How Slumping Market for SUVs Is Hurting Detroit's Bottom Line by Neal Boudette and Joseph B. White, Wall Street Journal, May 13, 2005
A big problem for General Motors Corp. and Ford Motor Co. as they struggle with falling sales and profits is the rapidly bursting bubble for highly profitable sport-utility vehicles. But just howbad is the damage? An unpublished study from the University of Michigan Transportation Research Institute estimates that profits of large and midsize SUVs for GM, Ford and DaimlerChrysler AG's Chrysler Group dropped 40%, or almost $7 billion, from 2001 to the end of last year. The figure tracks the steady decline of the once-booming market for SUVs, which carried the U.S. auto giants for much of the 1990s and into the start of this decade. The study provides rare insight into how badly SUV profits have been curbed in recent years. Because the auto makers don't break out profit and sales by model line or segment, the precise impact of the SUV slump has been hard to gauge. Making up that lost ground is a major challenge for Detroit's auto companies. Industry analysts widely believe that GM and Ford make money only from SUVs, full-size pickup trucks and a few luxury cars - while sustaining losses on everything else. Yesterday, at Ford's annual shareholder meeting, Chairman and Chief Executive William C. Ford Jr. said SUV sales are falling even faster than the company previously anticipated. "Our margins are higher on our SUVs than on our cars and on our crossovers, and that lowered our profits" in the first quarter, Mr. Ford said. The drop in SUV profits has come at a time when Ford and GM already are wrestling with high health-care costs, surging foreign competition and the recent move by Standard & Poor's downgrading their credit ratings to "junk" status. Yesterday, Moody's Investors Service downgraded Ford's credit rating to its lowest investment-grade level, citing lower profit expectations and sinking market share. Several factors are hurting SUVs. Consumer appetite for large, gas-guzzling SUVs like the Chevrolet Suburban and GMC Yukon has dropped as U.S. gas prices have surged to more than $2 a gallon. But even before the latest gas price surge, sales of crossover utility vehicles - smoother-riding,lighter-weight SUVs, such as the Lexus RX 330 - were making gains as traditional SUVs were beginning to stall. Customers liked the combination crossovers offered: SUV cargo room and uphigh seating with a softer ride and nimbler, carlike handling. Between 2001 and 2004, the Michigan study estimates, sales volumes for big SUVs dropped nearly 9%. To keep SUV sales up, auto makers have offered steep discounts and other sales incentives. But those breaks have cut into the profit per vehicle. As a result, the typical profit margin on an SUV like GM's Chevrolet Suburban has dropped by about a third in the last four years, the University of Michigan estimates. In 2001, the study found, the per-vehicle profit was about $9,500. Today, thanks mostly to big discounts, the margin on such vehicles is about $6,300. On midsize SUVs, such as the Ford Explorer and Chevrolet TrailBlazer, margins are down even more steeply, to $4,100 from $7,200. With the decline in SUV profits, GM and Ford's "whole profit structure has been lowered," says Walter McManus, an analyst at the institute. "They are in a bad competitive position. Things are much worse for them now than in 2001." Mr. McManus developed his profit model from industry sales figures, publicly available incentive data and profit-margin estimates developed from talks with industry executives and Wall Street analysts. The estimates don't take into account the bottom-line impact of fixed costs such as development, capital equipment, health care and pensions. Jerry Dubrowski, a GM spokesman, acknowledges the car maker has seen declines in its SUV margins, but says the institute's estimates are "more than a little low," compared with GM's actual variable profits - that is, the price the manufacturer gets for a car minus the cost of the parts and labor. GM's bottom line, he adds, has been hurt mostly by lower sales of SUVs, not shrinking profit margins on these vehicles. Until recently, SUVs were widely seen as Detroit's saviors. After the oil crunch and surging foreign competition of the 1970s and early 1980s, the popularity of SUVs enabled the auto makers to develop a business model similar to those of big Hollywood studios. Traditional SUVs - which essentially are big wagons built on a truck frame - became Detroit's blockbusters, piling up more than enough profits to offset the money auto makers lost on duds and also-rans. But their success also deferred a day of reckoning with competitive deficits that have dogged the big, unionized U.S. auto makers for more than two decades. While SUVs have surged, Detroit's small and midsize cars have stayed at best minimally profitable, in part because customers perceive them as