Wednesday, September 08, 2004

Detroit Is Over A ($50) Barrel

From Business Week:
For the past decade -- the auto industry's fat years, when average annual sales of 17 million cars and trucks generated big returns -- the U.S. Big Three invested much of their profits in horsepower. The resulting muscle-bound trucks and bulky SUVs proved wildly popular, and probably saved Motown's hide. In the meantime, though, the Japanese and Europeans -- whose home markets have long had more expensive fuel -- were investing in a host of fuel-efficient technologies. So while Wagoner (GM's Chairman and CEO) is showing off a new SSR, Toyota Motor Corp. is boosting production capacity for its 50-mile-per-gallon Prius by 50% and plans the launch of another gas-electric hybrid, the Lexus RX 400h luxury SUV, this fall. Ford Motor Co. will soon launch the first American hybrid, a nearly 40-mpg version of its Escape SUV. But Honda Motor Co. is about to sell its third hybrid, an Accord, promising at least 240 horsepower and fuel economy that tops 30 mpg. The Europeans, meanwhile, are pushing clean diesel engines, which get at least 30% better fuel economy. And all foreign auto makers have a jump on selling "crossover" sport-utes, which are built using the understructure of a car, thus offering buyers the cavernous confines of a big SUV but with a smoother ride and better fuel economy.

Crossover vehicles have been steadily gaining in terms of market share, and Toyota RAV4 and Honda Pilot seem to be doing quite good. With gas prices staying high, consumers may want to buy more of these crossover vehicles as opposed to huge trucks or large SUVs.
Detroit execs argue that SUV and truck sales are still strong, even for monsters like the 15-mpg Chevrolet (GM ) Tahoe and Ford Expedition. Indeed, sales of truck-based SUVs -- which account for most of Detroit's automotive profits -- are up 1.3% so far this year. But look closer: Nearly 50% of consumers who are trading in a traditional truck-based SUV buy something else, says Art Spinella, president of CNW Marketing Research Inc. in Bandon, Ore. Buyers are leaving to make a fashion statement as much as to save gas. But in any case, the vehicles they're choosing -- smaller SUVs and luxury cars -- are more likely to be foreign-made.
Indeed, sales of less-efficient truck-based SUVs are only still rising because auto makers are laying out as much as $6,000 in rebates. That's richer than the deals being offered on any other type of vehicle. Margins, as a result, are suffering for all the U.S. carmakers. Says Detroit-area Chevy dealer Gordon Stewart: "They're overcoming the fuel-cost increase with incentives that you can't believe."

Hmm...Incentives. It has been three years since the latest wave of incentives continues. I wonder if the results have started to show already in the bottomline now. IF the sales drop for a year or two, Detroit may be in for a big trouble. Not only would it loose on new sales, but also on the vehicles that they forced down the market by means of these discounts. Meanwhile, hybrids have started knocking on the door.
. Now Toyota and Honda have been selling hybrid-electric cars for seven years, working out the kinks and priming consumers to think of it as trustworthy technology. It will be three years before GM offers a hybrid system on its new full-size SUVs. That will be more robust than the 10% mileage boost that commercial-fleet buyers now get with a "mild" hybrid version of the Chevrolet Silverado truck. GM execs argued that they could make a bigger impact on fuel consumption and tailpipe emissions by adding hybrid systems to their big SUVs than the other guys were through hybrid small cars. But with the shift that's under way, by the time the hybrid trucks arrive Detroit could be defending a smaller market.
To be sure, no one knows how big a market hybrids will become. The technology adds $2,000 to $5,000 to the cost of building each vehicle, some of which gets passed on to the customer. But as gasoline stays close to $2 a gallon, hybrids can only get more attention. Dealers already have waiting lists for the Prius.

We all know that there is tremendous overcapacity in the cars market. All is not well, not even as good as it should be. We are in for some rough ride in the automotive sector here in the US.


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