GM Wrestles With Excess Capacity -- WSJ

Auto maker is operating too many U.S. plants, which saddles it with higher fixed costs

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 10, 2017).

ORION TOWNSHIP, Mich. -- Despite its drastic downsizing a decade ago under a federally funded bailout and bankruptcy restructuring, General Motors Co. again finds itself with too many U.S. factories that can turn out too many vehicles.

But as GM considers how to trim the excess capacity, which saddles the company with higher fixed costs, it faces a tricky political factor: President Donald Trump's insistence that auto makers assemble more of their vehicles in America and not in lower-cost plants elsewhere.

This year through August, GM built about 7% more vehicles at its North American plants than rival Ford Motor Co. but used about one-third more assembly plants to do so, according WardsAuto.com.

GM's factory-utilization rate in North America averaged 95.1% over the past two years, below Ford's 111.9% and Toyota's 101.4%, Wards data shows. (Rates can exceed 100% when factories work a third shift or schedule overtime work on weekends.)

GM's sprawling factory here in Orion Township, a suburb north of Detroit, is a glaring example of the company's predicament. It makes the slow-selling Chevrolet Sonic subcompact and the new Bolt electric model, for which GM has modest though undisclosed sales goals.

One recent afternoon, workers filed into the parking lot a few minutes after the day's sole production shift ended -- a rarity in an industry that often runs its factories dawn-till-dusk or even around the clock to boost their efficiency.

GM recently lowered production at Orion by 20%, resulting in 100 lost jobs, said people familiar with the matter. GM declined to quantify the cuts but confirmed it is making fewer Sonics.

"The Bolt is hanging in there, which is good," Henrietta Holland, an Orion factory worker, said after her shift. "But we are worried" about job security. "We feel like we should be getting another product."

Factory-utilization rates typically measure how much production capacity a plant uses, based on a 16-hour workday. GM says its utilization rate is 100% on average when its round-the-clock truck and sport-utility vehicle lines are figured in with the relatively sleepy factories making cars.

While GM has boosted its U.S. employment by more than 6,000 factory jobs since 2010, it also has bulked up production in Mexico for export to the U.S. under the North American Free Trade Agreement. It recently started making two popular crossover SUV models south of the border, and for years has imported large pickup trucks from there.

GM has no plans to construct new U.S. factories, and executives in recent years have weighed closing at least two existing ones, according to people familiar with the matter.

Some of the low usage of its U.S. plants stems from a decision GM made a number of years ago to revitalize its lineup of sedans and coupes, including a new Chevy Malibu that has garnered glowing reviews from critics. But in the past few years, low gasoline prices prompted millions of Americans to gravitate from passenger cars to less-fuel-efficient SUVs and pickup trucks.

To be sure, all auto makers have been grappling with the dramatic consumer shift. Less than 10 years ago, passenger cars accounted for roughly half of U.S. vehicle purchases at retail. Last month, cars accounted for a record low of 35%, according to J.D. Power.

While leaving some GM plants with unused capacity, this switch has boosted the company's bottom line. Its plants that build the highly profitable Chevrolet Silverado pickup, for instance, are working overtime, which helped GM earn a record $12.5 billion operating profit in 2016. GM's stock price has hit a multiyear high.

Chief Executive Mary Barra, a GM lifer of more than three decades who once roamed the factory floors as a plant manager, must contend with the capacity glut at the same time the company is making costly investments in electric cars and self-driving vehicles.

GM said it is working to "drive further improvements" in its plant utilization, including adding crossover SUVs to more factory lines. A plant in the Kansas City area that now makes only the Malibu is scheduled to begin assembling a small Cadillac SUV by late 2018. But such a switch-over typically takes car makers several years of lead time, to order and install new assembly-line equipment and tooling.

GM operates 17 vehicle-assembly plants in North America, after closing several during its bankruptcy. Most, except for five that operate around the clock to build trucks and SUVs, have ample unused capacity.

GM's Detroit-Hamtramck assembly plant, the lone factory in the auto maker's hometown, in 1999 cranked out more than 200,000 Cadillacs and Buicks. It will likely make around 80,000 vehicles this year.

Compared with competitors, GM has a larger number of plants that make only cars. That has forced GM to make more drastic moves when adjusting production toward trucks and SUVs. It has cut nearly 3,000 jobs since late last year, leaving many U.S. factories on reduced schedules.

GM has more leeway to cut factory workers under more flexible terms under its recent contracts with unionized workers. It pays less in unemployment benefits and uses more temporary workers who aren't due money when they are let go.

GM can "react to market dynamics and take costs out more aggressively compared with past [economic] cycles," company finance chief Chuck Stevens told analysts last year.

Some analysts expect Ms. Barra will make aggressive moves with underused plants, after showing a willingness to ditch unprofitable operations in Europe and elsewhere that other GM executives had long tolerated.

"I would expect to see GM make some bold moves on their car lineup," said Jeff Schuster, an analyst at research firm LMC Automotive.

Write to Mike Colias at Mike.Colias@wsj.com

(END) Dow Jones Newswires

October 10, 2017 02:47 ET (06:47 GMT)