Pickup Trucks at the Crossroads

S&P Ratings says U.S. truck makers, while not about to cede dominance, may lose key profits as Toyota mounts a big push with its Tundra

The U.S. full-size pickup truck market is at an historic crossroads, as new-product introductions are increasing competition and demand remains below the peaks of recent years. One sign of the slowdown: According to press reports, Ford Motor (F) said on Apr. 3 that sales of its F-Series pickup truck, one of its most profitable vehicles, dropped 15% in March, with the weakness exacerbated by a contractual dispute with engine maker Navistar International.

This segment has long been one of the most important profit contributors for General Motors (GM; S&P credit rating B), Ford (B), and the Chrysler unit of Germany's DaimlerChrysler (DCX; BBB), who dominate the market, so developments in the pickup market will have a sizable effect on their efforts to return to profitability in North America.

Full-size pickups account for about 22% of the U.S. automakers' aggregate unit sales (27% of Ford's light-vehicle sales, 22% of GM's, and 17% of Chrysler's, based on 2006 data) and have a far greater effect on profitability because of these vehicles' larger contribution margin. Standard & Poor's Ratings Services believes these companies' sales of full-size pickups will remain highly profitable, helping partially offset the steep cash losses of recent years in their North American automotive operations and diminishing sales and overall profits from the large and midsize sport-utility vehicle (SUV) segments.

In a League of Their Own

GM, Ford, and Chrysler together control more than 90% of the U.S. full-size pickup market, making it one of the last refuges of their dominance in North America. By comparison, the three companies have 72% of the midsize SUV market (see charts 1 and 2). We don't expect any dramatic deterioration in the Big Three's pickup share anytime soon, but increased competition from Japan's Toyota Motor (TM; AAA) seems likely to at least chip away at profitability in this segment, even if it remains a distant fourth in unit sales of large pickups for the foreseeable future.

SUV sales, which have fallen much more dramatically in recent years (down 9.2% and 15.6%, respectively, in 2006 following sharp declines in both segments in 2005). Our expectation reflects in part the greater functionality of pickup trucks, which are not as easily replaced by the popular new crossover utility vehicles (CUVs). Many pickups are used for commercial applications.

The relative resilience of the full-size pickup segment also reflects high customer loyalty, both to specific brands and to the segment as a whole. Still, a 10% sales decline in this important segment is a concern, and a recession or further erosion in the housing market would likely take an additional toll on sales, at least in the short term.

Toyota Gets Aggressive

Last month Toyota began selling new versions of its Tundra full-size trucks. The Tundra was introduced nearly a decade ago, but previous versions were considered too small to make a significant dent in the popularity of the Ford F-150, Chevrolet Silverado, or Dodge Ram. However the 2007 version of the Tundra is not only larger than its predecessors, but also is being built in the U.S. at an all-new assembly plant in Texas—not coincidentally, the state with the highest concentration of pickup buyers.

As expected, the new Tundra's arrival is being accompanied by an aggressive advertising and marketing campaign in media channels that are popular among truck drivers. Even though Toyota received some poorly timed negative press in January when it announced a recall of 533,000 earlier-model Tundras and Sequoia SUVs because of a steering-related problem, proper handling of the recall will likely mitigate any long-term effect.

Toyota's goal is to sell 200,000 Tundras in the U.S. in 2007, up from 124,508 of the older versions sold in 2006. And the company expects to sell even more in the long term—the new San Antonio (Tex.) plant will have capacity for 200,000 vehicles, and Toyota's existing truck plant in Princeton, Ind., can build another 100,000.

Nissan Stays Stable

By meeting this year's sales objective, Toyota will increase its market share to about 9%, from 5.6% in 2006, which will still leave the lion's share of the market to Ford, GM, and Chrysler. The only other competitor, Nissan Motor's Titan model, entered the market in 2004 and has just over a 3% share, a level that has been stable for the past three years.

However, even a seemingly small increase in share by Toyota, particularly in conjunction with overall segment softness, could result in a larger hit on profitability if Ford, GM, and Chrysler are forced to compete more heavily on price in this segment than they have historically.

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