lagging behind Japanese autos in quality and durability. GM and Ford factories also have long lagged behind the best rival Japanese factories in productivity. Meanwhile, the companies pay more per vehicle than their foreign rivals, because of the high costs of their North American work forces. Now the two auto giants are under enormous pressure to find a way to rebuild SUV profits or quickly develop models in other segments that can replace the margins they once enjoyed on SUVs. GM and Ford have mapped out starkly different plans for recovery. Ford's plan depends on breaking away from the Hollywood blockbuster business mode. To offset lower SUV margins, the company hopes to cut its development costs enough to make respectable profits on a new generation of cars and crossovers. The company concluded a few years ago that demand for truck-based SUVs had peaked. "We couldn't have everything riding on just a few products," Mr. Ford said in a recent conference call with reporters. "We had to change our cost structure so that we didn't lose money on the smaller [vehicles].... The overall blend, when you add up the total Ford lineup, should deliver us very good profitability." By contrast, GM is betting SUV sales will rebound next year. The company recently delayed work on a line of rear-wheel-drive cars. Instead said it will divert engineers and money to speeding up the launch early next year of redesigned versions of its largest SUVs. GM officials say these new versions of the Suburban and Yukon will offer improved gas mileage and a less truck-like ride. In a recent interview, GM Chairman and CEO G. Richard Wagoner acknowledged the SUV segment won't grow as fast as it did in the past. But he said GM expects demand to remain fairly strong, despite higher fuel prices. Buyers of GM's large SUVs, he said, tend to have higher incomes and these people "don't indicate that at current levels of gasoline prices they are going to significantly change their behavior." A GM spokesman said yesterday that the company also plans to launch 14 new crossover models between now and the 2009 model year. Complicating the challenge for GM and Ford: The growing crossover market, which is almost as large as the traditional SUV market, is dominated by Japanese and European auto makers. As those companies saw Detroit raking in profits with SUVs, they had no fast way to get in on the action, because they lacked high-volume truck-making operations in the U.S. Instead, companies like Honda and BMW AG, built SUVs on the foundations of the cars or minivans they already made. Honda's successful Acura MDX crossover is derived from the company's Odyssey minivan, for example. Because they don't have the heavy steel frame of truck-based SUVs, crossovers tend to ride more comfortably and get better gas mileage. Meanwhile, crossover vehicles like the Honda Pilot or Toyota's Highlander and Lexus RX330 and Nissan Motor Corp.'s Murano are selling well with far smaller rebates than Detroit's SUVs. Write to Neal Boudette at [EMAIL PROTECTED] and Joseph B. White at [EMAIL PROTECTED] -----Original Message----- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] Behalf Of Christoph Reuss Sent: Monday, July 18, 2005 9:34 PM To: [email protected] Subject: RE: [Futurework] some really big questions Harry Pollard wrote: > The car industry doesn't "prefer" to sell "12-20 mpg rolling > fortresses because they (and their buddies in the oil > industry) can make much higher profits that way." > > It can sell only what people want - otherwise they go broke. On the contrary... the profit margin for SUVs is up to $15,000 per car, compared to a few hundred bucks for a "normal" car. So much money for such cheapo and unsafe trash. That's why all car manufacturers jumped on the SUV bandwagon -- not to go broke! (Market competition, you know.) There are even Porsche SUVs -- basically an oxymoron, one would have thought. > It's called the market. Yeah, eh. Guess what's the purpose of advertising ? Image is everything. Lemmings buy what the ads are pushing. > As gas prices rise, the consumer is beginning to look > askance at the behemoths. So, the car industry will have to > sell smaller or more economical cars. The SUV arms race on the roads will prevent that. A few SUVs on the roads are enough -- and people will grab for the ever-bigger calibres of rolling fortresses, for fear of being crushed. As for gas prices, the empire will see to it that they won't rise too much. That's what all the fuss since Gulf War I is about. Chris ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SpamWall: Mail to this addy is deleted unread unless it contains the keyword "igve". _______________________________________________ Futurework mailing list [email protected] http://fes.uwaterloo.ca/mailman/listinfo/futurework _______________________________________________ Futurework mailing list [email protected] http://fes.uwaterloo.ca/mailman/listinfo/futurework
