How a small car is helping rewrite labor costs in a U.S. plant. Maybe even a profit.

General Motors' Orion Township plant in Michigan will be a lab to test cost-saving tactics.

Mike Colias
and David Barkholz
Automotive News -- July 11, 2011 - 12:01 am ET

DETROIT -- Inside General Motors' sprawling Orion Township assembly plant, nearly 100 workers pick through a jumble of components for power mirrors, heated seats and other trim parts for the new Chevrolet Sonic. For easy plucking on the assembly line, the parts are sorted neatly into a single plastic bin for each car.

GM says the system of sequencing parts into tidy kits for line workers is a game-changer that will boost productivity. And the workers doing the sorting are not GM employees. They're UAW workers employed by an outside supplier and paid about $20 an hour, including benefits, far less than GM's Orion workers.
Both the parts sorting and outsourcing are examples of how GM has rewritten its manufacturing playbook for Orion, a suburban Detroit plant where workers will begin assembling the only U.S.-built subcompact car next month.

Historically, small U.S.-built cars lose money. Small price tags on small cars leave little breathing room for automakers to build them profitably in the United States, where labor costs can run several times that of, say, Mexico.

But GM and the UAW say they've got the formula for making the Sonic profitably in the United States. An Automotive News analysis shows GM will cut roughly $450 in assembly plant labor cost per car -- a savings of nearly 40 percent of the roughly $1,160 in costs it would incur if GM ran it like any other plant. Sonic prices start at $14,495, including shipping.

That will make Orion a laboratory to test cost-saving tactics that could be adopted at other GM plants to drive down manufacturing costs, a key objective of CEO Dan Akerson. In particular, Orion's two-tier wage system looms large this month as GM, Ford Motor Co. and Chrysler Group start negotiations with the UAW on a new four-year contract.

"I think GM is taking a longer view and sees possibilities to set a precedent from this system at Lake Orion," said Sean McAlinden, chief economist at the Center for Automotive Research. And UAW President Bob King "knows that Orion has to pay. This is a huge experiment for the union, too."

Beyond Tier 2

The Sonic replaces the Aveo, which is built in Korea and was engineered by GM's Korean unit, formerly known as GM Daewoo Auto & Technology Co. The current Aveo also is made in Mexico for Latin American markets.

GM vows it will make money on the Sonic assembled in Michigan. But how?

Cheaper labor will be a big factor. But GM is reaching far beyond the savings it will wring by paying 40 percent of its Orion workers a so-called Tier 2 entry-level wage of about $33 per hour in wages and benefits. That's well below the $57 hourly figure for full-pay workers.

The Tier 2 arrangement is the core of a deal struck in 2009 between GM and the UAW that created as many as 1,800 GM and third-party UAW jobs by putting Sonic production at Orion rather than in Mexico.
Key figures on both sides of the landmark deal included Cal Rapson, then a UAW vice president and head of its GM department, and Diana Tremblay, then GM's vice president of labor relations. They were the lead negotiators during the talks leading up to GM's 2009 bankruptcy.

Rapson in particular, an unabashed Michigan supporter, pushed hard for Orion over idled GM plants in Spring Hill, Tenn., and Janesville, Wis., and hashed over with Tremblay the details of Orion's labor arrangements, according to a person involved in the negotiations.

Still, the UAW insists in a statement that Orion "is specifically not intended to be a model for other plants." It says the arrangement is a "unique operation for both GM and the UAW with the very special objective of bringing a small-car platform assembly into the U.S."

GM believes it can coax profits out of Orion through other methods that are used sparingly or not at all in its other plants:

-- Slashing the number of skilled workers at Orion will save millions, though line workers will have to learn and perform some new duties.
-- As many as 500 workers from a half-dozen suppliers eventually will work at Orion. All are UAW-represented, and many will perform tasks that higher-paid GM employees typically do.
-- Having non-GM workers perform parts sequencing and subassembly work in-house, rather than at the usual off-site facility, eliminates transportation costs and ensures line workers get the right parts at the right time, boosting productivity.

"That's breaking new ground for us by reducing the overall net cost of the vehicle," said Terry Woychowski, GM vice president of global quality and vehicle launches. "It's a game-changer."

Success on all those fronts could cut Orion's labor costs by roughly $72 million annually, based on wage rates provided by CAR and GM's employment forecasts. That saves about $450 per car, driving Orion's per-unit labor costs down 40 percent, to about $710 per car, compared with what the costs would be without those changes.

Not bad. But consider this: Ford's labor cost at its assembly plant in Cuautitlan, Mexico, where it builds the subcompact Fiesta, may be as low as $150 per vehicle, CAR estimates.
History of GM's Orion Township Plant on Dipity.

Doing the math

General Motors expects to save on labor costs at its Orion Township, Mich., plant. Some workers will get Tier 2 entry-level wages, and others will be paid by suppliers.

Even before its 2009 deal with the UAW to build a small car at Orion, GM crunched plenty of numbers. Executives estimated the cost required to ensure a profit, then worked with the UAW on ways to hit that target, according to a person familiar with those negotiations.

