Auto industry’s higher sales reflect demand for smaller, more fuel-efficient cars

April 3, 2012

Back in August, when General Motors began rolling out its tiny $14,000 Chevy Sonic from its retooled factory in Lake Orion, Mich., analysts were nervous.

The conventional wisdom was that no automaker could make money building a subcompact car in the United States. Toyota couldn’t do it. Honda couldn’t do it. True, GM had struck a deal with its union, the United Auto Workers, to reduce labor costs at the plant by paying 40 percent of the workers an “entry level” wage. And the ultra-light car, which gets 40 miles per gallon, was one of GM’s most innovative. But history was not in its favor.

Half a year later, GM’s gamble on the Sonic — part of the company’s push to develop smaller, more fuel-efficient cars — appears to be paying off. Sales of the Sonic have risen steadily in every month, reaching 8,251 units last month. And on Tuesday, the automaker announced a whopping 12 percent rise in overall vehicle sales for March over the previous year. Nearly half of that increase, the company said, was driven by demand for smaller cars and crossover vehicles that get better than 30 miles per gallon.

The rest of the Big Three are following suit. By introducing new lineups of small and mid-size cars and by cutting costs since teetering on the brink of collapse three years ago, GM, Ford and Chrysler are slowly reclaiming market share from once-unsinkable foreign competitors such as Toyota.

In March, both Ford and Chrysler posted their best sales months in four years. Chrysler, which filed for bankruptcy in April 2009, has recorded 24 straight months of year-over-year sales gains. GM has seen bumps for every model in its Chevrolet lineup — even the electric Volt, with sales doubling in March.


Auto sales for March are up for most companies. (The Washington Post/Source: Autodata.com)

“The economic recovery and a deep bench of fuel-efficient cars and crossovers have been driving our sales for more than a year, but the combined impact has never been stronger than it was in March,” Don Johnson, vice president of GM’s U.S. sales operations, said in a statement. “Since the last time fuel prices spiked, both the economy and GM’s product portfolio are undeniably stronger.”

American automakers are faring well, in part, because the entire industry is recovering. U.S. vehicle sales for March reached an estimated 1.42 million, the best month since August 2007. That’s largely due to an improving economy and the fact that many Americans delayed car purchases during the recession. The average vehicle is a record 10.8 years old, according to automotive research firm R.L. Polk & Co. And credit is much more readily available this year.

But there’s a more subtle reason that the Big Three are succeeding. With gasoline prices topping $4 per gallon in many parts of the country, Detroit needed to offer reliable, fuel-efficient vehicles that Americans would actually buy. And, unlike when they faced this situation in 2008, the Big Three are well prepared this time around.

“The Big Three are in a far better place than they were in 2008,” said Michelle Krebs, a senior analyst at Edmunds.com. “They’re all producing really good mid-sized cars, compact cars, subcompact cars. Back then, they often didn’t even have a player in some of those categories. There wasn’t a Ford Fiesta [in the United States]. There wasn’t the type of Ford Focus we have now. There wasn’t a Chevy Cruze, a Chevy Sonic.”

Back during the depths of the financial crisis, as the U.S. auto industry was facing collapse, President-elect Barack Obama groused about GM’s inability to produce popular smaller cars. “Why can’t they make a Corolla?” he asked, according to a book by Steve Rattner, Obama’s former lead auto adviser.

Three years later, American automakers have their answer to Toyota’s popular compact car. GM’s Chevy Cruze, which averages 26 miles per gallon, sold 21,607 units in March, the seventh-straight month of sales higher than 20,000. Ford’s revamped, more efficient Focus sold 28,293 units in March, beating even the Corolla.

“The Detroit domestics are getting back in the game of getting their product financed,” said Tammy Darvish, vice president of Silver Spring-based Darcars, which has seven domestic dealerships. “There is consumer interest in the product. And everybody is building better cars.”

Ford, for one, has cut into the small-car market that has traditionally been dominated by Japanese manufacturers, said Jessica Caldwell of Edmunds.com. And it’s not just small cars. The company is doing well selling lighter crossover SUVs, such as the latest Ford Explorer, that are built like cars instead of trucks and get better mileage. According to an analysis by TrueCar, Ford has improved the fuel economy of its fleet by five miles per gallon in the past year, far more than any other manufacturer.

And the reputation of American cars appears to be improving. Domestic manufacturers no longer have to offer deep discounts to lure consumers.

“Those roles have reversed,” Krebs said. “It used to be that Toyota and Honda could charge a premium for their vehicles, but that’s not the case anymore. GM is making more money on the Cruze than the vehicle it replaced [the Chevy Cobalt], and that’s because it’s considered more premium. It’s getting more looks from consumers.”

Three years after GM and Chrysler filed for bankruptcy and received $25 billion in government loans, all of the U.S. automakers have restructured their labor contracts and pension costs, putting the Big Three on the road to recovery.

“Probably the most important part of federal assistance [that GM and Chrysler received] was the ability to maintain their product programs,” said Sean McAlinden, chief economist at the Center for Automotive Research. “Detroit had been criticized for years for not making smaller, fuel-efficient cars, and they’d finally gotten around to it by the time of the crisis. But these cars take about four or five years to develop.”

The Big Three have also managed to trim costs by seeking concessions from unions. The UAW has allowed GM, Chrysler and Ford to hire new workers at lower wages to compete with foreign manufacturers. In factories around Detroit, starting employees make $14 per hour, half of what more experienced union workers can make. And the automakers managed to close many of their unprofitable factories.

As result, McAlinden said, Ford, GM and Chrysler now have a far lower “break-even point” for each car they sell.

But for all the recent success, the Big Three still command just 45 percent of the vehicle market in the United States. That is up from a few years ago, but it is down dramatically from their peak. As recently as 1997, Detroit held 70 percent of the U.S. market.

And, while overall U.S. vehicle sales are improving, they are still well below long-term trends. Analysts estimate that 2012 vehicle sales will probably top 14.4 million, but that will need to rise to 16 million or 17 million before automakers are back to their pre-crisis point.

Even with the big March boost, Darvish said, domestic companies are not going to be consistently profitable “until we get to 2007 levels.”

Whether that happens depends on a number of factors. If gas prices keep rising, nervous consumers could delay vehicle purchases further. A March survey by TechnoMetrica found that the number of Americans hoping to buy or lease a car in the next six months had halved of late, thanks to higher fuel prices.

Industry observers also warn that foreign manufacturers will not vanish without a fight. Last year, Toyota struggled through an unprecedented series of natural disasters — such as the earthquake in Japan and floods in Thailand — that disrupted its supply chain. The year before, the company faced an investigation by the U.S. government into “sticky” gas pedals that forced it to recall 8 million units. (The cars were later deemed safe.) But Toyota has had a healthy 2012, with March sales up 11.2 percent over the previous year and Prius sales at an all-time high. Meanwhile, Korean companies such as Hyundai and Kia are making impressive inroads into the U.S. market.

For now, however, Detroit has reason for optimism. Thanks to the resurgence of the auto industry, Michigan’s once-staggering unemployment rate has improved faster than that of any state and now sits at 8.8 percent, not far from the national average.

“There’s a huge multiplier in automotive work,” McAlinden said. “It’s a good situation for Michigan.”

Staff writer Thomas Heath contributed to this report.

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