DETROIT -(Dow Jones)- Building small cars in the U.S. has generally been a money-losing venture for General Motors Corp. (GM)

But now the auto maker believes it has found the formula to turn a profit on compact cars, even if those cars are built by union labor in a traditional Rust Belt town.

GM on Thursday will announce a major investment in its Lordstown, Ohio, assembly plant designed to ready the factory for a next-generation compact car: the Chevrolet Cruze.

Mired in red ink and faced with sinking sales of profitable pickup trucks and sport-utility vehicles amid high fuel prices, the auto maker can no long afford to concede losses on small cars.

“Small cars are becoming a permanent feature of the U.S. market, and the odds of earning a decent return have gone up” for domestic auto makers, said auto analyst John Casesa, managing partner of Casesa Shapiro Group. “The window of opportunity for GM is now.”

The Cruze will be built on a single platform around the world, leveraging economies of scale.

Meantime, factory workers building the car will be working under a new labor deal that was inked last year with United Auto Workers and is expected to save GM roughly $5 billion a year in wages and benefits. The Ann Arbor-based Center for Automotive Research estimates the new contract will cut GM’s average cost of building a car or truck by $4,000 to $5,000 per vehicle by creating a second tier of lower-paid factory workers and offloading retiree medical benefits to the union.

GM is counting on one more critical - but still uncertain - element to turn small cars into money makers, which is that consumers will ante up thousands of dollars more for a new small Chevy.

The auto maker believes growing demand for nicer, well-equipped small cars coupled with a dramatic redesign for the Cruze will be enough to command sticker prices well beyond the $15,000 base price of a compact Chevrolet Cobalt.

GM’s cars typically sell for less than $20,000, or about half the price of many trucks and SUVs. While the bigger vehicles cost more to develop and build, profit margins on trucks are still far bigger than on cars.

GM is likely losing hundreds of dollars on each compact Chevrolet Cobalt it sells in the U.S., while the auto maker’s trucks deliver thousands of dollars in net profits, said David Cole, chairman of the Center for Automotive Research.

Deep production cuts also will help the auto maker run its factories at full capacity, further eliminating waste, he said.

“What they are enabling is a business model they have not had in years,” he said. “They’re going to be profitable across their entire product line.”

“This car will represent the first U.S. application of our global architecture strategy,” GM Chief Executive Rick Wagoner said of the Cruze in June, when he laid out a plan to build fewer trucks and ramp up production of small and midsize cars. “This strategy will pay major dividends as we leverage our extensive car product development capability in Europe, Korea, and other locations to accelerate the shift in our U.S. product portfolio.”

Ford Motor Co. (F) is attempting the same global platform approach with the introduction of its new subcompact Ford Fiesta vehicles, due to hit the U.S. in 2010. The Fiesta is already on sale in Europe.

Americans stunned by record gas prices have begun clamoring for fuel-efficient small cars, and major auto makers are struggling to meet demand.

Small car sales were up 11% through July, while overall U.S. auto sales were down 11%. GM is adding a third shift at the Lordstown factory to meet demand for the Cobalt, which is currently built there. Ford, Toyota Motor Corp.(TM) and Honda Motor Co. (HMC) also are scrambling to meet soaring demand for cars like the Ford Focus, Honda Civic and Toyota Corolla.

“The small car was never aspirational until three months ago, and with that change comes that opportunity to potentially make money on small cars,” said analyst Rebecca Lindland of Global Insight Inc.

To succeed, she said, GM must fight the perception that its cars are subpar compared to offerings from Toyota and Honda.

“They continue to suffer from the perception that they don’t make a quality vehicle,” she said.

- By Sharon Terlep, Dow Jones Newswires; 248-204-5532; sharon.terlep@ dowjones.com.

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DETROIT (Reuters) - General Motors Corp on Tuesday said it was extending a warranty offer on certified used cars and trucks, citing gains in quality and a drop in warranty-funded repairs.

GM said it would begin offering a 12-month, 12,000-mile “bumper-to-bumper” warranty on all used cars and trucks certified as eligible for the repair coverage by participating GM dealers.

The change, which takes effect on September 13, extends the term of the GM warranty on late model used cars in good condition by an additional 9 months and 9,000 miles.

The move comes a day after GM announced it was rolling out a sweeping new discount program on new cars and trucks that will offer employee-level pricing for any buyer.

U.S. automakers, including GM, have long argued that improvements in the quality of their vehicles have not been fully recognized by American consumers.

In response, all three Detroit-based automakers have rolled out more generous warranties over the past several years in a bid to raise consumer confidence.

GM’s sales of new cars and trucks have dropped 18 percent so far this year, pushing its dealers to rely more heavily on sales of used cars, which typically carry higher margins.

“This is a clear indication of the confidence in the quality and value of our cars and trucks,” Brian McVeigh, GM’s manager of fleet and commercial operations, said in a statement about the revamped warranty offer.

GM has seen a drop of 40 percent in warranty-funded repairs over the past two years and a decline of 14 percent this year alone, Jamie Hresko, the automaker’s vice president of quality, told reporters and analysts.

GM said it expected that the new warranty offer, which can be transferred to subsequent buyers, would support resale values for GM vehicles but declined to provide a target.

Auto brands with higher resale values are able to command higher prices on new car sales, a key advantage in profitability for Japanese automakers like Honda Motor Co and Toyota Motor Corp in the U.S. market.

A year ago, Chrysler LLC began offering a “lifetime” warranty on the powertrain on almost all of its new vehicles to address a longtime concern of dealers.

In February 2007, GM extended a five-year, 100,000-mile powertrain warranty to its certified used cars, the same offer that the automaker extends on new car sales.

That portion of the GM warranty remains unchanged.

In addition, the “bumper-to-bumper” portion of the GM warranty will now run for 12 months or 12,000 miles of additional driving from the time of purchase. The warranty covers all repairs due to defects but excludes items like tires and brake pads that suffer normal wear and tear.

The new GM warranty terms apply to Chevrolet, GMC, Buick, Pontiac and Saturn certified used vehicles. The automaker’s upscale Saab, Hummer and Cadillac brands carry a longer 6-year, 100,000-mile warranty that remains unchanged.