GM: Going After the Young and the Thrifty

Lutz needs hot new models to compete in small cars

When he was hired last September, General Motors Corp. (GM ) Vice-Chairman Robert A. Lutz vowed that his knack for making cool cars would help turn GM around. The former Chrysler Corp. president has moved fast to live up to that promise. First, he gave GM's car designers much more power. Then, in January, he began slashing bureaucracy throughout the company's bloated product-development process. Now, Lutz wants to take on what may be the toughest challenge of all: dragging GM's money-losing small-car business back into the black. GM's first move will come on Mar. 28, when the Saturn Ion, the carmaker's first new compact car in a decade, will debut at the New York Auto Show.

Winning back small-car buyers would be some trick. GM loses an average of $2,000 on each of the half-million small cars it sells each year. All told, it dropped more than $1 billion last year on small cars as it tried to prop up sales volume of its slow-selling models with 0% loans, rebates, and discount sales to car-rental fleets. Yet none of that has stopped GM's share of small-car sales from tumbling to just 21.8% last year, from 29.8% in 1998.

To halt the free fall, Lutz is hoping to tap the market for lower-income and younger buyers. More and more such buyers--15% of the total auto market--have been turning to Japanese and Korean models for their first cars. Asian carmakers command 53% of small-car sales, up from 40% in 1998. And as consumers age, they will be tough to woo away, especially since many Asian auto makers now offer the SUVs and minivans that older buyers favor. If it fails to bolster its small-car lineup, GM risks losing young drivers for life. Says Burnham Securities Inc. analyst David Healy: "GM hasn't had a hot car in years."

Lutz plans to change that by using GM's small-car plants to crank out a cornucopia of hip vehicles that don't have the "econobox" stigma of GM's current offerings. Indeed, Lutz has GM's designers working on a number of concept vehicles that could be built sharing parts with the Ion. He's also counting on being able to sell them for thousands more than its current small cars.

GM hits the market with two new offerings this year. One is the Pontiac Vibe, a wagon offering the storage space of an SUV with the tight handling of a sports car. Engineered by GM's small-car partner, Toyota Motor Corp., the Vibe went into production on Feb. 1 and replaces the money-losing $12,000 Chevrolet Prizm compact. GM figures it will sell 65,000 Vibes a year, vs. 45,000 of the Prizm. And with a sticker price of $17,000 to $23,000, analysts expect GM to garner a per-car profit of at least $2,000.

GM's other new entrant is the Saturn Ion--the first new compact for that division since the S-series was launched more than a decade ago. With more horsepower, and better fuel economy than the S-series, it's expected to sell 182,000 cars, a 10% jump.

The new duo is just the beginning. As early as 2004, GM plans to market a retro-styled compact SUV that would be GM's answer to the Chrysler PT Cruiser. Lutz has also ordered up two more cars that could be built off the Ion platform: the Saturn Sky, a four-seat convertible and the Pontiac Solstice, a two-seat roadster that won plaudits at the Detroit auto show in January. "There's no reason you can't pull a lot of different vehicles off a small-car platform," Lutz says.

True, but others say the plan could backfire. Critics say replacing some of GM's cheap cars with $20,000 vehicles would put those models out of reach for many entry-level buyers. "They're giving up on new consumers," says Rod Lache, a Deutsche Bank analyst. Lutz maintains that shoppers will pay up if a car's quality is good enough. For GM's answer to the PT Cruiser, he even asked Bryan Nesbitt, the PT Cruiser's designer hired by GM last year, to oversee a winning design.

Can Lutz's latest plan end GM's long-standing small-car problems? "If GM just stanches its losses on small cars, this could be a good story," says Sanford C. Bernstein & Co.'s Scott Hill. And if it can get those buyers to stick around, it could be even better.

By David Welch in Detroit

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