After complaints from UAW, Congress and others, GM and government reverse GM's restructuring plan and GM agrees to make subcompact cars in the U.S.

The Wall Street Journal reports:

As part of the pact, the auto maker agreed to make subcompact cars in the U.S., rather than China or South Korea. GM announced plans Friday to built such vehicles at a to-be-determined idled plant, said people familiar with the plan.

A 5-18-09 post entitled "The story covered in an earlier post noting GM to build more cars overseas did not get much press. Look for this to change," quoted from a 5-9-09 post that noted in part:

The U.S. government is pouring billions into General Motors in hopes of reviving the domestic economy, but when the automaker completes its restructuring plan, many of the company's new jobs will be filled by workers overseas.

As a result, the long-simmering argument over U.S. manufacturers expanding production overseas -- normally arising between unions and private companies -- is about to engage the Obama administration.

The administration has aroused similar complaints by shepherding a merger between Chrysler and Italian automaker Fiat. But it has extracted a promise from Fiat that it will build small cars in the United States.

The complaints about GM's operations portend a potentially larger argument, a political dispute led in part by the United Auto Workers.

While paying a U.S. autoworker with benefits costs about $54 an hour, a South Korean worker earns about $22 an hour, a Mexican worker earns less than $10 an hour and some Chinese workers can earn as little as $3 an hour, industry sources said.

Why would the U.S. spend our taxpayer dollars to expand production overseas. As explained in the 5-18-09 post:

The Obama administration, for better or for worse, has determined that if it insisted that GM preserve American jobs by shifting production to the United States from abroad, many times more in federal aid than the $16.3 billion in loans now anticipated would be required, and this is just not going to happen.

This is not commentary; it is just reporting. Under the revised restruturing plan the jobs will be here rather than in other countries which of course is good if they remain because the public is buying the product. But as a result of this change we are also upping the required amount of federal aid by billions of our tax dollars. Is this for better or for worse? This is your call. But of course the real answer is it depends; it depends on whether GM can perform differently now freed if its legacy costs, unneeded dealerships and excess capacity than it has in the past. Bottom line: it depends on whether it works.

The Obama administration says that if the company's restructuring succeeds, we could begin to see some payback within 5 years.

A couple of days ago The Wall Street Journal reported this about what is being now called "Government Motors," a company whose market share peaked in 1963 at 52% and fell to 19.2% in the first four months of 2009:

The Obama administration plans to usher General Motors Corp. into bankruptcy court Monday and push through a restructuring that will cost taxpayers billions of dollars more than previously envisioned, turning what once was one of the most profitable companies in the world into a government ward.

As part of the revised plan, the U.S. would provide GM with at least $30 billion in financing to carry it through and out of bankruptcy, on top of the $20 billion in loans the government already has given the company. It also agreed to turn the loans into a controlling ownership stake in GM of up to 72.5% -- a big bet that could cost taxpayers dearly if the car maker fails to recover.

The restructuring plan envisions GM breaking even at total U.S. sales of 10 million a year. So far this year, Americans are on pace to buy only 9.5 million new cars and trucks. The levels of recent years -- when new-car sales peaked at more than 17 million in 2000 -- likely won't return without a strong economic rebound.

If sales did return to such heights, the cutting of GM's labor costs, halving of its brands, winnowing of its dealership network and closure of several factories could push the auto maker into the black.

And it is just as disturbing to me that the breakeven point is 10 million cars a year given GM's current market share. Consider the following from today's New York Times in an article entitled "Industry Fears U.S. May Quit New Car Habit":

For all the drastic cuts and financial overhauls that are meant to secure a future for General Motors and Chrysler, their prospects in coming years will be determined more by the answer to a simple question: Can American drivers live without that new-car smell?

In recent years Americans appeared to be hooked on it and took advantage of home equity loans, easy credit and cheap short-term lease deals to send new-car sales to levels of more than 17 million a year.

Now the market has collapsed by 46 percent to below 10 million, as people are making do with the cars they have, leaving the industry to debate — and worry — about what the new normal will be once the recession ends.

Some say the downturn is temporary and that sales will spring back in a few years. Others believe Americans will rethink whether they need so many cars, particularly new ones.

The Treasury Department’s advisers, who initially expected auto sales to pick up late next year, now foresee no jump in demand this year or in 2010. And even five years out, they expect annual sales to be about 15 million, still well below the peaks of this decade.

If sales do not recover, the Treasury will have to provide more financial support for G.M. and for Chrysler, which has received about $10 billion in federal aid, before they can stand on their own and the government can divest its shares.