General Motors’ turnaround bolsters Fairfax plant


General Motors was on the financial brink, and at the Fairfax plant in Kansas City, Kan., the stress was growing.

The budget was slashed. Production was down. The launch of a new Buick LaCrosse was delayed.

In late 2009, as GM plunged toward a government-managed bankruptcy and bailout, executives in Detroit were offering no assurances the plant would remain open.

Managers here wondered whether its days were numbered.

 “It was an awful time,” said assistant plant manager Dave Carter. “Going through it, you don’t know if you’re going to get a second chance.”

Those tumultuous times are history, and GM chairman and CEO Daniel F. Akerson is scheduled to visit Fairfax on Monday to announce an investment of hundreds of millions of dollars for a new paint shop and upgrades to the existing plant.

The announcement will be another sign of GM’s turnaround and an affirmation that the Fairfax plant has a solid spot in the company’s future. GM’s investments in Fairfax in the past decade match the improvements Ford Motor Co. has made to the Claycomo assembly plant and will strengthen the Kansas City area’s identity as an automaking center.

Combined, the two plants employ about 8,000 workers in well-paying jobs and have created thousands of spinoff jobs. Their estimated direct effect on the area amounts to more than $1 billion.

GM declined to discuss details of Monday’s announcement, but Akerson’s attendance lends it significance. In his two years as CEO, he has traveled to only one other plant to make an announcement, also about a big investment.

The announcement comes at a crucial time for GM as it moves from a fight for financial survival to building itself back up and improving the vehicles it sells.

“It is the pivot point for the company,” Mark Reuss, the president of GM North America, said in an interview in Detroit last week. “It’s going to be fun again.”

In 2012, global sales were up about 3 percent, and Chevrolet sold a record number of vehicles.

And this year, just in the U.S., GM will launch more than a dozen new, redesigned or substantially upgraded models. In the interview last week, Reuss said for the first time publicly that the LaCrosse, built at Fairfax, will get a major upgrade this year.

Since its exit from the government-managed bankruptcy, GM has posted 11 consecutive quarters of profits. The federal government, which invested about $50 billion to help save the company, has said it will sell its remaining stake in the company within 14 months.

But the turnaround is still a work in progress. The 17.9 percent share of the U.S. market GM snagged last year was its smallest in decades. And Fairfax idled production of the Chevrolet Malibu in December because of ballooning stockpiles. GM will refresh the midsize car with upgrades this year to help it compete.

“We’re on our way,” said Reuss. “But we still have work to do.”

Bailout transformation

GM once was by far the dominant automaker, selling one of every two cars sold in the U.S. at its peak in 1961.

By 2008, it was in desperate shape. It had lost $38 billion for the year and was so short of cash it was tapping government loans to stay afloat.

Two years later it turned a $4.7 billion profit.

In between, the government-managed bankruptcy washed out a lot of debt and interest payments. Pre-bankruptcy, its automotive debt was $45.8 billion. By the end of last year it was $5.6 billion.

Arguably even more important, its production capacity was brought more in line with the number of cars and light trucks it actually sold. Since its 1961 peak, its sales rate plunged by more than half, but its capacity to produce vehicles didn’t follow.

Simply, the company was failing to produce vehicles that consumers wanted, and labor agreements made it more difficult to close plants.

The situation spun out of control when auto sales plummeted in 2008 as the recession deepened. Ford, led by Alan Mulally, a University of Kansas graduate, had the cash to make it through the crisis, although it did receive a $5.9 billion government loan in 2009 to develop electric cars.

But GM and Chrysler received government assistance combined with their pre-arranged bankruptcies. Critics disapproved of the government stepping in and saving specific companies, and they contended the bailouts wouldn’t produce the kind of makeovers the companies needed.

In return for its lifeline to GM, the U.S. took an ownership stake.

The United Auto Workers helped in the restructuring, also taking an ownership stake after agreeing to manage a trust to pay for retiree benefits, taking the expense off GM’s books. The union also agreed to a two-tier wage system allowing new hires to be paid a lower wage. And it accepted the elimination of the “jobs bank,” which paid hourly employees even when they didn’t have work to do.

