21 July 2010

Big Is Back For American Auto Buyers


Two years after gasoline prices hit a record high of more than $4 a gallon, size matters again for many American drivers.

New or used—pickup trucks, SUVs, crossovers, even minivans—Americans want to drive big.

“The further we get past the gas crisis, the less people remember it,” says Jessica Caldwell, senior analyst for Edmunds.com.

The renewed popularity of the light-truck segment comes as the global auto industry enters the second year of a modest and at times tentative recovery.

“The American consumer likes size and functionality,” says George Magliano, director of North American auto research, at IHS Automotive.

Though the current market has much it common with the pre-crisis one, there are differences.

For one, annual sales—after falling to under 9 million a year in 2008, are running around 11 million for 2010, a far cry from the 15-17 million in the pre-crisis years.

Crossover SUVs look a lot like the SUV of the past but they're built on a car base, not a light truck one. These vehicles, along with the new and improved F150 light-truck line from Ford Motor [F  11.771    0.021  (+0.18%)   ] are also slightly more fuel efficient.

Sales of crossovers are up 24.2 percent this year through June. At the same time, however, midsize SUVs (with the traditional base) are up 22.8 percent, outpacing the gain of the midsize car category.

The small car category is up 14.2 percent, while the small SUV one is actually down—15.0 percent.

“When gasoline was above 4 dollars a gallon people wouldn’t even buy a crossover,” says Magliano. “Demand for smaller cars goes away when fuel prices drop. Hybrids are even worse. Consumers don’t want to pay the premium.”

Now And Then

A look at sales data then and now clearly reflects such consumer behavior.

In February 2009, for example, sales of crossovers fell almost 33 percent month over month and slightly less year over year. During that same period, the Ford Escape—one of the hot SUVS now –posted monthly and yearly declines of 28.9 and 27.3 percent, respectively.

By contrasts, in May 2010—one of the industry’s best months this year— Escape sales jumped 17.3 percent, while those of crossover SUVS rose 16.6 percent.

The crossover SUV segment—which Toyota launched with the RAV4 in 1995—is now a large and competitive one

"Crossovers have become so mainstream," says Caldwell. "I think people are being more realistic about how they use their SUVs. They're more of a car substitute, not an off-road vehicle."

In the first half of 2010, four models had unit sales of 50,000 or more; another four had sales between 35,000 and 45,000. The eight vehicles were made by seven different manufacturers.

The current sales pattern is much the same for pick-ups and to a lesser extent vans.

Ford’s F150 truck is once again the top-selling vehicle in America. General Motors’ Silverado is close behind.

Light-duty trucks sales in June were up 20.1 percent over a year ago and are up 17.2 year to date. F150 sales were up 29.5 percent and i33.8 percent, respectively; GM's Silverado, 25.1  and 11.2 percent.

But back in June 2008, with prices closing on the $4 level, total light truck sales tumbled 37-percent. For all of 2008, F-Series sales plummeted 25-percent in 2008; Silverado’s 28 percent.

"That segment is absolutely solid. Talk about bang for your buck," says Kelley Blue Book'a Juan Flores, who is among the many who applauds Ford's 2009 redesign, which includes greater fuel efficiency.

Like many things, however, fuel efficiency and gas prices are in the eye of the buyer.

Ford bills the F150 as 8 percent more fuel efficient. In most models that's a difference of a mike or two a gallon. At its best, the new vehicle mpg grid is 15 city, 21 highway.

"Just enough to justify it in a person's mind," says Hossack.

There's no denying the average price for a gallon of gasoline is significantly lower than the crisis period high of $4.11 on July 17, 2008, but it is still historically high.

Over the past 12 months, the price has remained in a pretty narrow range ($2.65 -$2.85). Nevertheless, even at its current level ($2.71), it is well above the 2009 average ($2.37).

“It’s not so much what fuel prices are, but what they may become,“ says Hossack. “When gasoline was $4.00 a gallon, people feared $5.00. They feared $6.00. Now, prices have been holding at $2.75 a gallon, so people think, maybe gasoline goes to $3.25 or $3.50.”

History suggests that may be the case. In August 2008, even as the trend is in gas prices was decidedly lower, sales of light trucks continued to plummet. Gas prices fell 10 percent for the month; truck sales 24 percent.

Given the weak state of both the U.S. and global economies, and barring any major geopolitical event, it's unlikely gasoline prices will move up much in the next couple years. If so, that will support recent sales trends.

Analysts say cash-strapped automakers will continue to give American consumers what they want. The so-called aspirational truck buyer may be gone for good, but a small-car nation is hardly around the bend, even now that cars once again represent 50-plus percent of the market,

"Washington will have to wake up and orchestrate it," says Magliano. "It will have to either incentivize people to buy smaller or companies to sell smaller."

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