What GM’s Downsizing Means for Drivers

The automaker foresees more costly gas—but better cars await.


If General Motors is getting small, something big must be happening.

GM's announcement today that it will close four SUV and pickup-truck plants—and possibly stop building Hummers—is a startling turnaround for Detroit's biggest automaker. The car companies routinely speed up or slow down assembly lines to tweak the mix of big and small vehicles consumers seem to be most interested in. But shutting down several production lines, and possibly killing off an iconic brand, signal a long-term retrenchment.

It's obvious why: With gas prices cresting $4 in much of the country, nobody wants to buy the kinds of big vehicles that have been GM's mainstay. But there are even deeper implications behind the automaker's move. Some of them:

$5 gas. The biggest question among drivers and automakers alike is what will happen to gas prices. GM seems to be betting that they'll continue to go up, which many analysts believe. Goldman Sachs has predicted that oil prices, now around $125 a barrel, could hit $200 a barrel by 2010. That could lead to gas costing $5 a gallon—and maybe even $6. If that happens, demand for large vehicles obviously will get even weaker. That seems to be the scenario GM is hedging against.

Fading profits. When gas was cheap, GM and its competitors made profits of $15,000 per vehicle, or more, on some of their biggest trucks and SUVs. That cash cow has been put out to pasture. The profit margins on smaller cars are much lower—and some small cars are actually loss leaders that produce no profits at all. Even Honda and Toyota will feel the sting, since they too produce trucks and large SUVs that have become much harder to sell.

Speedier breakthroughs. The costlier gas gets, the stronger the incentive for other kinds of fuel. While announcing its truck cutbacks, GM also affirmed plans to build the Chevrolet Volt, an electric plug-in vehicle that could get the equivalent of 50 miles per gallon or more and run on power from the electrical grid, which would be much cheaper than $4 or $5 gasoline. Skeptics have argued that GM's plans to sell a commercially viable plug-in by 2010 are unrealistic. But Toyota and Nissan have now joined the race to field some kind of plug-in by 2010, and GM's move away from big vehicles could intensify the competition. That's the best way to foster breakthroughs.

Big shifts by other automakers. GM is a wounded giant, but it's still the biggest automaker in the United States, with the heft to change the market. All the automakers are curtailing their big-car lineups, while focusing on smaller crossovers and sedans. But now they may have to accelerate their own shifting plans. The plants GM is closing produce 700,000 vehicles, about 40 percent of the company's output. GM will offset some of the lost production by ramping up output of smaller cars, which will significantly change the kinds of vehicles available to buyers. Like GM, Ford and Chrysler have been overreliant upon large vehicles that are now stacking up on dealer lots. Since GM is their top competitor, they'll have to keep pace.

Better cars. It may take a few years, but as the automakers invest their engineering talent in more efficient cars and new technologies—rather than "horsepower wars," the competitive mantra of the past dozen years—the payoff will be cars that do more and require less fuel. It will be a painful transition for drivers and car companies alike. But the car you drive 10 years from now might just be a prototype for the gas-free automobile.