Automotive News' analysis of the major potential cost savings at Orion is based on a projected 1,800 GM and third-party workers, which is GM's projected maximum employment level for two shifts. It assumes GM's eventual production target of 160,000 annual units of the Sonic and Buick Verano, a compact to be built at Orion starting late this year.

Orion will employ 800 full-wage workers at $57 an hour, including benefits, CAR estimates; 500 Tier 2 workers at $33 an hour, including benefits; and, eventually, up to 500 workers from outside suppliers.
Here's how the estimated cost savings break down:

-- Entry-level wages: Adding those 500 $33-an-hour Tier 2 workers to Orion will save roughly $25 million a year, assuming straight time of 2,080 hours. That's about $155 per car in labor costs, trimming about 13 percent in per-unit labor cost at Orion.
-- Fewer skilled-trades workers: Cutting the number of skilled-trades workers at Orion by about 60 percent will save GM about $18 million, or about $110 per car.

Skilled trades workers earn about $62 an hour including benefits, CAR figures, to maintain and repair plant machinery. Orion will operate with a total of about 90 of them for two shifts, down from roughly 230 when the plant cranked out Pontiac G6s and Chevrolet Malibus, also on two shifts, before being temporarily shuttered in 2009.

That means line workers will be expected to perform tasks they have never done before, such as changing welding tips and oiling machines. But GM believes the high-tech equipment at Orion is more efficient than in most plants and should be easier to maintain. It has spent nearly $600 million to renovate and retool the facility.

-- On-site suppliers: The 400 to 500 employees from outside suppliers who eventually will work at Orion are represented by the UAW, but their employers, such as LINC Logistics Co. and Sodecia Group of Portugal pay them less than even Tier 2 GM workers -- about $10 an hour, $20 an hour including benefits -- in many cases, several plant workers have said.

Say about half those third-party workers, or 250 of them, will do jobs that normally would have been done by GM employees. At $20 an hour, that would save GM another $19 million per year, or about $120 per car, compared with the cost of having full-wage workers doing those tasks at $57 an hour.

Having the suppliers work on site will save another $10 million a year, or about $65 per car, on transportation costs, GM estimates. For example, Sodecia assembles underbody components inside Orion's body shop. That work normally would be done at an off-site warehouse, where subassemblies would be loaded and shipped to the plant.

Saving steps

How is there room to do all that third-party work in-house? GM's overhaul of Orion carved out a smaller manufacturing footprint to accommodate them. The new body shop, for example, takes up about 500,000 square feet, less than half as big as the previous one. The shop now uses about 400 welding robots, down from nearly 700 previously.

GM touts many "lean manufacturing" elements at Orion that should boost productivity and cut costs, though they're tougher to quantify. A good example is the sequencing of those interior parts for delivery to the assembly line.

In most GM plants, fasteners, bolts and other parts are stored in bins on racks along the assembly line. Workers walk back and forth from the line to the car, picking the right part for the right trim level. For instance, cars with heated seats get one set of wiring; ones that don't get another.

At Orion, LINC workers organize the parts into plastic bins, or "kits," that move down the line inside the car. Workers simply pick out the parts without worrying about matching the part to the car.
Bulkier components, such as wiring harnesses or carpeting, go on an automated cart that follows just behind the car on the line.

Steve Brock, Orion's assistant plant manager, says it's akin to making sure a surgeon is handed the right instrument at just the right time.

"It allows us to very effectively get them that one right part that goes into the particular car they're building," Brock says.

He said GM believes Orion is using the system, known as kitting and sequencing, more extensively than any other North American assembly plant.

Even with all of Orion's cost cuts and efficiencies, there's no guarantee GM will make the Sonic profitably.
Rival foreign-made vehicles such as the Ford Fiesta still will enjoy a cost advantage. That will make it easier for the companies that sell them to offer discounts while maintaining profit margins, McAlinden says. And the drop in gasoline prices could let the air out of small-car demand, he adds.

Mike Smitka, an economics professor at Washington and Lee University in Lexington, Va., who studies the auto industry, says profits could hinge on GM being able to persuade buyers to spring for higher trim levels.

GM seems to subscribe to that theory. Sonic prices start at $14,495, including shipping, about $500 above the base-model Fiesta. But a fully loaded Sonic can top $19,000, with several trim levels in between.

GM will need to sell a lot of those higher trim levels, and a lot of cars overall, for all its effort at Orion to pay off, Smitka says.

"Fixed costs are the name of the game," he said. "So if the volumes aren't there, neither will the profits be there."


In its bid to build the Chevrolet Sonic subcompact profitably in the United States, GM will slash roughly $72 million in assembly plant labor costs per year. Breakdown of annual savings:
• $25 million: 500 Tier 2 UAW workers instead of full-wage UAW workers
• $18 million: 60% fewer skilled-trades workers
• $19 million: 400-500 employees from outside suppliers, who will be paid less than Tier 2 workers
• $10 million: Transportation costs from having suppliers' work performed on-site
Automotive News projections assume straight time of 2,080 hours, based on a projected 1,800 GM and third-party workers, and assumes GM's eventual production target of 160,000 annual units of the Sonic and Buick Verano.

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