General Motors: Myths And Reality

Jerry Flint

The auto business is different from other endeavors, so some traditional business rules do not apply.

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Forget what some people in the media are saying. General Motors is not going out of business. Yes, the company is in a terrible crisis, but even if the business here completely fails, GM's foreign empire--in Europe, Brazil and China--will carry on the fight.

In Europe, General Motors (nyse: GM - news - people ) newest sedan, the Opel Insignia, just won "car of the year" from the Continent's car writers. GM's sales in Brazil and Argentina--574,000 cars and trucks in 10 months--are 20% ahead of last year. This company will endure, regardless of what happens in the U.S.

Another misunderstanding is that the high price of labor is the company's greatest problem. Yes, labor costs are high, but that $75 an hour includes benefits, such as Social Security and health care. Base pay rates in the non-union auto plants are quite similar to the union rates, but older, higher seniority workers get more. The foreigners also do not have any pension costs--yet.

Keep in mind that volume is the key cost factor in this industry. Run a factory at three shifts and sell every vehicle at top dollar and the profits are great. Run at 50% capacity and the losses are great, whether you are General Motors or Toyota Motor (nyse: TM - news - people ).

The greatest problem for any automaker is creating vehicles that win customers. Today, the industry faces a new challenge: credit. Dealers need credit to finance their inventories and customers need credit to buy new cars.

Another myth is that retraining will help if Detroit goes down. Retraining does not work. I know because I read it in The New York Times--and I remember because I wrote that story. The people who get the most out of retraining are those hired to do it. If the trainees are paid, then it is little more than extended unemployment compensation.

General Motors' great gamble is the Chevrolet Volt. If it flops, GM falls on its face, bailout or no bailout. Just do not ask if the Volt will make money. That is not the issue.

GM promises that this vehicle, a plug-in electric hybrid, will travel as far as 40 miles just on electricity stored in its batteries. Then a gasoline engine will power a generator that will create more electricity to turn the wheels. Consumers will be able to plug in the car at home to recharge the batteries.

The Volt is a halo vehicle; its purpose is to lure people into showrooms to see it, and to get people interested in GM cars. Most important to GM, the Volt can help restore its prestige as a technological leader, in greenness and in an energy-efficient future.

Halo cars do not have to make money. Toyota Motor's hybrid Prius was a halo, created to show the world what Toyota could do technically--and it worked. Until recently, the Prius was not a profit center. The Dodge Viper was a halo for Chrysler, showing it was still in the car game and could excite people. The Pontiac Solstice is a halo, as are the "V" high performance models from Cadillac.

What the Volt must do is work. It must have an all-electric range of 40 miles every time. It must start every time. Its gasoline engine must work perfectly in running the generator. There is no "rebooting" for cars; it must recharge perfectly every night so it can do it all again the next morning. The Volt must turn out to be practical, which is no easy task with this new technology.

The Volt faces obstacles too. You cannot run a cord from your sixth-floor apartment to recharge it. To get those 40 miles on electric power, the car needs lots of batteries, maybe $10,000 or more worth.

Eventually those lithium ion batteries in the Volt should cost less than nickel metal hydride batteries in the Prius (now $3,000 to $4,000), since they use less expensive materials. "You don't need to carry 50 pounds of nickel," one battery company man told me.

General Motors has far more at stake with the Volt than Toyota ever had with the Prius. Toyota could afford a failure; GM cannot. The Volt will not turn around GM. To remain viable, GM needs many more winners in its conventional lineup, such as the Chevrolet Malibu and Cadillac CTS, and a home run with its new lower-priced car, the Cruze, which it plans to build in Lordstown, Ohio, in 2010.

In the future, there could be an entire line of Volt models. Remember, Toyota did not sell many Prius cars in its first years (5,562 in 2000; 6,254 in 2001). The Volt does not have to make money; it just has to work--and make sense to car buyers.

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