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Detroit Regained

The whole trick here is to overcome this old Detroit myth that you can’t make money on small cars.

The whole trick here is to overcome this old Detroit myth that you can’t make money on small cars. You can make money on small cars, but they have to be interesting small cars. If they’re commodity small cars, then basically nobody wants them because they’re not aspirational. Look at the BMW Mini. It’s a small car—at current exchange rates I’m not sure that they’re not losing money on it—but under normal circumstances, when you look at what that car is selling for, it should be a very profitable car because people want it, as opposed to being willing to take it.” That’s Bob Lutz talking. The vice chairman of Product Development for General Motors and the chairman of GM North America. Clearly a guy who knows what’s what. The venue of the discussion is an interview at the 2004 North American International Auto Show in Detroit. And his comments are in the context of whether GM can profitably make low volumes—say 20,000 per year—of vehicles based on its newly developed Kappa small rear-wheel-drive architecture, which is the basis of the Pontiac Solstice. Unquestionably, the Solstice roadster is a car that people desire, not some sort of default mode of transportation. “The Solstice,” Lutz said, “by virtue of the very small investment and good margins on the car, can be produced very profitably at 20,000 per year.” They won’t make money the first year. But he’s confident that even with the low volumes they will recoup the investment. That’s certainly not in keeping with what I’d argue is not the “Detroit myth,” but actually the long-standing “Detroit belief system.” It’s a town where economies of scale rule with an iron fist—and forget the velvet glove. Either you’re making 250,000 of something or you find an engineering partner who is willing to do the task for you. That no longer cuts it.

There’s something beyond just the issues of fast product development and the notion of creating production modules in units of 10,000 to 20,000 units at a time in Lutz’s observations. Something that is more fundamental to the continued existence of the U.S. auto industry—and other industries in this country, for that matter. Lutz noted that when you consider the materials for a vehicle, the costs for a run-of-the-mill four-banger and the costs for an apsirational roadster are probably about the same. The addition can be considered intellectual capital. Or, put another way: Design smarts. When there is a significant adding of cleverness, cleverness that is a consequence of thoroughly understanding the nuances and the desires of the American market, when there is a willingness to abandon old methodologies (“We’ve always done it this way around here”), then there can be success. Realize—as all too many unfortunate people already have, people who are now unemployed or who are working jobs that are providing but a fraction of the wages they once earned—that when it comes to commodities, fungible cookie-cutter products, chances are there isn’t a business case (as in a green-eyeshade-mortality-is-left-at-the-door calculation) that can be made for making those things here. Mexico, maybe. China, certainly. Oh, maybe there isn’t a whole lot of that now. But just wait. And not that long.

Successful manufacturing can only be predicated on superlative design and extraordinary engineering. With Kappa, at least, GM gets it. If Detroit is to be regained, Kappa thinking must permeate everyone in this town.

Kappa architecture.

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