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Supplier squeezing gave birth to flawed GM cars

By Keith Naughton, David Welch, Jeff Green and Mina Kimes
Bloomberg News

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The cars at the center of General Motors’ ignition switch recall were still on the drawing board when a top engineer gathered more than a dozen managers and delivered a fateful message: Build them for less.

At the time, around 2000, GM’s profit margins were shrinking as worker- and retiree-benefit costs rose and its U.S. market share leadership was eroding. GM’s grand plan to make money on small cars, by developing them jointly with Fiat SpA, was crashing.

As it became clear that GM’s planned Chevrolet Cobalts and Saturn Ions wouldn’t get made on a money-saving global design, Gary Altman, the models’ chief engineer, told the group they needed to find other ways to reduce costs, including a suggestion to pull parts from existing models, said a person who was at the meeting in the automaker’s suburban Detroit technical center.

Those same Cobalts and Ions are among 1.6 million vehicles that GM recalled last month over a flaw the company says is behind 12 deaths. U.S. investigators and regulators want to know what went wrong, who knew about it and why the nation’s largest automaker took so long to mount a recall of models made a decade ago.

Altman’s message, while by no means a directive to build unsafe vehicles, reflected the environment at GM: The cars were the product of a culture of cutting costs and squeezing suppliers, as described by five people with knowledge of the automaker’s engineering, management and suppliers in the decade preceding its 2009 bankruptcy.

GM began pressing its supplier and former parts division, Delphi Automotive Plc, to shave pennies off the price of every part to match what several of the people familiar with GM called the “China Cost” — a rock-bottom price pegged to cheap Chinese labor. If suppliers couldn’t match it, GM would threaten to outsource production overseas.

“It was a chaotic situation inside General Motors back then,” said Maryann Keller, a veteran auto analyst who has written two books on the company. “It was a company suffering from falling margins and desperate to lower costs. So engineers and parts suppliers were under extreme pressure to do whatever they could to take costs out.”

In that environment, basic components could take low priority, such as the ignition switch that GM sourced for Ions, Cobalts and other models. The right to manufacture the switch had been won by Eaton Corp., according to documents from a wrongful-death lawsuit filed against GM. Delphi bought Eaton’s switch division in 2001. Eaton was formerly based in Cleveland but now is headquartered in Dublin, Ireland.

The switch would cost “as little as $2 to $5 to produce,” Delphi’s current chief executive officer told analysts at a dinner this month, according to a JPMorgan Chase & Co. report on March 11.

“We’re continuing to cooperate with GM on reaching an expedited solution,” Claudia Tapia, a Delphi spokeswoman, said in an e-mail. She declined to discuss Delphi’s relationship with GM during the development and production of the Ion and Cobalt.

Inside that simple part was a spring loose enough to allow the ignition to switch out of the “on” position when bumped, a risk that would grow if the key was weighted by a heavy ring, GM has said. The turned key would then shut off the engine and power steering and disable the air bags.

The fatal flaw in the ignition switch, which GM now says its engineers discovered in 2001 while developing the Ion, has spurred the automaker’s biggest crisis since its 2009 bankruptcy and bailout.

GM declined to comment on any meetings involving Altman or make him available for comment.

The origins of the crisis engulfing GM go back 14 years. Back then, GM made most of its money selling big SUVs such as the Chevy Suburban and offering home mortgages through its GMAC lending arm, according to Keller. As the 1990s SUV boom faded, the company’s net income fell from $6 billion in 1999 to $601 million in 2001.

GM at the time produced small cars on the cheap to meet federal fuel-economy regulations. The company lost money on each one.

Building a compact car off a single global platform could have changed that. Stamping out millions of similar models would’ve created economies of scale to allow a profit on a $12,000 car.

GM’s plan was to develop its Ion, Cobalt and Opel Astra cars from the same mechanical platform. That called for GM’s European operations to lead development of the car jointly with Fiat, in which GM took 20 percent ownership in 2000. The effort ran aground over acrimony between GM and Fiat, which slowed the car’s development and endangered the U.S. operation’s deadline. GM and Fiat would eventually part ways through a bitter split that required the American automaker to pay $2 billion to exit the marriage in 2005.

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