Ford and GM finally get their act together

NEW YORK (Fortune) -- This year's Detroit auto show is notable for its lack of pizzazz. On a day when an inch of snow snarled traffic throughout the metro area, the show itself seemed muffled by the precipitation. Hard to find this day were the made-for-TV unveilings of new models, extravagant and fanciful concept cart reveals, or exciting new models.

The lack of hoopla, which so dominated news coverage in the past, has allowed subtler -- and perhaps more significant - stories to emerge. A big one is changes in the way new models are engineered. Process changes at Ford and new bookkeeping at General Motors mean that small cars will be able generate a profit for these companies for the first time in decades.

At Ford, the new darling of the U.S. auto industry, product development chief Derrick Kuzak revealed that Ford's new Global Production System has enabled it to shave eight to 14 months off the time needed to develop a new model and get it to production.

One trick: reducing the number of running prototypes it builds for testing by half. That enables Ford to get a new model to market in well under three years. The means less work for engineers, and it allows the company to get closer to the needs and desires of its customers.

The production system wasn't developed at Ford (F, Fortune 500) but adapted from Mazda, Ford's Japanese partner. Input on computer engineering came from Volvo and on data management from Ford itself.

Accompanying that acceleration in speed is a reduction in engineering effort. Ford has been able to cut its engineering forces by double digits by working globally, reducing complexity, and sharply cutting the number of variations to uses in identical parts. For instance, according to Kuzak, the contours in every Ford seat are now the same, whether the car is a Fiesta or a Taurus. That enables seat suppliers to commonize designs and parts.

Ford is also benchmarking other manufacturers to make sure it doesn't offer more choices in exterior colors or interior fabrics than competitors -- another time and cost saver.

In a "why didn't they think of this before" idea, Kuzak says Ford now makes better use of engineers' time by reducing the number of meetings they attend. "We're giving time back to the engineers," he says.

The result of this, Kuzak concluded, is a 60% reduction in product development cost in the past three years. Ford intends to plow the savings back into its portfolio by adding new models to its product line. One example: the Focus C-Max, a seven- passenger people-mover, which is due in 2011.

Over at GM, Mark Reuss, the new head of North American operations, revealed the surprising news that GM expects to make money on the latest version of the Chevy Aveo subcompact.

Profits on small cars have been hard to come by because pricing flexibility is limited, and manufacturers often have to discount them so that they can sell more and meet fuel economy rules. They have been consistent money losers at GM

But Reuss said GM has reevaluated every cost item in the Aveo -- from what suppliers spent, to the expense of logistics -- all to the penny for everything that is spent on the car.

Reuss also conceded that GM got a big reduction in its structural and labor costs by going through bankruptcy last year. As debt was scrubbed from its balance sheet, so was the need to make interest payments. Costs like that used to make big inroads on the potential profit of every vehicle.

Armed with lower costs, GM will be going head to head with Ford and its improved processes, and the always-efficient Japanese and Korean manufacturers. The battles begin this year, as GM's new Aveo and Chevy Cruze go up against Ford's Fiesta and Focus.

These cars will become a more significant part of the competitive equation as time passes, since demand is expected to grow as gas prices inevitably rise. Watch out for intense hand-to-hand combat as they vie for market superiority.