Economics Wasn’t GM’s Only Criteria for New Plant

  • JULY 6, 2009

Economics Wasn’t GM’s Only Criteria for New Plant

When it was deciding where to build its new compact car, General Motors Corp. made a point of saying it would push politics aside and use strictly commercial criteria.

So Tennessee’s three top officials were astonished last month, in a meeting with GM, when they were told the first two criteria were "community impact" and "carbon footprint" — or how the choice would affect unemployment rates and carbon-dioxide emissions.

"Those didn’t strike us as business criteria at all," said Tennessee Sen. Lamar Alexander, who was joined in the meeting by fellow Republican Sen. Bob Corker and the state’s Democratic governor, Phil Bredesen. Those factors, Mr. Alexander said, "seemed odd for a company struggling to get back on its feet."

On June 26, after a monthlong competition, GM tapped an existing factory in Orion, Mich., pushing aside competing plants in Spring Hill, Tenn., and Janesville, Wis.

All the sites had merits, but the Michigan plant had additional attractions. It is embedded in a struggling state that is a Democratic stronghold. The Orion site, 35 miles from GM’s Detroit headquarters, is also close to tens of thousands of current and former United Auto Workers union employees, whose pressure previously helped persuade GM to scrap plans to build the car overseas.

The area has one of the region’s highest unemployment rates, at 12.4%, though the Wisconsin site’s was even higher, at 12.9%. Janesville, by contrast, offered a less-expensive labor pool, according to people briefed on the plan. In Spring Hill, GM has a new, $225 million paint shop. The Orion plant’s paint shop needs to be replaced.

Set to emerge from bankruptcy within weeks, GM declined to disclose the factors it weighed in picking Orion, but said the process was free of political meddling. "It’s in the best interest of all involved to not discuss the selection criteria for the small-car plant," said GM spokeswoman Sherrie Childers Arb. "All three plants have individual merits, but when all told, the Orion plant scenario provided the best business case."

The federal government’s outsize role in the new GM has already raised concerns about the mixing of politics and commerce. Lawmakers, such as Rep. Barney Frank (D-Mass.), chairman of the powerful House Financial Services Committee, have squeezed GM to reject plant closures in their districts. Obama administration officials have prodded the car giant to develop smaller, more fuel-efficient cars.

Associated Press

General Motors chose the Orion, Mich., factory over two other candidates to build its new compact car.

gm orion plant

gm orion plant

The multistate tussle over the compact-car plant was itself the byproduct of political pressure. This spring, while seeking upward of $50 billion in federal assistance to shed debt and keep afloat, GM disclosed plans to import a new line of compact cars the size of a Toyota Yaris from China. That sparked an outcry from the UAW and from Congress, which put pressure on the Obama administration to persuade GM to drop the plan and build the cars in the U.S. GM, already deeply indebted to the government, agreed.

GM plans to invest more than $800 million to retool the Orion plant, with the aim of building its first U.S.-made compacts by 2011. The operation is expected to employ 1,400 workers. The UAW agreed to allow GM to employ lower-cost workers earning $14 to $16.23 an hour, compared with the current base of $28 an hour, with less-expensive benefits than traditional assembly-line personnel.

Troy Clarke, GM’s head of North American production, told reporters after the Orion announcement that GM was confident "that we have the ability to do this on a very cost-competitive basis."

Even with the labor savings, analysts question the logic of building a compact car in the U.S. Margins are so tight that even Toyota and Honda have opted to build their smallest models in countries with lower labor costs. "Virtually nobody makes cars that size in the U.S.," said CSM Worldwide automotive analyst Michael Robinet. "There is a reason why GM at the outset was going to bring this car in from China."

Estimates peg GM’s losses on U.S.-built small cars at roughly $1,000 to $2,000 per vehicle sold in recent years. Lawmakers and congressional staffers involved in the compact-car competition said GM acknowledged the company expected to struggle to break even on the venture. GM views small cars as central to its bid to become what Mr. Clarke called "the greenest car company in the world."

Anticipating higher gasoline prices, the cars will be "more and more toward the sweet spot of the market" when they roll off the assembly line sometime after 2012, Mr. Clarke said. Even before the competition got under way, GM officials told the U.S. auto task force in late May they were inclined to pick the Orion facility.

Michigan won the bidding by offering $779 million in business tax credits over the next 20 years, along with $130 million in federal funds for worker training. Local officials threw in additional $102 million in incentives.

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