SUV Makers Feel the Heat of Higher Oil Prices

The Sport Utility Vehicle has been an American icon ever since it was born into mass popularity during the days of World War II when the American Willys Jeep was introduced in the US car market. Vehicle buyers were drawn to their large cabins, higher ride height, and perceived safety. Additionally, full-size SUVs have greater towing capabilities than conventional cars, and can haul trailers, campers and boats. SUVs had the added benefit that they could carry more passengers than a pick-up truck. Finally, SUV owners had a higher perceived social wealth.

For 17 years, the Ford (F) F-150 Pick-up truck was the best selling vehicle in America on a monthly basis. That spot was lost to not only one car, but to four. The Toyota (TM) Camry and Corolla and Honda (HMC) Civic and Accord all passed the Ford F-150 in sales for the month of May and more vehicles are expected to make the leap. Light truck and SUV sales at major auto makers are down anywhere from 12 percent at Toyota to 37 percent at GM. GM announced plans to close four plants that manufacturer trucks and SUVs. Nissan (NSANY), Ford and Chrysler all have similar plans.

General Motors Corp. (GM), the automaker that popularized the "monster car" Hummer, may sell a mini-car four feet (1.2 meters) shorter than its biggest offering and more than a foot shorter than anything else it markets in the U.S. to win back buyers scared off by high fuel prices. GM may bring the production version of the Chevrolet Beat to the U.S., people familiar with the plan said. The car, which would normally be reserved for Asia and Latin America, gets as much as 40 miles a gallon, a fuel efficiency topped in the U.S. only by hybrids.

The possible American introduction of the Beat would be one step in a fleet downsizing and shift away from fossil fuel-based vehicles that is already under way at Detroit- based GM. Resigned to $4-a-gallon gasoline and stricter pollution rules, the largest U.S. automaker has recognized that its response must go beyond the mothballing of large truck plants.

GM, turning 100 this year, has few options to re-inventing itself. Mattel Inc. (MAT), maker of toy cars, has a larger market value than General Motors Corp. for the first time as record U.S. gasoline prices crimp sales of real cars and trucks. The company reported its largest annual loss in 2007, $38.7 billion, and hasn't had a profitable year in the past four. The car maker's U.S. market share hovers at the lowest level since 1925, and last year GM was 3,000 cars away from being dethroned by Toyota Motor Corp. as the world's largest automaker. GM shares fell to the lowest since 1954 this week after an analyst said bankruptcy was "not impossible'' if the auto market continues to deteriorate.

Besides the Beat, GM is weighing a list of options for refocusing its auto lineup on fuel efficiency rather than performance. It includes the U.S. introduction of a small pickup popular in Latin America and an expansion of the number of versions of the Volt plug-in electric car. GM is also trying to increase production and speed up availability of the successor to the Chevy Cobalt sedan and develop a fuel-efficient alternative to the Cadillac Escalade sport-utility vehicle, the company said.

Already, GM has reassigned engineers to many of the projects, according to people familiar with the planning. The company is taking them from SUV and truck programs suspended while awaiting the return of customers. Now, these sources said, GM sees no point in waiting.

Sales of the smallest cars in the U.S. have risen 31 percent in the first half of this year as the industry total fell 10 percent and the largest SUVs 31 percent. GM reported a 21 percent plunge in U.S. sales of pickups, SUVs and vans for the first six months. Higher input costs, which can be primarily attributed to a surge in steel prices, are also seen as hitting the profitability of SUV makers.

Thus, a clear shift in consumer tastes and preferences is being marked in the U.S., thanks to the crude oil spike. As I pointed out in my earlier post in the same blog, Americans are cutting down on distance traveled on road. The American airline industry too is reeling under the pressure emanating from high aviation turbine fuel [ATF].

Not surprisingly, the American railroad industry has posted a decent comeback this year, with ridership on Amtrak trains in the Northeast corridor climbing sharply higher. May was the best month ever for the government-owned railroad company, said Amtrak spokeswoman Tracy L. Connell. For the Northeast corridor, from October to May, ridership was up 11 percent over the same period a year ago, and for May alone, it was up 9.2 percent over the previous May. Other mass transit systems like Peter Pan Bus Lines, which serves much of the Northeast, have also seen their ridership rise as gas prices have been rising.

Earlier too, during the oil crisis of 1973 when OPEC blocked shipments of crude oil to countries that supported Israel in the Yom Kippur War, Americans and other countries converted to more fuel efficient cars. Before the embargo, American car makers made larger and less fuel efficient vehicles. As the embargo took place, consumers made up their minds with their wallets. Foreign producers like Datsun (Nissan), Toyota, Peugeot, Volkswagen (VLKAY.PK), Mazda and Honda generated record sales during this time. As OPEC lost its hold on oil production, gas became cheap once again by the 1980s. Americans drove larger cars once again, albeit with somewhat better fuel efficiency than that of the 1960s and early 1970s. SUV sales finally peaked in 2004 and 2005, reaching a peak of 4 million SUVs.

