GM's Blue Macaw finally takes flight GRAVATAI, Brazil - No one would blame Mark T. Hogan if he had no intention of attending the July 20 inaugural festivities for General Motors Corp.'s $554 million "Blue Macaw" small-car project, located here in Brazil's southern-most state of Rio Grande do Sul.

Surprising, perhaps, given that Mr. Hogan spearheaded the top-secret project back in 1997, when he was president of GM do Brasil. The goal was to build profitable small cars using supplier modules pre-assembled within a multi-manufacturing complex that functions as a single plant. But an ensuing flap with the United Auto Workers union over a similar North American strategy, dubbed "Yellowstone," left Mr. Hogan with a lasting disappointment, and ended up banning the word "module" from GM's vocabulary in the U.S.

In GM's rush to ensure that 1999 U.S. labor contract negotiations went smoothly, Mr. Hogan was muzzled from speaking about Yellowstone and eventually moved from his duties as GM vice president and general manager of the Small Car Group into a newly created job as chief of the automaker's budding online business, e-GM.

Yet, even as the plan to marry its suppliers was being scrapped in North America, it was being embraced by GM do Brasil. The subsidiary - now celebrating its 75th year - found its leading Chevrolet brand challenged by a sea of foreign automakers bringing to market small economical cars. Not only were top contenders Volkswagen AG, Fiat SpA and Ford Motor Co. closing in, but newcomers DaimlerChrysler AG, Toyota Motor Corp., Honda Motor Co. Ltd. and Renault SA soon would be making waves.

Volkswagen, Ford, DaimlerChrysler and numerous suppliers also were looking to Brazil as a proving ground for new, innovative manufacturing methods.

Unlike Yellowstone, the Blue Macaw project prevailed. This, despite political wrangling over millions in financial incentives promised and then temporarily withdrawn; torrential rains that set construction back by six months; and an unexpected devaluation of Brazil's currency in January 1999, causing the region's economic collapse.

As GM Chairman John F. Smith Jr. ruefully admits, things in Brazil "never work quite like you want." Indeed, the bottom dropped out of the Brazilian car market as construction of the Gravatai plant finally got under way. In pre-crisis 1998, Brazil produced 1.6 million vehicles and sold 1.1 million, following record levels set in 1996 and 1997 when some 2 million cars were built and sold.

"When this project was projected, we were looking at an industry of 2.5 million units," says Frederick Henderson, former president of GM do Brasil and newly named director of GM Latin America, South Africa and Middle East. "We didn't see the devaluation."

After 18 months of hard times, the industry this year has churned out about 25% more vehicles in the first half compared to the same period last year, convincing industry officials the worst is over. With the government slashing interest rates and the economy poised to grow 4% this year, Brazilians bought 610,000 cars in the first six months. Output rose 24%, hitting 800,000 units in the period, helped by a buoyant export market. Mr. Henderson optimistically forecasts sales of 1.5 million units by year's end.

While market pressure forced GM to make a few changes in its Blue Macaw plans, Robert Tinoco, overall director of operations, says the concept is the same. The key to efficient mass production, Mr. Hogan had reasoned, was to create an automotive complex where suppliers would invest in their own plants to build customized modules and deliver them in just-in-time sequence to the final assembly line - eliminating needless inventory and a costly delivery infrastructure.

GM in Brazil minimized its investment by requiring suppliers to share the costs and risks at the Gravatai complex. The Tier 1 companies invested $117 million to set up individual plants, with a collective floor space of 807,300 sq.-ft (75,000 sq.-m). An employee cafeteria, security services and other facilities are shared. The government kicked in $77 million in incentives for the project, leaving GM with an investment of $360 million, far less than comparable plant expenditures.

UAW members in the U.S. worry that supplier-built modules will eliminate jobs. But in Brazil, where the 16 onsite suppliers are turning out everything from interior cockpits to front and rear suspensions with state-of-the-art technology, more than 4,000 jobs will be created.

While 2,100 employees now build 20,000 Corsa-based 1L Celta subcompacts at the 860,000 sq.-ft (80,000 sq.-m) plant, the ramp up next year to 120,000 units will call for potentially doubling the workforce between GM and its suppliers.

Mr. Tinoco says annual capacity eventually could stretch to 160,000, much of that for export to Asia, Eastern Europe and South America. While most automakers see annual production rates of 30 to 50 vehicles per worker, GM is aiming for more than 100 - the same productivity goal set for the erstwhile Yellowstone project.

At the time Mr. Hogan's Blue Macaw idea was taking shape, GM's ultimate small-car strategy - Saturn Corp. - was being hailed as a success. But the multi-billion dollar operation eventually was credited more for its innovative retailing and marketing rather than its manufacturing technology. GM-Brazil, nevertheless, borrowed from lessons learned at Saturn, combining them with successes at its new ultra-efficient plants in Eisenach, Germany; Rosario, Argentina; Thailand, China and Poland.

"We applied everything we learned in terms of technology, work teams and efficiency of processes to optimize the product quality and minimize the cost," say Jose Carlos do Pinheiro Neto, vice president of GM do Brasil. GM also learned from VW's more radical approach at its commercial truck plant in Resende, Brazil, where suppliers attach modules built up in the factory to vehicles on the assembly line. Although it has been praised for its innovation, Resende has been criticized for failing to clearly define the suppliers' role and responsibilities.

