GM Gambles That Size Does Matter

But new Hummers face cost constraints and a gas-guzzler backlash

Jack Guy, a Malibu (Calif.) photographer, has long admired the macho image of the Hummer H1, the civilian version of the U.S. Army's Humvee assault truck. But the Hummer's huge girth and $100,000 sticker price put it out of Guy's range. So when General Motors Corp. (GM ), which acquired Hummer from AM General Corp. in 1999, started taking orders for its new smaller and--at $50,000--far cheaper Hummer H2, the 40-year-old Californian finally bit. Guy's pewter-colored H2 should arrive in a few weeks. "The H2 looks like the toughest truck on the road," he boasts.

GM is betting hundreds of millions of dollars that there are plenty more Jack Guys out there. It wants to boost sales of the Hummer line, which now total about 700 a year, to roughly 200,000 a year by the end of the decade. Eventually, GM hopes each H2 will generate up to $15,000 in profit, with the Hummer line becoming as profitable as the Cadillac division, which earns about $500 million a year. Plans are also afoot to produce a $35,000 SUV called the H3 and a Jeep Wrangler-like H4. "People don't appreciate how important Hummer is to GM," says GM Vice-Chairman Robert A. Lutz. "It's going to be a big moneymaker."

Perhaps, but GM's gambit is hardly risk-free. For starters, GM has to hope that the environmental lobby's continued push for tougher fuel economy standards doesn't succeed to the point of undercutting the market for gas-guzzling sport-utility vehicles--a real threat given pending legislation in California that would force SUVs to achieve better mileage. Plus, the federal government is mulling stricter fuel standards for the 2005 to 2010 model years.

Moreover, Lutz will be hard-pressed at a time of corporate belt-tightening to find the money to design, build, and market future models. "GM will support Hummer because it will make them money, [but] what other parts of the business do you sacrifice?" asks James N. Hall, an industry consultant at AutoPacific Inc. And GM designers and engineers face the challenge of mass marketing the Hummer while maintaining its current cachet. "If Hummer sells too many, it loses its exclusivity," notes DRI-WEFA analyst Rebecca Lindland.

GM's big bet on the Hummer comes during a period when the cash-strapped auto giant has already whacked $900 million from its capital budget, to $7.1 billion this year. The cash crunch has forced GM to delay the launch of the H3 by six months to mid-2005, while divisions like Buick and Saab have had proposed new models nixed. That means Lutz may have to grab from GM's other divisions to come up with enough cash to build SUVs that are true Hummers, not just Chevy trucks dressed in military garb.

Indeed, that may be exactly what happens as GM's engineers scramble to build the new H3 on the cheap. They want to put the SUV on the platform of the forthcoming Chevy Colorado small pickup. But designers gripe that the result will be a tall, upright vehicle, not the low, grimacing road warrior consumers associate with the Hummer name. "The H3 could make or break the brand," concedes one GM product development executive.

Then there's the struggle with fuel-economy standards. Fortunately for GM, the H1 and H2 are classified as medium-duty trucks and are exempt from the standards. But the smaller H3 and H4 lines won't fit through the same loophole. At the same time, environmentalists continue to try to remove the exemption for medium-duty trucks. Losing those exemptions, warns Hall, "would devastate the H2."

For its part, GM remains undaunted. Lutz views the Hummer as the antidote to SUVs "that are becoming station wagons or another form of minivans." Now, the question is whether there are enough Jack Guys out there to turn the Hummer into a winner.

By David Welch in Detroit

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