GM Picks Up Speed

With truck sales accelerating, has the carmaker stopped its slide?

When it came time for Long Island bond trader Tom Fumai to get a new sport-utility vehicle last October, he had every intention of buying another Ford Expedition. But after comparing its performance, size, and styling with those of the new GMC Yukon XL introduced last year, Fumai, 39, didn't hesitate to ditch his loyalty to Ford. Says Fumai: "The Expedition is too small, and I like the styling on the GMC."

Score that as one big and surprising turnaround for GM. For most of the 1990s, Ford Motor Co. (F ) dominated the market for big pickups and SUVs, while GM (GM ), busy blowing cash to revamp its aging car line, remained a perennial also-ran. But thanks to improved styling, the freshest products on the market, and aggressive pricing, the No. 1 auto maker has already grabbed the lead in full-size SUVs and pickups. Now, it's out to beat a suddenly vulnerable Ford in Detroit's largest market: midsize SUVs, long ruled by Ford's popular Explorer.

More than bragging rights are at stake. Pickups and SUVs are Detroit's cash cow. While they account for 40% of total sales, they have been racking up 90% of profits. What's more, gaining the edge in trucks might halt GM's long market-share slide and may even prevent what had seemed a foregone conclusion: that Ford would replace it as the world's biggest auto maker. "We will hold or gain market share this year," says William J. Lovejoy, GM's group vice-president for vehicle sales, service, and marketing in North America. "These are the products we can do it with."

Of course, the tricky part for GM will be to maintain profitability as the market toughens. Many of GM's new truck models are coming to market just as the souring economy, slowing SUV sales, soaring gas prices, and an increasingly crowded field are all taking a toll on once-rich truck profits.

So far, Wall Street seems happy just to get good news from GM. Thanks to its popular new Chevy Tahoe, it is surging in full-size SUVs, where profits are $10,000 to $15,000 per vehicle. That has helped send the stock up 16% this year, to about 58. Ford is up just 4%, to around 24. Many analysts are raising their earnings estimates despite the slowing economy and GM's weak car business. According to First Call, analysts now think GM can earn $2.1 billion for 2001, up from a projected $1.7 billion in March. "Ford was the low-risk auto stock," says Stephen Girsky, an analyst at Morgan Stanley Dean Witter. "Now that GM is moving forward, that's not so clear."

How has CEO Rick Wagoner managed to turn things around? Basically, by improving everything. GM's Chevy Silverado pickup and its big SUVs--the Chevy Tahoe and Suburban, GMC Yukon, and Cadillac Escalade--all have more power than the old ones, plus better fuel economy. They're also more comfortable, with plusher seats and a softer ride than the competitors. Plus, GM's two-year-old trucks look more modern than the designs of Ford's five-year-old SUVs. Concedes Ford Market Analyst George Pipas: "We're not the newest kid on the block anymore."

But that doesn't tell the whole story. Aside from GM, only Ford, DaimlerChrysler (DCX ), and Toyota (TM ) have vehicles in the large-SUV segment. And while Toyota Motor Corp.'s new Sequoia full-size SUV is coming on strong, its sales volumes are only a modest 100,000 a year, vs. more than 400,000 a year sold by GM. Ford won't have a new Expedition until early 2002, and Chrysler won't launch its new Dodge Durango full-size SUV until 2003.

That window has boosted GM's sales. Through May, its stake in the full-size SUV market jumped to 51.5%, while Ford's and Daimler's fell to 26% and 14%, respectively. And for the first time since 1994, GM has grabbed the lead in big-pickup sales from ex-segment leader Ford. Now, GM has 41.5% of the big-pickup market, vs. Ford's 38.4% stake.

But the hardest part of GM's Detroit Triple Crown is now unfolding. It aims to take the lead in the biggest and most competitive part the truck segment: midsize SUVs. So far, GM has spent $1.5 billion redesigning its midsize offerings--the Chevrolet Trailblazer, GMC Envoy, and Oldsmobile Bravada--which were launched three months ago. Taking a page from its success in full-size SUVs, GM's engineers came up with an all-new six-cylinder motor that delivers more power and better mileage than its predecessor. And, taking direct aim at the market leader, the Ford Explorer, GM engineers made their midsize engine more powerful than the Explorer's.

Surprisingly, GM, which has long been known for bland design, is also gaining points for style. Its new midsize suvs have stronger outlines, and their interiors, which had been smaller, are now the same size as the Explorer's. "GM's new SUVs come across as leading-edge and contemporary," says Christopher Cedergren, an analyst at Nextrend Inc. in Thousand Oaks, Calif. "The Explorer looks dated."

For now, GM is gaining on its Detroit rivals even without adding share. Its piece of the midsize market has held roughly steady at 20% since 1998, while Ford has slipped 5 percentage points, to 26, and Chrysler has dropped 2.5 percentage points, to 25%.

FOREIGN RIVALS. Of course, it would be surprising if GM didn't gain at their expense. Chrysler continues to lose sales. High prices have caused its midsize Grand Cherokee, launched two years ago, to flop. And the lower-grade Cherokee is being phased out in favor of the compact Jeep Liberty, which is new this year. As for Ford, its Explorer has gone from crisis to crisis. With the brand name already under a cloud because of rollover woes associated with Bridgestone/Firestone tires, the new Explorer has been recalled twice since its January launch. That has hurt sales: They're down 21% since the start of the year, vs. sales of the old model for the same period last year. Says Saul Rubin, an analyst at UBS Warburg: "With the Explorer reeling, there could be a swing to GM."

GM is counting on that. It has added 70,000 units of plant capacity to the 380,000 units for its old SUV models. If GM hits those targets, its midsize sales will match last year's record Explorer sales of 445,000. That would move GM close to the top spot in midsize SUVs this year. If sales continue to rise, it could take the lead in 2002.

Still, GM hardly has the field to itself. The biggest move in the segment may come from foreign rivals such as Toyota and Honda Motor Co. (HMC ) Largely on the strength of the new Highlander it launched early this year, Toyota's share in midsize SUVs has jumped from 10% in 1998 to 15% this year. And Honda has a midsize sport ute coming next year that is expected to be a big draw.

Elsewhere, too, competition is heating up. Overall, there are 56 SUVs on the market, vs. 45 last year. And they're all chasing a shrinking market. SUV sales grew just 9% this year and last, vs. sizzling growth rates of at least 15% from 1997 to 1999. "It's more of a crap shoot that we'll gain share," says Rick Spina, assistant vehicle line executive for GM's new midsize sport utes.

It's also more of a crap shoot that profitability can hold up. Auto makers have been forced to raise the average rebate for midsize SUVs, to $2,500 per vehicle, up from $2,000 as late as November. Such moves have shaved the average truck profit by 10%, to about $5,000 per vehicle. And it's likely to fall further. In early June, GM and Ford both slapped additional discounts on fullsize SUVs and pickups

That's why GM's rise to King of the Truckmakers may end up a less than fulfilling victory. Sure, as Warburg's Rubin says, trucks and SUVs "will still be the most profitable for some time to come." But considering the cost of buyer incentives and rising competition, the payoff for owning that segment may be a lot less than it's cracked up to be.

By David Welch, with Kathleen Kerwin, in Detroit

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