“We knew changes needed to be made to make the company vigorous … like it or not,” said A.J. Shumate, vice president of UAW Local 31, which represents hourly employees at Fairfax.

GM’s labor cost, which in 2006 was $79 an hour, including benefits, declined to $56 an hour in 2012. That is nearly the same as Toyota’s labor cost of $57 an hour, according to the Center for Automotive Research in Ann Arbor, Mich.

The concessions and the bankruptcy also sped the closing of plants and cost-cutting. GM, which had 129,000 hourly employees at the end of 2006, had 49,000 by the end of last year. Its North American production capacity, which was at 6.2 million units in 2004, had fallen to 3.9 million by last year, setting the stage for GM’s return to profitability.

Here’s why: Keeping plants open gave it higher fixed costs, so it needed to raise extra cash. But it couldn’t sell enough cars and trucks to do that without resorting to financial incentives to get vehicles sold.

That was a losing financial game. The average sales price of a vehicle remained essentially unchanged from 2001 to 2008, according to the Center for Automotive Research.

But post-bankruptcy, with less capacity and lower expenses, GM has offered fewer incentives. By the end of 2012, it was reaping about $4,000 more revenue per vehicle.

GM’s North America operations, once a financial weakling compared with the company’s operations in many other countries, were transformed.

“It’s a new world,” said David Cole, chairman emeritus of the Center for Automotive Research. “It put them in the position to be very profitable.”

By the numbers, GM still looks formidable. It is struggling in Europe because of that region’s economy, but it’s doing well elsewhere. In 2012, it sold 9.3 million vehicles globally, making it the world’s second-largest automaker, behind Toyota.

The company sold nearly 5 million Chevrolets worldwide in 2012, and 63 percent of those were outside the U.S. The company sold 755,000 units of the Chevrolet Cruze, a small car capable of getting more than 40 miles a gallon on the highway, making it GM’s most popular vehicle worldwide. GM also did well in China, where it sold 600,000 Buicks last year — three times the number sold in the U.S.

Overall the company’s strategy depends on developing a deep roster of vehicles that will deliver value instead of just relying on lower prices to attract buyers. An example is the decision to put a small electric motor and battery in the Buick LaCrosse to supplement the gasoline engine, which boosted the car’s highway fuel economy to 36 miles per gallon.

“We want to sell on real value; we don’t want to sell on price,” said Alan Batey, chief marketing officer of GM, during an interview at his Detroit office.

Both GM and Chrysler, a majority stake of which is owned by Italian automaker Fiat, have recovered better than critics of the bailouts thought possible. And now GM officials want to get rid of the moniker spawned by the government bailout: Government Motors.

The nickname, GM executives say, continues to ding sales. Though they have repaid much of the bailout, they are eager to have the U.S. dispose of what remains of its stake.

“It’s highly motivational,” Reuss said.

Obstacles to overcome

One issue facing GM now will be convincing consumers that GM has changed, that the perception among many that it can’t make good cars and trucks is no longer the reality.

“That’s a big challenge,” Batey said.

The promise and challenges could be seen at this year’s North American International Auto Show in Detroit.

GM demonstrated it could still create a showstopper. The new Chevy Corvette, available in the fall, was the biggest attraction, with a crowd of about 200 people circling it throughout the day and taking photos.

“I have faith in American carmakers,” said Gino Minona of Livonia, Mich. “This Corvette is awesome.”

The company’s engineering chops were also shown with the electric Chevrolet Volt on display. A GM executive had projected that sales would reach 120,000 in 2012, but only 23,461 ended up being sold. Its high sticker price scared off buyers and will be an issue until battery prices drop.

But GM is doubling down on electrification by working on a second generation of the Volt. Later this year it will offer a Cadillac version. And in some markets it will offer the Chevy Spark, a mini-car that will rely solely on its electric battery. (The regular Volt has a small gasoline engine for backup.)

A new Cadillac, the small Cadillac ATS sedan, which competes with such models as the BMW 3 series, got the auto show’s best car award. And Chevrolet also unveiled an improved Silverado pickup truck.

