Detroit's No Good, Very Bad May

As gas prices spiked in May, not even incentives could stop the Big Three's skid although Honda and Toyota saw double-digit gains

No question about it: Consumers are increasingly looking at continued high gas prices to inform their new-vehicle purchases or keep them on the sidelines altogether. Auto sales in May sank, with all three U.S. companies down and looking warily at a summer selldown of 2006 models that could force cutthroat discounting, especially to move increasingly unfashionable and impractical SUVs and trucks.

Auto sales as a whole were down 4.6% in May,when adjusted for an extra selling day last month versus a year ago, and 0.3% for the year. General Motors (GM) and Chrysler Group (DCX) reported double-digit declines driven by evaporating demand for midsize sport-utility vehicles. Ford (F) sales were down 6% as its SUVs took a beating, though its new midsize cars helped make up for it. In fact, the demand for once-popular midsize SUVs like the Ford Explorer, Chevy Trailblazer, and Dodge Durango has plunged 50% in just three years.

Meantime, Toyota (TM) and Honda (HMC) each racked up double-digit gains based on brisk demand for their new passenger cars. It doesn't hurt that both companies have reputations for high quality and fuel efficiency, which become popular draws among consumers when gas prices are high and consumer confidence is low.


  There is perhaps no greater indication that people are making vehicle purchases with an eye on the gas pump than Ford's decision on May 31 to offer buyers of any of its vehicles zero-percent financing and free gas for the balance of this year. How it works: The auto maker offers customers a prepaid MasterCard debit card that can be used to purchase up to $1,000 of gas, E-85, or diesel -- enough to drive about 6,000 miles, or half the miles the average driver puts on a vehicle per year. Alternatively, a customer could opt for a cash discount.

"It's not complicated, you've only got two choices to make. ... Hopefully, with this program we can go take market share from Toyota and Honda -- the 800-pound gorillas in the room," said Ford spokesman Jim Cain.

Clearly, Ford and GM are frustrated by the growth of Toyota and Honda in the face of their own market-share declines. Paul Ballew, GM's executive director of market and industry analysis, expressed frustration over his company's lack of success in advertising what he feels is GM's fuel-efficiency advantage over Toyota in most of the categories in which the companies compete head-to-head. The Chevy Impala, for example, gets higher fuel economy than the Toyota Camry, and the new Chevy Suburban and Tahoe full-size SUVs get better mileage than Toyota's Sequoia SUV.


  "We didn't tell our story when we should have, and we've allowed other auto makers to occupy the high ground when objectively we should be occupying the high ground," said Ballew.

Ballew and other GM executives were especially peeved on June 1, a day after The New York Times columnist Thomas Friedman wrote a column saying that GM is "more dangerous to America's future" than any other company; that it's "like a crack dealer" addicting helpless Americans to SUVs, and is in a cabal with Ford and DaimlerChrysler to buy votes in Congress. Friedman was angry about a GM promotion in which it offers consumers in California and Florida gas capped at $1.99 per gallon if they buy one of GM's thirstier SUVs or sedans. Ballew said the company was still weighing whether to expand the program to compete against Ford's gas promotion.

Some analysts point to the enormous value of well-defined and trusted brands at a time when consumer confidence is rattled by a major upheaval, such as permanently higher energy prices. "If you just go by head-to-head recent comparisons, GM does come out looking better on fuel economy than most people would think," says independent marketing consultant Dennis Keene. "But Honda and Toyota in particular have deftly managed their brands for two decades so that they are the trusted ports in a storm when gas prices are forcing a change in consumer behavior, and you can't say the same for Ford and GM."


  Honda's 16.6% sales gain over May, 2005, was driven by continued success of the Civic, in demand for both its design and fuel economy, as well as the first full month of its new small car, the Honda Fit. Toyota was boosted by strong sales gains for the Corolla, newly redesigned Camry, and its all-new Yaris small economy car.

Not all Asian carmakers enjoy the same status. Nissan (NSANY) saw a double-digit sales drop despite increasing its sales incentives. Meantime, Hyundai sales were up just 1%, Mazda was up 3%, and Suzuki was up 30.5% on the strength of new models.

Chrysler, the only Detroit auto maker to post profits from its auto operations lately, had a bad May despite higher spending on sales incentives. The maker of Chrysler, Dodge, and Jeep vehicles posted a sales drop of 14.7% off much softer sales of Jeep Grand Cherokee, Dodge Durango, and Dodge Dakota and Ram pickups. Its new Caliber subcompact, though, is in big demand, and the company is coming out with two more new subcompacts later this year -- the Jeep Compass and Jeep Patriot -- that it hopes will offset falling demand for the more gas-thirsty midsize SUVs.


  GM has been holding down its incentive spending to try to boost profits and resale value of its vehicles. The auto maker has rolled back rebates from $3,500 per vehicle a year ago to $2,500 per vehicle as it has cut sticker prices. But, says Jesse Toprak, executive director of industry analysis with, it will be tough for GM to stay out of the incentive game all summer if Ford and Chrysler, as well as Nissan, keep the pressure up. It will be especially tough for GM not to match Ford's gas promotion.

"Given the way things were shaping up this spring, particularly given the lack of new models, I suspected Ford would blink first on incentives, and they did," said Toprak. "The big problem is they end up selling the deal and not the product."

As Toyota and Honda have proved to the chagrin of Detroit, marketing the product and brand above the deal pays off in good times as well as tough.

Before it's here, it's on the Bloomberg Terminal.