Detroit's Temporary Turnaround?
If October auto sales show anything, it's that a lot of consumers are still hooked on sport-utility vehicles. All they need are some lower gas prices and a few more dollars in discounts to take the plunge—no matter how many warnings there are of a rebound in high prices at the pump next year and beyond.
General Motors (GM) posted a 17% gain in sales of cars and light trucks, including SUVs, while at Ford (F) sales were up 8%, according to Autodata. GM reported retail truck sales up 52%, led by a doubling of sales of both its 2006 and '07 Chevy Silverado and GMC Sierra pickup trucks and a 46% gain in luxury SUV sales. GM has been discounting its pickups to make way for a redesigned pickup about to hit showrooms, and a redesigned Chevy Silverado/Tahoe was launched last spring to rave reviews in the autos press.
"Gas prices coming down combined with redesigned models have helped a rebound—no question," says GM's sales analysis chief Paul Ballew. Ford's SUVs, especially the redesigned Lincoln Navigator (up 44%) and Ford Expedition (up 41%), are also benefiting from newness and lower gas prices. Meantime, Toyota's (TM) SUV sales were up 52%. Most of Honda's (HMC) light truck business was down.
"What a difference a year makes," said Jim Lentz, executive vice-president of Toyota Motor Sales. "Last October, the industry plunged to a seven-year low, weaning itself from an incentive binge. Today, the industry is seeing modest gains on the strength of fresh products."
The Detroit Three are all working out a strategy of building fewer vehicles to better match consumer demand rather than relying on heavy incentives to inspire customers. But the recent soft demand for trucks and SUVs has left them no choice. Edmunds.com reported that in October the average automotive manufacturer incentive in the U.S. was $2,257 per vehicle, down $431, or 16%, from September, 2006, but up $245, or 12%, from October, 2005.
According to Edmunds.com, combined incentives spending for domestic manufacturers averaged $3,129 per vehicle sold in October, down from $3,687 in September, 2006. Compared with the previous month, Chrysler's October incentives spending was up $3 to $4,214 per vehicle sold, Ford's incentives spending was down $845 to $3,278 per vehicle sold, and General Motors decreased its incentives by $676 to $2,497 per vehicle sold.
Taurus Build-Out Boosts Ford
Those numbers clearly show that GM and Ford are moving a bit faster than rival Chrysler in getting their offerings more in line with natural retail demand. Confidence in a turnaround at DaimlerChrysler's (DCX) Chrysler division has been stung in recent weeks as the company disclosed that it has been piling up thousands of vehicles at showrooms around the country that dealers hadn't ordered as a means of boosting its earnings (see BusinessWeek.com, 10/25/06, "Crisis at Chrysler"). Automakers actually book sales and profit when a vehicle leaves the factory, not when it gets sold to a dealer or a customer. Chrysler sales were up 1% in October.
Ford's results were a bit misleading, however. About 5 points of its 8% sales gain came from a build-out of the Ford Taurus. Ford built and shipped about 10,000 more Tauruses than in October of last year as it prepared to close the factory and cease production of the once-popular model. But there was good news for the struggling automaker: Retail sales at Ford were up 5%, with sales of the Fusion, Focus, and Escape showing gains.
Domestic automakers are battling through a transition in which they are all losing money on their North American vehicle business as trucks and SUVs are no longer supplying the rich profits they once did, even after heavy discounting. What's more, they are short of enough compelling passenger car and crossover SUV offerings.
Lineup Makeovers Still Far Off
In the meantime, Asian carmakers continue to mount sales and market-share gains. Toyota was up 9.2% in October, and it's up 12.2% on the year. Its Lexus division was up 3% in October and is up 7% on the year. Honda was flat in October, but it's up 4% on the year. Nissan was up 4% last month, but it's down 7% on the year. Mazda was down 3% in October, but up 3% on the year. Hyundai sales were up 4% in October, and its sales are up on the year despite losing some supply of vehicles due to labor strikes in South Korea.
Sales incentives will likely stay at current levels well into next year because adjustable-rate mortgages are being reset with the Federal Reserve's recent interest rate hikes, and automakers are catering to many homeowners who are getting used to absorbing higher monthly mortgage payments.
A prolonged dip in gas prices would be a boost for Detroit automakers. Ford and Chrysler especially are still more than a year away from having a better complement of passenger cars and light SUVs that are more attractive to consumers when pump prices climb. Until then, the more pickups and SUVs they can sell, the better their sales and profit results will be. The long-term concern is that higher gas prices, or the fear of higher gas prices, will return and this time, maybe, Americans will move on from larger SUVs and pickups entirely.