Arlington, Texas - General Motors is raising the stakes on its bet that sales of fuel-guzzling SUVs will keep driving its global profits as Chinese and other markets sag.
GM recently announced that plans to spend $1.4 billion (R17.3bn) to modernise the factory in Arlington, Texas, that builds the Cadillac Escalade, Chevrolet Suburban and GMC Yukon sport utility vehicles.
Though GM operates almost 400 factories around the world and sells vehicles in 120 countries under 11 different brands, the vehicles built in Arlington alone generate about $3 billion (R37.1bn) or more in profits annually, or almost half of GM's $6.5 billion operating profit last year, analysts said. Each of Arlington's 3800 hourly employees could take credit for earning the company about $800 000 (R9.9m) a year in profit, though they get the same profit sharing checks as every other US worker.
IT’S A MONEY-PRINTING MACHINE!
In part because its major rivals backed away from the large SUV market when US fuel prices spiked in 2008-2009 and killed demand, GM now boasts a 64 percent share of the US large SUV market. Now that fuel prices have fallen, US consumers are snapping up Escalades and Suburbans again. GM realizes operating profits of $10 000 (R123 800) per vehicle on the Arlington SUVs, with higher end models at triple that rate or more, analysts estimate.
“The Escalade is just a machine to print money,” Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions, said of the Cadillac large SUV. “When you're selling them for $83 000 (R1.03m) apiece and you have only 20 days supply, people are lining up to give you money.”
GM doesn't disclose profits by plant or model line.
With China's vehicle market slowing down, sustaining profits from large SUVs and pickups will be critical to Barra's strategy for lifting GM's shares. In the first quarter, margins from Chinese operations fell to 9.9 percent of revenue from 11.2 percent a year earlier.
NEXT VERSIONS WILL BE LIGHTER, RIVALS TO FOLLOW
One supplier source said the GM has decided the next-generation big SUVs in 2019 will use more aluminum to reduce weight and boost fuel economy, which helps meet tougher federal fuel efficiency requirements and hedge against higher fuel prices. Research firm LMC Automotive says fuel economy mandates could push large SUV prices higher, damping sales, but profits per vehicle should remain strong.
The Chevrolet Tahoe, GMC Yukon and the Cadillac Escalade not long ago were symbols of the company's failure to respond to change. Sales of the nearly-three ton vehicles collapsed during the financial crisis. When GM was restructured in a government-funded bankruptcy, President Barack Obama and the company's leaders touted highly efficient cars such as the Chevrolet Volt hybrid as symbols of the US motor industry's new direction.
Now, GM sells about 12 large SUVs for every Volt.
Supplier sources say GM's rivals want to get back in the game. Ford plans to offer redesigned Ford Expedition and Lincoln Navigator SUVs in 2017, while Toyota's and Nissan's redesigned models are expected in 2016 or 2017. Fiat Chrysler's planned all-new Jeep Grand Wagoneer likely won't arrive until 2019 or 2020, the sources said.
THE BIG CHALLENGE IN TEXAS
The biggest challenge at Arlington is keeping up with demand among the three brands it serves. Each SUV, over 24 hours, travels about 25 miles by conveyor, from the stamping and body lines to paint and final assembly. The 4.4 million-square-foot plant sits on 250 acres in a city of more than 365 000 people that is known as much for the Dallas Cowboys' football stadium and the Six Flags amusement park there.
When GM shuttered Johnny Pruitte's home plant in Janesville, the United Auto Workers officer transferred south to Arlington to build the same vehicles.
“I wanted to follow the product because I knew the strength of it,” the 56-year-old president of UAW Local 276 said in an interview. “History shows people don't mind spending for it. People are going to own these Escalades, Suburbans and Tahoes even if gas goes to $5 a gallon.”
Arlington has been running flat out, building 1200 vehicles a day over three shifts including many Saturdays.
The typical mix of production is 60 percent Chevy, 30 percent GMC and 10 percent to 15 percent Cadillac. Cadillac dealers have complained that they should get an even larger share because demand for the chrome-decked Escalades is so strong.
“I could easily say, 'Go for more (GMC Yukon) Denalis or go for more Cadillacs,' but you have the Chevrolet customers,” plant manager Juan Carlos Jimenez said. “You don't want to tell them, 'You're not going to get your Tahoe because I'm giving someone else a Denali.'”
Jimenez says the plant's profits get the attention of GM executives in Detroit. “Everybody makes sure we have what we need,” he says.
Reuters