Smaller Cars Enjoy New Chic
Wednesday, September 28, 2005
John Mathews of Universal Toyota in San Antonio has witnessed the day that auto industry executives in Detroit said would never come.
"We are seeing people who are driving $40,000 Suburbans trading them in on $15,000 Corollas," said Mathews, who manages a dealership in a state where big trucks and sport-utility vehicles rule the roads. "The last 30 days have been unlike anything I've ever seen in the automotive industry."
Even in hurricane-addled Alabama, people pouring in from Louisiana and Mississippi are popping into Treadwell Honda looking for replacements for destroyed cars. Harold Wesley, a salesman, in the midst of fielding calls last week, said he can't keep Civics on the lot -- new or used. "As soon as the new ones get here, they are sold." Wesley said the manufacturer is allocating dealers a few at a time to be fair. Treadwell's last shipment of 12 sold in three days, he said.
Nationally, Toyota Motor Corp. officials say the Corolla, one of the Japanese company's smallest and most fuel-efficient passenger cars, had 8.7 days' supply of inventory at the end of last week. In the industry, inventory of 50 to 60 days' supply is seen as adequate. Honda Motor Co. officials are struggling to keep up with demand for the Civic, of which there is nine days' supply. "Inventories are as low or lower than they've ever been for the Civic," said Sage Marie, a Honda spokesman. "They're basically being bought right off the truck."
Toyota dealers in the D.C. area say they also are seeing an uptick in demand for the smaller vehicles. But the trend isn't as pronounced as in truck-dominated Texas where people who have been buying trucks for years are rushing to get out of them. "Most of the time you come in here and you might have 80 Corollas to choose from," said Dave Reynolds, general sales manager of Jack Taylor's Alexandria Toyota. "Now you come in and you have 20 to choose from."
While small car sales are helping to lift the Japanese automakers, Detroit's General Motors Corp. and Ford Motor Co. are sinking under the weight of large sport-utility vehicles, once the industry's cash cows. The two automakers have reported substantial slides in profits in their North American operations this year, and their bonds have junk status on Wall Street. The interest in small cars has caught the two automakers unprepared, said Dave Healy, an auto industry analyst at Burnham Securities Inc. in New York.
For the Big Three, Healy said, investment followed profit margins. "As long as the SUV segment was doing well, they poured money into that and neglected small cars," Healy said. "At that time you could have made a very good case that it was giving the public what it wants."
Healy and other analysts are predicting bleak results for Detroit automakers when they report sales results for September on Monday. Healy said large sport-utility vehicles will be especially hard-hit after climbing in the summer due to "employee pricing for everyone" discount pricing sales. "We're looking at 20, 30, 40 percent yearly declines," Healy said. The spike in gasoline prices and the summer incentives have crushed SUV sales now.
Brad Boeckmann, vice president of Galpin Motors Inc., based in North Hills, Calif., the biggest Ford retail dealer in the nation, said Ford's "family price" employee discounts has "propped up" sales of large SUVs at the dealership. "When the family pricing goes away, obviously Ford and the dealers are going to need to do something to get people's attention again."
Dealers say inventory of used SUVs is building up. Raj Sundaram, president of Automotive Lease Guide, which tracks vehicle resale values, said SUVs remain under pressure. "Can anybody answer the million-dollar question -- when is this going to turn around and end?" he said. "Nobody seems to know."
GM and Ford are getting some benefit from greater interest in small cars. George Pipas, Ford's U.S. sales analysis manger, said inventories are tight for the Focus passenger car. He said sales of the Focus have grown 10 percent in the past 90 days, compared with a year ago. Pipas said the small car segment is one of the hottest in the industry. To meet demand, he said, the Focus car plant in Wayne, Mich., has had fewer production shutdowns than in past years. "As far as we can see, Wayne is going to be running," Pipas said. "But the sales pace may outstrip our production for the foreseeable future."
Over the years, Detroit's investment in new cars has taken a back seat to developing more and more truck and SUV models. Last year, GM introduced the small Chevrolet Cobalt, but consumers were cool to the car early on. Ford hasn't significantly updated the Focus in the past six years. Both companies have new or redesigned models headed for showrooms in coming months. DaimlerChrysler AG is also concentrating on bringing out smaller SUVs that get better fuel economy, an area of sales growth in the industry.
Paul Ballew, GM's chief market analyst, said the level of consumer interest in small cars is being overplayed. He said Japanese automakers are benefiting most because of their experience in the segment, particularly in their home market. Meanwhile, Ballew said GM was having a "solid" small-car month, and he said GM will continue running its Lordstown, Ohio, plant where the Cobalt is assembled at a "very aggressive clip."
Ballew said GM will continue to watch the car market before making additional plans to bring out more small cars for American buyers. Honda and Toyota are moving forward. This month Honda launched the latest Civic that includes a remodeled hybrid and high-performance models. In recent years, Toyota launched the Scion brand -- a line of small cars that Toyota is marketing to younger buyers. Scion has a tight 7.2 days' supply.