Downsizing arrives -- with a vengeance

Shift in buying patterns picks up steam in 2008, leaving the Detroit 3 with a revenue shortfall

DETROIT — The big shift to small cars this year threatens the revenue and profitability prospects of the Detroit 3.

The change in buying patterns accelerated in March, while overall sales tanked. The problem for the domestic automakers: They are still way underrepresented in the vehicle segments that are growing.

All three say they aim to bolster their small-car portfolio.

"We are working on a couple of programs that are small and premium," said John Smith, General Motors group vice president of global product planning, last week.

Total U.S. light-vehicle sales in March dropped by 12.0 percent; sales for the first quarter fell 8.0 percent. But sales of small cars — from the Honda Fit to the Ford Focus — rose 3.6 percent during the first quarter, according to Ford Motor Co. The segment's share jumped by 2.1 percentage points to 17.8 percent of the total industry.

The downsizing trend can be seen elsewhere, too. Crossover sales are now almost double those of truck-based SUVs, Ford says. And sales of four-cylinder engines are spiking: Nearly 40 percent of vehicles purchased in March contained four cylinders, overtaking six cylinders and showing the highest monthly share since at least 2002, according to J.D. Power and Associates.

It's all evidence of what Ford executives are calling a "seismic" shift in consumer preferences.

That begs a question for Ford, GM and Chrysler LLC: How do they compensate for revenue and margin loss as buyers continue to leave the truck segments dominated by the domestic brands in favor of car segments dominated by import brands?

"While overall demand is weak, mix is even weaker," Credit Suisse analyst Christopher Ceraso said in a research note last week. "The profit hit from mix deterioration will be profound."

Consumers are packing pricier content into those smaller vehicles, but that will only partially offset the hit, Ceraso said.

Focus vs. F-150

There's no question the shift is hurting revenue and profits, said George Pipas, sales analyst at Ford Motor, which saw a 14.2 percent decline for its domestic brands in March. Ford already has retooled its restructuring plan to accommodate the changes, and executives say they stand ready to cut deeper if sales worsen.

"Do we make less money on a Focus than we do on a 4-by-4 (F-150) Lariat SuperCrew?" Pipas asked. "Yeah. But that's what the restructuring is about. ... So we can be profitable at lower volume and changed mix."

So even though sales of the Ford F-series pickup plunged 23.8 percent in March, Ford was pleased to trumpet the 24.0 percent spike in sales of the compact Ford Focus. While revenues and margins are much lower on the small cars, Ford is seeing improvement: The transaction price on the average Focus sold in the first quarter rose by $2,000, Ford marketing chief Jim Farley said last week.

But the domestic automakers are still disproportionately underrepresented in the small-vehicle segments.

"Focus and Fusion and Edge are really helping us compete," Farley said. "But frankly, this shift puts a lot of pressure on our market share."

GM's small cars are doing worse than the rest of the segment. Sales of the subcompact Chevrolet Aveo dropped 45.6 percent in March and 19.2 percent for the first quarter. Sales of the compact Chevrolet Cobalt fell 23.8 percent in March but are up 14.5 percent for the quarter.

"The move away from trucks that we've seen ... is definitely fuel-price-related in our view," Smith said. Sales of GM's domestic brands dropped 18.9 percent in March.

More small cars

Until the subcompact Fiesta goes on sale in the United States in 2010, the Focus is the only small-car entry in the Ford-Lincoln-Mercury portfolio. By contrast, Toyota Motor Sales U.S.A. sells six small-car models in its Toyota-Lexus-Scion portfolio.

For Ford Motor to succeed in the long term, it has to pump up its product offerings in the supercompetitive segments of small and mid-sized vehicles. The company's global product development strategy aims to do just that, though most of the new vehicles won't arrive until the next decade.

"We fully understand the days of selling 900,000 F-series trucks and 400,000 Explorers and 200,000 Expeditions are a distant memory," Pipas said. "It will never happen" again.

GM says it has a renewed focus on car programs, too.

Said Smith: "If we have to respond to the market, we can turn on a dime, as opposed to a new sheet of paper, and respond to that opportunity in two years or less."

Meanwhile, Chrysler is scrambling to develop more fuel-efficient vehicles and will likely rely on alliance partners to develop them.

The company already has an arrangement with Nissan Motor Co. to build about 20,000 Versa-based subcompacts for Latin America starting next year.

Chrysler also has a venture with Chery Automobile Co. in China to develop a range of vehicles. Chrysler has not set a timetable or indicated when the Chrysler-Chery products might be ready for North American sale.

Jamie LaReau and Bradford Wernle contributed to this report

You can reach Amy Wilson at awilson@crain.com

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