One has to wonder though, will we see the SUV back on top in the American auto market any time soon? This is yet another question, which only time can tell.

Comments

[bbzz24]

SUVs will be seen wheels up along the highways like dead cockroaches.

[surviror]

Road kill - a SUV vs a Civic vs a Honda Accord. The survivor is......

[BioInvestor]

johndough110, your abusive comment is out of place on this site. If you can't be civil, stop posting.

[Doug Korthof]

Very funny, GM putting SUV engineers to work on fuel-efficient cars! As if it just takes skin designers to make a new bumper or better door!

GM will find out that it has no skillsets needed for plug-in and other efficient cars; importing small cars (built using expensive Euros) into American is a money-loser.

The one plug-in car that GM had, the EV1, is NOT under consideration for a resumption of production. That entails, the rest is nonsense.

[paulk8756]

Well done article.

One thing I know for sure, we won't get it done with recriminations, guys.

The enemy is our government, and we need to focus on that. Or should that read, "We have met the enemy, and it is us?"

[paulk8756]

The EV1 was a piece of junk. But did it deserve to be crushed... I don't know. It's probably a good thing GM has that one under its belt already. Let's hope they do better this time.

It is curious that NO OTHER major manufacturer has done a decent electric by now, though. Maybe it's a fairly daunting technology, after all.

As regards our government bailing out what's left of our auto industry, I'd hate to see stupidity and unions rewarded for their many failures. But to tell the truth, I'd like depending on foreign producers for our future vehicle fleet even less.

[DrChaos]

"bbzz24 you're an idiot. How do your landscapers get your yard done? How do your deliveries get to your house? How do your contractors get your new A/C there and installed?"

Guess what? I've been to other countries, and they have landscapers, home deliveries and air conditioning.

What they don't have is US-size "full-size" pickups and SUV's.

There are plenty of 'utility' vehicles, rather like "El Camino" style smaller pickups on a car body, and occasional somewhat larger pickups. And then commercial delivery trucks.

In reality, few of the US full-size pickup buyers (and virtulaly none of the full-size SUV buyers) actually use their trucks to their capabilities.

Back to the USA. In 1980, cars were something like 80% of the vehicle sales, trucks/suv's 20%. Today it's like 48%-52%. So, did nobody have landscaping, construction and A/C in 1980? Obviously they did. Farmers and ranchers got the trucks they needed and life went on.

The reality is that most (not all, but the large majority) of the demand today is spurious egoboosting and neurotic mommyism.

[ED: Comment edited to remove abuse.]

[najdorf]

Let me give you some examples of SUV owners I have known in the past few years in America:

Countless suburban soccer moms with 2 children who live on paved roads and never tow or transport anything sizable - Land Rovers, Expeditions, Excursions, Suburbans, etc.

A single man who made his fortune with male-enhancement pills and professional poker, usually drives alone in our largest city - H2, then Escalade.

A 16-year-old kid who usually drives alone within the largest city in our state - Expedition.

Most of the working people I know drive trucks, because a truck is a whole lot more practical than an SUV. Most of the SUV drivers I know were seeking a status symbol or the ability to keep themselves safe while crushing other drivers in an accident.

[M1M]

I would have to agree that the SUV is one of the dumbest ideas to ever hit the marketplace. I had the equivalent of one in the 80's when my kids were small. It was called a station wagon and had a 4 cyl engine.

GM and Ford also have not been blessed with the smartest CEO's ever to grace the planet, especially GM. A CEO is paid to have vision and these guys are blind. It took until May for GM to admit the SUV and large truck market was permanently disabled. They did nothing to balance the risk with gas prices, spent cash on bad investments like Hummer and SAAB...

But, GM has some levers to pull. They have a decent set of cars in China that would fit perfectly in this market. And, they have good engineering and the ability to engineer their way out of this mess. It's the top management that is the problem. In GM's case, they have paid top dollar to a CEO that has delivered nothing but losses,rapid decline in market share (even when SUV's were selling), arrogantly dismissed help (Kekorian), and cancelled efficient car design in order to double the bet on large gas-consuming vehicles. As long as that situation remains, I don't have too much hope for them...

[willdryden]

I take issue with the comment that gas got cheap in the 80s. People just got use to paying 3 times as much for the gas because there was no option.

I also take issue with the comment that the EV1 was a piece of junk. The EV1 I drove in 2000 was a wonderful vehicle that I would like to be driving now. The only thing bad about the EV1 was in 1997 when GM used Delco batteries. Those Delco batteries were a piece of junk in the application they were being used.