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http://online.wsj.com/article/SB124786970963060453.html

On July 5, 1984, President Ronald Reagan joined General Motors Chairman Roger Smith at a dedication ceremony opening Orion Assembly, a sprawling plant off of Interstate 75 north of GM's Detroit headquarters.

America's largest auto maker was then emerging from the most severe downturn since the Great Depression and a decade of punishing federal fuel-economy regulations that gave Japanese auto makers an edge.

The Orion plant was a symbol of the U.S. auto industry's rebirth as GM invested $50 billion in state-of-the-art facilities world-wide.
[CROSS COUNTRY] Associated Press

"Let our competitors take note today: The American automobile industry is back," Reagan thundered to a building full of auto workers. :what:




On July 5, 1984, President Ronald Reagan joined General Motors Chairman Roger Smith at a dedication ceremony opening Orion Assembly, a sprawling plant off of Interstate 75 north of GM's Detroit headquarters.

America's largest auto maker was then emerging from the most severe downturn since the Great Depression and a decade of punishing federal fuel-economy regulations that gave Japanese auto makers an edge.

The Orion plant was a symbol of the U.S. auto industry's rebirth as GM invested $50 billion in state-of-the-art facilities world-wide.
[CROSS COUNTRY] Associated Press

"Let our competitors take note today: The American automobile industry is back," Reagan thundered to a building full of auto workers. "You've demonstrated when the chips are down, what people can do working together freely, rather than at the dictates of some central planner or bureaucratic mandate of government. I happen to believe the last thing your industry needs is the federal government bringing in outsiders to tell you how to run your business. . . . We immediately moved to reduce the regulatory burden . . . and I'm proud to say, we made a special effort on behalf of the auto industry, saving you hundreds of millions of dollars."

Twenty-five years later, GM is again at a crossroads. And again Orion is the focus of its future plans.

This time, however, a very different White House led by President Barack Obama and his Auto Task Force is calling the shots. This time, Washington is telling GM how to run its business. This time, the Orion plant is a symbol of government regulation run amok as Washington keeps GM on life support so that it will produce the cars Washington wants to build.

On June 1, GM Vice President for Global Manufacturing Gary Cowger announced as part of the company's bankruptcy filing that it would close the Orion facility in its drive to become a "leaner, stronger and more flexible" company. Though still a relatively modern facility making midsize Chevy Malibu and Pontiac G6 sedans, Orion's once 5,000-strong labor force had shriveled to 1,200 as the recession ravaged sales and the company planned to eliminate its Pontiac brand and consolidate Malibu production at a Kansas City facility.

But a few weeks later, the company reversed course. GM now says it will retool Orion to make compact, gas-sipping cars. The change of heart says a lot about how GM's new owners -- the federal government owns 60% of the company and the United Auto Workers (UAW) owns 17% -- are making considerations other than profitability a top priority for the auto maker.

The Obama administration is increasing Corporate Average Fuel Economy (CAFE) mandates to 35.5 mpg for all vehicles in a company's fleet by 2016, up from 27.5 mpg for cars and 23 mpg for light trucks now. Not a single GM vehicle meets the new CAFE standard, so the company is scrambling to make new high-mileage cars.

It was planning to build a new compact car in China (it already works with Daewoo to make the tiny Chevy Aveo in South Korea). Most auto makers have similar arrangements -- profit margins are so low for compacts made in America that not a single auto company makes a compact inside the U.S. Not the Japanese. Not the Koreans. And not even Ford, which plans to make its new Fiesta in Mexico.

But the UAW insisted that GM build its compact stateside and along with the Obama administration forced the company to agree to build a new green car somewhere in the U.S. as a condition for exiting bankruptcy.

This is a mistake that will only make it harder for GM to make good on the president's pledge that it will repay every penny of the $50 billion in federal loans it recently received. Why? Because auto makers make a slim $1,500 per vehicle profit, on average, on small cars. The profit margin on SUVs can be $5,000 or even $7,000.

One reason for the small margin on small cars is that compacts occupy a tiny niche of the market. Gasoline is relatively cheap in America, so those interested in buying fuel-sipping autos often base their buying preferences on environmental or political considerations, or they are particularly sensitive to the variable price of gasoline. There aren't enough of these people, Center for Auto Research analyst Kristin Dziezek told me, to allow auto makers to develop models with varying pricey features that drive up profit margins.

In Europe, things are different. There gasoline costs 100% to 200% more than it does here, so there are a lot of buyers who make fuel efficiency their No. 1 priority.

GM says that once its Orion plant is turning out compact cars, it can increase its small car sales to 100,000 units a year. But that claim seems dubious because its current compact, the Aveo, sold just 55,000 units in 2008. The critically acclaimed Honda Fit sold 80,000 units last year. Only the class-leading Toyota Yaris has sold 100,000 vehicles.

However, there is one way to make building small cars in America pay off -- through government subsidies.

There is a provision in the 2007 Energy Bill that allows the Energy Department to dole out up to $25 billion to domestic auto makers to pay for, as the bill spells out, "the cost of re-equipping, expanding, or establishing manufacturing facilities in the United States to produce" low-mileage vehicles. Ford has already been awarded $6 billion in such loans. With its new plans for Orion, GM will likely get its own slice of that pie.

Also, once it was clear that GM planned to build compacts somewhere in the U.S. a bidding war broke out between Michigan, Tennessee and Wisconsin -- all of which had GM plants slated to be closed. Michigan won by giving away the store. The Orion plant will get $1 billion in tax incentives and job training grants from the state, which will pay for the $800 million GM will spend on retooling.

GM insists that business factors alone drove its decision. But in the era of Government Motors, there's reason to be skeptical. Speaking to reporters recently, GM North America President Troy Clarke made an environmental, not an economic, argument for building small cars at Orion. He said that the new plans for the plant would help GM's "efforts to become the greenest car company in the world."

While acquiescing to the demands of its two major shareholders -- Washington and Big Labor -- GM did get concessions of its own. The UAW will allow the company to pay a majority of workers at Orion lower, "second-tier" wages of $14-$16 an hour with no pension benefits. That will make Orion's wages competitive with the non-union Kia plant in Georgia (which makes SUVs).

Outgoing car czar Steve Rattner insisted recently that "We are not going to micromanage or get involved in day to day decisions" at GM. Americans can take him at his word. That is, assuming they overlook Washington's tight grip on a bankruptcy process in which the UAW demanded that the company make a green car in the U.S. that is designed to meet Washington-mandated mileage standards in a plant that makes Washington-favored cars so that GM can get billions in Washington-issued funds.

Mr. Payne is a writer and cartoonis

I8ABMR

the government cant do worse than the heads of GM did. I am for the government running GM or at least watching it closely