Steering Away From Guzzlers
Jung Chai, 38, was appalled by the $50 it sometimes cost to fill the tank of her 2000 Ford Expedition -- and the pollution spewed by the jumbo SUV. So in February, the Lake Forest (Ill.) mother of three traded it in for a Ford Freestar minivan. While hardly a gas-sipper at 19 miles per gallon, it gave Chai a 25% improvement in mileage and plenty of seating for car-pooling. Now her husband, Nelson, 38, a financial officer for an e-trading company, is following suit: He's swapping his Isuzu Trooper compact SUV for a 55-mpg Toyota Prius gas-electric hybrid. "I look at gas prices now, and I just laugh," says the stay-at-home mom. "I'm very happy I made the switch."
Chai's reaction may be more dramatic than most, but rising prices at the pump are starting to make some Americans think twice before buying a gas-sucking behemoth. Sales of big SUVs took a beating in April, and as truck inventories pile up on dealer lots, the Big Three are piling on the incentives. General Motors Corp. (GM ) raised its rebates on big SUVs by $500 on May 18; on some models, they now hit $4,000 per vehicle.
SMALL SHIFT, BIG IMPACT. GM and most other carmakers insist that April is an aberration and that gas prices aren't affecting truck sales. And it's true that a glut of trucks and SUVs, as well as the growing popularity of smoother-riding crossover SUVs, are also taking a toll on sales. But a growing chorus of auto researchers, consultants, and car dealers insist that high gas prices have become a factor. A recent poll by market researchers Harris Interactive Inc. and auto-information service Kelley Blue Book found that one in six car buyers has changed purchase plans because of higher fuel costs. Researchers at auto Web site Edmunds.com also cite the effect of rising gas prices. And Ford Motor Co. (F ) CEO William C. Ford Jr. is one of the few auto execs to acknowledge that high gas prices could "slow down or even stop" the nation's shift to bigger trucks. Even a small move away from such vehicles could have profound implications for the Big Three since nearly all of their auto profits come from big SUVs and pickup trucks.
So why are most carmakers adopting a "what, me worry?" attitude? They insist consumers aren't that concerned about gas prices and won't shift over to smaller, more fuel-efficient cars. After all, they note, when national pump prices spiked to nearly $2 a gallon in recent summers, Americans continued to buy big SUVs. Says GM Vice-Chairman Robert A. Lutz: "It sounds cavalier, but in any household budget, gasoline isn't a factor."
Certainly, this isn't a crisis on a scale with the OPEC oil embargos of the 1970s. Back then, shortages forced consumers to line up for hours, and prices peaked in 1981 at $1.42 a gallon. That's $3 in today's dollars, vs. $2.02, the national average as of May 19. But many economists believe prices will stay high for years, citing rising demand from China and India and turmoil in oil-producing regions. Drivers are increasingly convinced that costly gas is here to stay. An April survey by auto market researcher CNW Marketing Research found that 61% of consumers expect gas prices to keep rising -- the highest percentage since the 1970s.
The upshot: Consumer psychology, shaped by more than a decade of cheap gas, may be changing. While not yet strong enough to prompt Detroit or most of its Japanese rivals to start fiddling with their product mix, a new skepticism is being felt at dealers' lots across the country. "We're starting to see people asking questions they haven't asked before, like: 'What's the gas mileage?"' says Delaware auto dealer Frank Ursomarso.
So, quietly, carmakers are making contingency plans. The most obvious, if crude, response has been to jack up incentives on big trucks. That's now so widespread that even the Japanese are offering incentives despite having only recently entered this niche. Edmunds.com says large SUVs carry the highest average incentives: $3,740 per vehicle by April, up 14% from the month before, vs. just $1,800 for compact cars. Not so long ago, small cars needed big rebates while big SUVs sold fast at full price.
Keeping truck sales high is crucial for the Big Three. Because of high labor and fixed costs even when their factories are idle, Detroit is likely to keep cranking out gas-guzzlers and slapping on fatter incentives to sell them. It's a costly policy: Every month that GM boosts truck incentives by $1,000 -- as it is doing now with its "Truckfest" promotion -- it slashes an estimated $230 million from its bottom line. Says Joseph S. Phillippi, president of AutoTrends Consulting in Short Hills, N.J.: "This could be a significant hit to their North American profitability."
Moreover, the shift risks denting profits at the Big Three more than at their Japanese rivals, despite big moves by Toyota Motor Corp. (TM ) and Nissan Motor Co. (NSANY ) to boost their truck capacity. That's because both have strong lineups of cars and crossovers, the segments likely to benefit from any exodus out of trucks. In contrast, the Big Three have slacked off on developing new cars. And while a bevy of new models are coming out this year, they're not likely to make a difference for some time.
It's also easier for Japanese carmakers to shift their factories from making big trucks to cars or small SUVs. Says James E. Press, executive vice-president and COO for Toyota Motor Sales USA Inc.: "We can go from large to small sport-utility vehicles in 60 to 90 days." Already, he says, Toyota is making "incremental changes," such as building more four- and six-cylinder engines instead of the V-8s in big trucks such as the Tundra.
Another sign that carmakers are taking the rise in gas prices seriously: They're speeding up plans to put other gas-saving technologies into big vehicles.
Chrysler Group (DCX ) aims to rev the launch of its "displacement on demand" systems for the Hemi V-8 engine in its Ram full-size pickups. With displacement on demand, half the cylinders in an engine shut down when their power isn't needed.
For manufacturers with gas-electric hybrids to sell, higher gas prices may bring a much-needed silver lining. Bill Ford calls it "fortuitous" that his company is just a few months from bringing out a hybrid version of its 34 mpg Escape SUV, which can run 576 miles on a single tank of gas. Toyota's Prius and Honda Motor Co.'s (HMC ) hybrid Civic are flying out of showrooms. And several other companies, including GM and Nissan, plan to bring out hybrids.
Over the longer haul, if gas prices remain high, auto makers will have to consider more radical options. Some are looking at selling more cars that run on diesel fuel, which costs 10 cents less per gallon than gasoline but gets 30% better mileage. Mercedes-Benz (DCX ) just brought its diesel E320 sedan to the U.S., and BMW is considering bringing over a diesel-equipped 7-series. Chrysler's Jeep division will launch a diesel Liberty SUV later this year. Another option: importing the small econo-cars so beloved by Europeans.
Meanwhile, carmakers are starting to trumpet the mileage benefits of their current lineups. Toyota is running radio ads promising that if you buy a Prius today, you won't need to refill the gas tank until Labor Day. Then again, moving the metal "may come down to gimmickry," says AutoTrends' Phillippi. "We may soon have one of the companies saying: 'Buy an SUV and get 500 gallons of free gas."' That might win some buyers, but ultimately, Detroit will need to address consumers' gas-price worries head-on.
By Kathleen Kerwin, with David Welch, in Detroit, and Christopher Palmeri in Los Angeles