But the competition isn’t standing still, and that includes Ford and Chrysler. Ford displayed its best-selling Ford F-150, which is made in Claycomo, and a concept truck that could eventually replace it. The competition heated up some more with Chrysler’s new Ram 1500 pickup, which won the auto show’s best truck award.

GM won converts at the auto show, including Nick Linden of Cleveland. He admired the 2014 Chevrolet Impala, which has an upgraded interior, improved fuel economy and more safety features than the current model. But he said it would be tough to persuade some of his friends to buy the Impala or any GM vehicle.

“I don’t think they’re out of the woods yet,” he said.

The reality is that GM could be midstream in its makeover.

Consumers Union, the publisher of Consumer Reports, has been one of GM’s toughest critics over the years, but it has begun to warm up to the company. It notes that Cadillac especially is much improved.

“GM is on the upswing,” said Jake Fisher, director of auto testing for the magazine.

But he qualifies the compliment. GM’s quality has improved and is better than European carmakers, he said, but not as good as some others, including Honda and Toyota.

He said the Chevrolet Malibu, for example, has a world-class ride and quietness but is in a tough category that includes the Camry and Accord. It falls behind in some categories, he said.

The Malibu Eco, he noted, comes with a small electric battery and motor that help give it excellent gas mileage. But the new Honda Accord with just its base four-cylinder engine gets slightly better combined highway/city fuel economy.

“The competition is fierce,” Fisher said.

How Fairfax survived

So where does Fairfax stand in all of this?

GM has a long history in Fairfax, where bombers were built in World War II. In 1945, GM started making cars in the same building where the planes had been assembled. In 1987, the dated facility was replaced by the current plant, which continues to be an economic linchpin for Kansas City, Kan., and the rest of the area.

It now has 3,561 hourly and 316 salaried employees who annually collect wages and benefits worth $424 million. Frank Lenk, chief economist for the Mid-America Regional Council, said the manufacturing plant has more of an economic punch than most other businesses in part because of the need for suppliers, and ends up creating 9,500 additional spinoff and indirect jobs.

The company has also spent some big bucks on the plant over the years, although government incentives absorbed some of the cost. The new plant cost $1.1 billion in 1987, and GM spent $722 million to launch the Chevrolet Malibu in 2003 and $651 million for the launch of the Saturn Aura, which is no longer produced.

The future of a GM plant in Fairfax has been in doubt at least twice. In the 1980s, GM reviewed its options before deciding to replace the old plant. In 2009, fears about its future arose when uncertainty was washing over the entire company.

“I think every person at GM was threatened,” Diana Tremblay, vice president of North America manufacturing for General Motors, said in an interview in Detroit.

Tremblay said GM executives considered Fairfax a modern facility with a well-regarded workforce.

But the situation was dire enough that the product a plant was making at the time was a big factor in selecting the plants that survived.

Fairfax in 2009 was working to launch a new model of the LaCrosse, an important car for the company, and that was important to the plant’s survival.

Fairfax and the other surviving GM plants are now in a good spot because GM intends to improve and expand plants to handle increased sales rather than building new ones.

Reuss, who describes Fairfax as one of GM’s “foundational” plants, said during an interview that the company will expect Fairfax and the other plants to become more flexible — able to build more than just one or two different vehicles.

Even now, Reuss said, he would put the Fairfax plant’s flexibility “against any plant in the world.”

Such flexibility means, for example, that Fairfax could add the Impala to its production because of similar underpinnings to its current lineup, although GM has said nothing about even considering doing that.

What is certain is that Fairfax is doing well, and its future will look even rosier Monday — a change from a little over three years ago that is cheered from City Hall to the plant’s production lines.

Mayor Joe Reardon of Kansas City, Kan., who was among those in 2009 who worried about the survival of the city’s largest taxpayer and private employer, said, “I feel really good about the status of Fairfax.”

And Shawana Woods, an employee at Fairfax, remembers 2009 as an “edgy” time as GM was struggling. But now she is optimistic as GM increases the number of new products it is offering.

“As long as we’re profiting, we have a good chance of being gainfully employed,” she said.

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