General Motors Corp. sent a clear signal Tuesday that it believes $4 per gallon for gasoline is the tipping point for car buyers.
GM announced Tuesday that it would idle four of its North American truck plants, among other moves.
But increasing small car sales could take a big bite out of profits, not only for GM, but for Ford and Chrysler.
“This is a GM announcement, but it’s a ‘Detroit Three’ catastrophe,” said Brett Smith, senior automotive industry analyst with Ann Arbor-based Center for Automotive Research. “The Detroit Three haven’t made money on small cars, ever …. They’ve made all their profits on trucks. That’s scary when you consider they’re not making large trucks in the future.”
General Motors announced that it would close plants in Ohio, Wisconsin, Ontario and Mexico, where some of its larger cars and trucks such as GMC Sierra, Chevy Silverado, GMC Envoy and Chevy Suburban are made. At the same time, the company is expanding operations and adding shifts in Orion Township, which builds the Chevy Malibu and Pontiac G6, and Lordstown, Ohio, where the Chevy Cobalt and Pontiac G5 are built.
The company also announced that its board approved production of the electric/gas hybrid Volt for 2010.
Dearborn-based Ford (NYSE:F), meanwhile, Tuesday reported that sales of its SUVs dropped 44 percent in May over year-ago numbers, and trucks and vans sank 29 percent.
But sales of the Focus compact passed the 30,000-unit sales mark in May for the second time in nine years, it said, up 53 percent from a year ago.
Ford in April announced plans to produce 245,000 Focus units in 2008, about 30 percent more than in 2007. Ford expects to produce 280,000 Focus units in 2009. It also is cutting truck production, planning to idle its Wayne, Mich., truck plant for five weeks this summer.
What’s got Smith concerned, he said, is that the business model for American auto makers has to completely change. Historically, smaller American cars tend to have lower price tags and are built at a loss, whereas Asian manufacturers have had a better history of making money on smaller cars, he said.
“That was all fine and dandy when you could sell SUVs and Lincolns and Cadillacs at a profit. Now if all you’re selling is small car because that’s all the market will carry, it’s a tougher business model,” Smith said. “It’s beyond the point where larger vehicles are no longer a profitable market. They’re simply not viable anymore.”
Sustained high fuel prices have in a period of months changed everything.
“Consumers will value small cars more, so maybe they’ll be willing to pay more,” Smith said. “Adding options can also help with profits.”
If the shift to smaller car production seems dramatic now, Smith says, “We haven’t seen nothing yet.”
Car buyers used to make buying decisions based on gas that was $2.50 or even $3 per gallon, he said.
“Now we have to look at a completely different strategy,” Smith said. “Gas prices are here to stay at $4 per gallon, and while GM wouldn’t say they would go to $6 per gallon, that’s certainly on the horizon.”
Domestic car makers could soon begin to see profits on smaller cars, said Tom Libby, a senior analyst with J.D. Power and Associates.
“The profits on the small cars are much less. However, the profits for small vehicles will go up when the UAW contracts become fully implemented,” he said. “As the wages go way down, their cost per unit will go down, so they may be able to make money. That was a major benefit of the new lower wage structure — they won’t be making all their smaller vehicles at a loss.”
The consumer shift toward smaller cars has been gradual and “under the radar,” Libby said. And even though GM said the shift is going to be permanent, Libby said, in order for permanent buyer habits to form, gas prices will have to remain above $4 per gallon for more than a year.
Auto dealer Joe Serra, president of Serra Automotive in Grand Blanc, thinks the threshold is lower.
“If gas stays up over $3.50 or $4 ,then obviously I would agree that buying habits will shift permanently. It seems that the breaking point was about $3.50. If gas comes back down, then consumers will go back to bigger cars. Gas prices — that’s the real question,” he said.
“If a buyer started with an SUV that was getting 15 miles per gallon, then 20 looks good. If they were getting 25, then 30 looks good. The key is that everyone’s trying to improve,” Serra said. “But we all have needs from our vehicles. You can’t go from a work truck to a Cobalt.”
As for which auto makers will be able to quickly shift to profitability in an age of small cars, Libby has his doubts about the Detroit 3’s prospects.
“None of the (domestic manufacturers) are in as good a position as the Asians. The domestic portfolios are skewed toward larger vehicles as of right now. But if I had to pick which is positioned the best, I would say it’s GM,” he said. “I say that because while they have a lot of large vehicles, they do have more small vehicles than their counterparts. But none are in a good situation.”
GM has been consolidating facilities in nearby Pontiac as part of its utilization strategy, recently moving a 600-person OnStar call center from Troy into a former GM engineering office on South Boulevard. The automaker also is adding 1,200 engineers to a new, 450,000-square-foot engine test center at its Global Powertrain headquarters on Joslyn Road, drawing them from facilities in Romulus, Warren, Wixom and Ypsilanti.
EDS, a major supplier, moved 2,500 employees into nearby Centerpoint North offices on South Boulevard.