GM's Gravatai assembly plant is laid out in a "T" shape. The adjacent stamping plant, paint shop, quality control, testing ground and shipping area are grouped for one-piece flow. The separate shops are connected via enclosed conveyer lines. Body-in-white shells, for example, are elevated to a second-floor and conveyed to a separate building for painting. They are then returned to the assembly plant where they are mated to their chassis. The plant uses 120 robots, the majority of which are in the body shop. There are 17 quality gates.

Lear Corp., which makes the seat systems, headliners and door trim, is the only supplier to be assigned its own 8,000-sq.-ft. (743-sq.-m) subassembly area within the plant - which GM calls an experiment. Here, door locks, windows and other components are installed. Car doors are removed after the car body leaves the paint shop and then are reattached as the vehicle nears assembly completion.

Other suppliers, such as Delphi Automotive Systems Inc., Arvin Meritor Inc., Goodyear Tire & Rubber Co. and Valeo SA, are capable of delivering component modules on special transport dollies every 20 minutes, using strategic entry locations to the production line. In all, supplier modules make up 85% of the final value of each Celta. There are 14 imported parts used on the car, which GM hopes to reduce. As is, the supplier team represents 60% fewer suppliers and 50% fewer parts than would be necessary in a traditional manufacturing system.

More savings will be seen in three years when GM begins to co-manufacture powertrains and transmissions with Fiat, its new strategic alliance partner in which it holds a 20% stake. Fiat, ironically, builds Celta's No.1 competitor, the Fiat Uno. GM says 1L engines have a 60% market share in Brazil. In the future, it says, its joint venture with Fiat will build a family of engines.

While some automakers such as VW, Ford and DC already incorporate modular assembly into their South American operations, GM is breaking new ground in another way. "What is different is that we have created much deeper bonds here," says Sten Sorensen, president of VDO do Brasil Ltd.

VDO, recently purchased by Siemens AG, is a major supplier in the project, with an investment of about $28 million to build cockpit modules and instrument panels for the Celta. The company was able to design the cockpit from the car's inception and is overseeing designs by other component makers to meet the Celta's specific needs. Mr. Sorensen describes VDO's role in the operation as a "systems integrator."

Calling what's happening at Gravatai a "silent revolution," he says it's truly a win-win situation. "You want enthusiasm from your end customers," he says of automakers. "But in this case, you also have enthusiasm from the suppliers. It means breaking paradigms. I'm surprised GM did it. It's a great breakthrough. It allows all sub-system suppliers to retain their own identity. This is important. Our plant here is a German plant, run by German culture."

Relying on suppliers to provide pre-assembled sections of the car, GM further plans to carry out a build-to-order system through the use of online customer ordering that will allow the automaker to greatly reduce manufacturing and inventory costs. Negotiations continue with the company's 475 Chevrolet dealers to allow customers to equip their Celta on the Internet beginning in September, when the car goes on sale, and take delivery at a showroom in as little as three days. The beauty of the Brazilian strategy is that Celta's low volume and manufacturing simplicity (it only has 20 variations, instead of thousands) allow for a learning lab from which GM can apply to other global operations.

The opportunity to explain the significance of this strategy to journalists attending the Gravatai ceremonies is what finally brought Mr. Hogan to Brazil. He says it has yet to be determined whether customers will be able to perform online ordering from home or at the dealership. Either way, the order will go directly to the manufacturer.

Mr. Hogan calls it a "launch and learn" philosophy. "Connecting with our customer one-on-one is the ultimate goal," he says. "Build-to-order is where we want to go. We're developing a holistic system here, which we'll learn from. It's the most important part of this project. With the click of a button, we've got a customer. Our job then is to get the car to the customer."

GM expects at least 80% of Celta sales to take place over the Internet. "Use of the Internet has exploded here," Mr. Henderson says, noting that although only 1% of Brazil's 165 million people use the Internet, 65% of middle class consumers are Web-savvy. "If we can reduce our distribution costs, the price of the Celta will be better," he says. "Celta is the perfect car to try this on because it has so little imported content. Plus the margin with our dealers is lower. They don't have to maintain inventory. We'll take that cost and manage it. We're going to try it and see how it works."

The important thing, Mr. Hogan says, is that if Blue Macaw succeeds here, it will become a blueprint for GM's future global operations. Despite prior conflicts with the UAW, Mr. Hogan says elements of the manufacturing operation will be incorporated into GM's new Cadillac Catera plant in Lansing, MI, and another new plant under construction in Russel-sheim, Germany, where the '02 Vectra will be built. "We're trying to adapt new models to co-design with suppliers up front," he says. "It's a key trend. Chrysler is well down the path. We're learning."

Beyond that, Mr. Smith says GM is establishing a major industry benchmark. "The assembly complex we are dedicating today is much more than just another plant; it is a major step forward in the way automobiles are built," he says at the inaugural ceremony. "Engineers, economists, business leaders and reporters from around the world will be watching closely what we do here at Gravatai." So will the UAW.