General Motors Is Still Living Large

The success of its new SUVs has given it a boost. But the buzz may soon wear off

Last year, with gasoline prices soaring, General Motors (GM ) Chairman and Chief Executive G. Richard Wagoner Jr. leaned on his engineers to rush his new large sport-utility vehicles to market. At the time he looked like a desperate coach going back to the same old playbook. But he figured new models would goose sales, and the SUVs were the only volume sellers far enough along in the pipeline. Now, the move looks pretty smart. Even as gas prices approach $3 a gallon, sales of GM's new SUVs are up 22% in the first quarter. What's more, J.D. Power & Associates (MHP ) Inc. says buyers are paying up to $7,000 more for the new Tahoes ($32,000 base) and Cadillac Escalades ($57,000) than they shelled out for the old models. Says GM Vice-Chairman and Chief Financial Officer Frederick A. "Fritz" Henderson: "There are still plenty of customers who want the versatility of a full-size SUV."

Why on earth, with summer sure to bring higher prices at the pump, would consumers flock to these gas-guzzlers? For one thing, GM has the only new SUVs on the market. Trucks such as the Tahoe, Escalade, and GMC Yukon not only have posh cabins, but they boast fuel economy close to 20 mpg, thanks to a system that shuts down four of the engine's eight cylinders while cruising. That beats all competitors (the Toyota (TM ) Sequoia gets 16 mpg) and matches some midsize SUVs. As a result, GM's large SUVs are stealing buyers from other auto makers: Its share of the big SUV business has grown from a steady 62% in recent years to 67% this year. Rival models such as the Dodge Durango are down as much as 40% this year. And Ford Motor Co. (F ) won't strike back with a new Expedition and Lincoln Navigator until late this summer.

This is clearly good news for Wagoner and GM. SUV sales kicked in more than $1 billion in new revenue in the first quarter, helping the company surprise Wall Street with smaller than expected losses. And it's worth noting that GM can make profits upwards of $10,000 on each big truck, vs. next to nothing on some of its sedans. If rising gas prices don't derail the SUV sales trend, the added revenue and cost cuts coming in the second half of the year could help GM eke out a profit.

Of course, the buzz could just as well be short-lived. The American Automobile Assn. forecasts summer gas prices hitting an average of $3.05. Also, in the first quarter GM was cranking out new SUVs to fill dealer inventories. Since GM books a sale as soon as a vehicle leaves the factory, revenue was bound to jump. Once dealers stock up, production could slow. And the first models built tend to be loaded with pricey options, hence the fatter sticker prices. Henderson concedes that "over time, we'll see transaction prices decline."

Skeptics need only look to last fall. When gas spiked to $2.84 a gallon in September, SUV sales fell off a cliff. Dealers already are noticing that buyers are getting edgy as fuel prices rise again. James Hardick, who runs Chevrolet, Chrysler (DCX ), Jeep, and Kia dealerships in Fort Worth, says Tahoes are selling, but buyers are still looking at passenger cars and smaller SUVs. Says Hardick: "My Kia sales are off the scale."

Even GM admits that the SUV market is shrinking. Mark R. LaNeve, GM's vice-president for sales and marketing, says he expects the market for large SUVs to fall from its peak of 1 million vehicles in 2003 to 750,000 this year, but GM will have a bigger slice of that pie. Researcher Global Insight Inc. forecasts that GM will sell 436,000 of its new SUVs this year, or about the same as last year. But by 2011 that could shrink to 315,000.

That's why GM is pushing hard in other categories it hasn't mastered. Offering lower sticker prices rather than hefty rebates has given consumers more enticing comparisons when shopping online. Some vehicles, such as the Buick Lucerne sedan and the Chevy HHR retro wagon, are moving off lots twice as quickly as the average vehicle, says J.D. Power. And LaNeve says more new models are getting the fast-track treatment like the SUVs. But it will take more than a few scattered hits for a turnaround to take hold. GM's SUV sales show that Detroit is capable of making vehicles people want to buy. For GM, it just needs to happen a lot more -- and soon.

By David Welch

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