Detroit's Big Steeds Are Losing Traction
Karen Elkins wasn't even shopping for a new vehicle. But when she heard a radio ad for a new Ford Explorer from Texas Motors Ford in Ft. Worth offering a $1,500 rebate and cheap financing, she not only decided to buy one, she got the top-of-the-line Eddie Bauer edition.
Such deals are only likely to become sweeter if the annual Detroit Auto Show, set for Jan. 13 to 21, is any indication. Together, General Motors, Ford, DaimlerChrysler, and Toyota will send eight new models out into an already crowded field of midsize sport-utility vehicles. Indeed, Detroit's latest versions of America's must-have vehicle will include updates of all the industry's stars: a new model of Ford's best-selling Explorer and revamped offerings from General Motor's Chevy and GMC divisions, as well as new Jeeps from Chrysler.
Why the onslaught? Detroit's Big Three are still jockeying to cash in on one of their most profitable auto segments. Growing almost 10% annually for the past 10 years, sales of midsize SUVs account for 60% of the entire SUV market and have fueled much of the Big Three's earnings growth over the past decade.
Problem is, 2001 may well be a bust for Detroit. All the new models are coming just as a cooling economy and high gasoline prices are chilling demand for SUVs, particularly Detroit's mainstay midsize lines. In December, for instance, General Motors Corp. reported that truck sales are down 20%, and Ford Motor Co.'s truck sales fell 7%. Fat rebates are already needed to move many 2000 models off of crowded dealer lots. And after five years of steadily increasing incentive packages, it's likely that 2001 will bring even bigger deals.
That could mean a major squeeze on profits. Analysts expect Americans to buy about 16 million vehicles this year, down from a record 17.4 million in 2000. Of that, Comerica Bank's chief economist, David Littman, forecasts that truck and SUV sales will fall 10% this year, to just under 8 million vehicles. More worrisome: The 2 million-vehicle market for midsize SUVs is expected to be flat in 2001 even as auto makers add production capacity for an additional 300,000 units. "There will be a lot of pressure on margins," says Tom Davis, group vice-president for product development at GM.
Already, midsize SUVs are piling up on dealers' lots. At the end of November, Chevrolet dealers had 128 days' worth of trucks, vs. 87 days' of supply in late 1999. Ford Explorer inventories had grown to 70 days' supply by late 2000, up from 62 days' worth in 1999. "We aren't getting much activity on any new vehicles," says Elyria Ohio Chevrolet dealer Allan Spitzer. "We're making deals right from the start with whatever it takes."
To get the attention of consumers, auto makers have already had to hike incentives beyond current record levels. Last year, auto makers were selling midsize sport utilities at sticker prices of around $28,000, with an average discount of $3,000. That was up from $2,000 in 1999, according to CNW Marketing/Research in Bandon, Ore. But if competition gets brutal, it will be hard to resist expanding rebates even for its recent launches. "Manufacturers hate to put incentives on new vehicles," says Fort Worth (Tex.) Ford dealer Cliff Johnson. "But we might have to."
Publicly, at least, Detroit executives have a "What--me worry?" attitude. Many say that the new entries will generate buzz for all the carmakers involved. "The market will continue to grow," says Russ Clark, brand manager for the all-new Chevrolet TrailBlazer.
The stakes are high, particularly for Detroit's two biggest players, Ford and GM. For the first time, they will launch all-new offerings in the same year. GM will challenge the new Ford Explorer--and its related Mercury Mountaineer--with a redesigned family of truck-based SUVs that includes the Chevrolet Trailblazer, GMC Envoy, and Oldsmobile Bravada. At the high end, it will launch its more luxurious Buick Rendezvous next month.
GM is betting that such models will recoup market share and profits, which fell sharply in 2000. Its older, undersize Chevrolet Blazer and GMC Jimmy became also-rans behind the Explorer, Cherokee, and Grand Cherokee. "We have not had the competitive products we need," says Rick Spina, the vehicle line executive for GM's new sport-utes.
Now, GM will have entirely new SUV offerings at the low, mid, and high end. Their biggest selling point: larger bodies as well as a new six-cylinder engine. It puts out more power than Ford's competing V8 motor but with better fuel economy. "I'd be lying if I said these vehicles were anything but critical for us," Spina says.
Ford has much on the line, too. Its Explorer, long the best-selling SUV in the U.S., may have already run its best race. It has been tainted by the government investigation into 148 highway deaths in rollover accidents, most of which involved Explorers equipped with Bridgestone/Firestone tires. Sales fell more than 11% in the investigation's wake. Thanks to the new competition and the Firestone stigma, "Ford may have to launch the Explorer with incentives almost out of the gate," says Art Spinella, a vice-president at CMW.
Ford execs counter that the redesign will spur a rebound, since the new Explorer's wider wheel base makes it more stable. And Ford has replaced Bridgestone/Firestone as the SUV's tire supplier with Goodyear Tire & Rubber and Michelin. "The burden of proof is less on us than the Johnny-come-latelys," such as the Toyota and Jeep offerings, says James C. Schroer, Ford's vice-president for global marketing.
DaimlerChrysler will also elbow for market share. Its top American execs have fled the company, and German management has thus far failed to stem mounting losses. One big reason: Sales of its Jeep family of SUVs fell 10% in 2000 as its aging models lost out to new offerings from Ford and foreign carmakers.
Now, Chrysler is counting on its new Liberty model to reverse that trend. It is designed with bolder styling and a smoother ride than the 3-year-old Cherokee it replaces. Banking on strong demand, Chrysler has ambitious plans to build 80,000 Liberties in the first year and up to 130,000 thereafter.
As if domestic competition weren't enough, foreign SUV makers are also angling for a bigger slice of the pie. Toyota Motor Co.'s new Highlander--a lower-priced version of its top-shelf Lexus RX 300 SUV--will sell for under $30,000, one of the lowest prices for a midsize SUV. Designed around the chassis of the Camry sedan, it offers a smoother ride than Detroit's truck-based SUVs. Toyota "is absolutely a threat," says GM's Spina.
That may be so, but Toyota isn't nearly as optimistic as Detroit is. It expects to sell just 70,000 units this year and 100,000 a year after that--about two-thirds the sales of Jeep Cherokees. What's more, Toyota figures the Highlander will cut into sales of its 4Runner, the fifth-best-selling midsize SUV in the U.S. "Our volume plan is fairly modest," concedes Steven Sturm, Toyota Div.'s vice-president for marketing.
With so many new models competing for attention, that may be the wisest course. "The new-product effect won't generate as much buzz because consumers will be bombarded with rebate and discount ads," says Susan Jacobs, president of Jacobs & Associates, an automotive-marketing research firm in Rutherford, N.J. If that's so, Detroit's latest race may boast particularly sore losers.