initial capitalization, with the remainder of the $5 billion depending on when production starts. GM officials say the car will roll off the lines by 1988 at the earliest, by 1990 at the latest.