Gas prices fuel industry's new era

Automakers confront new reality: Trucks are out, cars are in, small is chic and mpg trumps everything else

It’s all about the gas mileage,” says Ohio dealer Rhett Ricart. “It’s all people are buying. If they’re not getting gas mileage, they’re not interested.” Photo credit: MICHAEL FOLEY/RYCUS ASSOCIATES
As gasoline prices top $4 a gallon, the shift by U.S. consumers from big, powerful trucks to small cars with small engines is now a stampede.

Fuel prices are roiling the auto industry in a way Americans have not seen since the panic that followed the embargoes by oil-exporting countries in the 1970s. Industry executives and vehicle buyers alike are acting on the belief that high fuel costs are not a momentary discomfort, but a new reality.

"I would bet my house that the old buying habits won't return," says Ford Motor Co. sales analyst George Pipas.

In a new Automotive News survey, dealers — especially those who sell Detroit 3 brands — cite a mismatch between the fuel-efficient vehicles their customers are demanding and the vehicles they have in stock. That mismatch, they say, is bleeding sales.

As in previous oil shocks, the market changes tend to benefit Asian brands whose lineups emphasize small cars. Meanwhile, the Detroit 3 are struggling to survive while they adjust their product plans.

Signs of the times:

-- Last month, vehicles with four-cylinder engines accounted for 45.6 percent of all U.S. retail sales of new cars and trucks, according to J.D. Power and Associates' Power Information Network. That's up from 36.0 percent in February 2008 — and just 28.2 percent in May 2004.

-- Between January and April, sales of basic compact cars such as the Toyota Yaris and Nissan Versa rose 36.7 percent over the year-ago period, according to J.D. Power. By contrast, sales of full-sized SUVs such as the Chevrolet Tahoe and Ford Expedition plunged 26.9 percent.

-- One out of 10 dealers in the Automotive News survey says he or she no longer accepts big SUVs and pickups as trade-ins. And many other dealers say they are offering far lower trade-in prices for those vehicles.

Rhett Ricart, who owns a seven-brand superstore in Columbus, Ohio, said he had a sobering glimpse of the market shift over Memorial Day weekend.

Four couples, Ricart says, all bought two smaller, less-expensive but more fuel-efficient new cars — his and hers — instead of one bigger, pricier vehicle.

"It's all about the gas mileage," Ricart told Automotive News. "It's all people are buying. If they're not getting gas mileage, they're not interested."

Out of stock

Nearly 650 dealers took part in the unscientific Automotive News online survey last week. Two-thirds sell primarily Detroit 3 domestic brands.

Of the Detroit 3 dealers, seven out of 10 say their stores lack the inventory to meet consumer demand for fuel-efficient cars. Four-fifths say they have lost sales this year because they didn't have the new vehicles their customers wanted. And almost three-fourths say automakers are not giving them the mix of vehicles they need.

Import-brand dealers, by contrast, are benefiting from relatively larger stocks of smaller cars. Only two-fifths of the import dealers in the survey said they lacked the right inventory to satisfy customers' demands.

"I'm looking out my window at 300 to 400 cars," says John Hawkins, a Honda and Acura dealer in suburban Los Angeles. "There are no Fits. They sell as fast as we get them."

That's no surprise. Sales of Honda's imported Fit compact are up 68.7 percent so far this year.

By contrast, many dealers now express fears they will be unable to resell big-engine vehicles they take in trade. Last week, Kelley Blue Book said retail prices of used SUVs have declined 8 percent since last September.

Different pitch

The Detroit 3, which traditionally have relied heavily on truck sales, are taking action to avoid bulging inventories of unsold pickups and SUVs.

Last month, Ford Motor Co. announced plans to slash truck production and build more cars. The company's sales for the first four months of 2008 declined nearly 8 percent from the same period of 2007.

"The die has been cast," warns Ford's Pipas. "We have reached an inflection point. The dramatic shifts we've seen in the last 60 days are due to the price of gasoline."

At the Automotive News Marketing Seminar last week in Los Angeles, Ford division's general marketing manager, Mark Felice, noted that the redesigned Ford Fusion will debut this year with a 2.5-liter four-cylinder engine that gets 32 mpg on the highway.

Said Felice: "Fuel economy has a big impact on consumer behavior."

General Motors, still the U.S. market leader, is feeling the pain, too. Sales of the full-sized Chevrolet Suburban SUV fell 25 percent in April compared with the same period a year earlier. Chevrolet Tahoe sales were down almost 30 percent.

At the same time, sales of the compact Chevrolet Aveo rose 23 percent in April after losing ground in the previous three months.

Chris Shackelford, new-car sales manager at Jim Reed Chevrolet-Subaru-Isuzu-Hyundai in Nashville, says he has stopped ordering Tahoes and Silverado pickups. "And I definitely don't want a Suburban," Shackelford says of the model that was his biggest seller just six months ago.

Cost chaos

The upheaval caused by high gasoline prices is not confined to shifting product preferences. Rising fuel prices are affecting delivery of new and used vehicles to dealerships.

CentralDispatch.com, an online service that links dealers to 5,000 trucking companies around the country, reported last week that vehicle hauling costs jumped 17 percent between February and April. Some dealers' vehicle transportation costs have soared 30 percent in the past two months, says Joe Steinberger, CentralDispatch's vice president of product and business development.

In response, Steinberger says, many dealers are wholesaling used vehicles locally instead of moving them to distant auctions.

Higher freight charges also are raising the cost of raw material shipments to factories, component shipments to assembly plants and parts shipments to dealerships.

There's some good news amid the turmoil, but it's getting harder to find. Dealerships with the right mix of small cars and trucks can profit from the market shift. For example, sales of the Toyota Prius hybrid shot up 66 percent in April.

But efforts by automakers to introduce fuel-efficient, diesel-powered vehicles may fall short. Next year, Nissan Motor Co. plans to introduce a diesel-engine Maxima in the United States. But as the price of diesel fuel approaches $5 a gallon, diesels may prove to be a risky investment.

For now, the big trend is simply toward "smaller."

You can reach Lindsay Chappell at lchappell@crain.com

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