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GAS GUZZLER BUSINESS MODEL BANKRUPTING DETROIT
New Analysis Shows Gas Prices are Hammering Profit Margins, Sales
WASHINGTON, (May 12, 2005) -- A new analysis by the University of Michigan Transportation Research Institute in conjunction with NRDC (Natural Resources Defense Council) shows that the gas guzzlers which supported Detroit's Big Three profits throughout the 1990's are experiencing not only sharply falling sales but also deeply diminished profit margins due to rising gas prices.
This finding directly contradicts top corporate officials at GM, who have widely dismissed pump prices as the reason for their falling sales, and raises serious questions about the need for fundamental changes in the industry's gas-guzzler-based business model.
"This shows the gas guzzler business model of the past is now bankrupt," said Roland Hwang, Vehicles Policy Director for NRDC. "Consumers are clamoring for more fuel-efficient vehicles, and it's high time that management in Detroit starts to listen."
The analysis also showed that costly sales incentives -- rebates and other giveaways -- that have been bleeding U.S. manufacturers' corporate cash correspond almost exactly to the yearly increase in customer operating costs due to higher gas prices. The analysis found that SUV sales would have slipped even further if it were not for disproportionately high incentives for the segment.
The findings are a small portion of a larger study set to be released soon by NRDC and the Institute. The research shows that in 2004, Big Three profits on large and midsize SUVs was $7 billion less than in 2001, and that profit margins on many of these vehicles fell by as much as 43 percent.
Nevertheless, GM says it is betting heavily on new, full-size trucks and SUVs, announced yesterday that it is planning to increase production of the current full-size pickup truck line despite a huge backlog of unsold vehicles sitting on dealer lots.
Betting the Company, and Losing
Last week Standard & Poor's downgraded GM and Ford debt to junk bond status, citing the companies' continued adherence to a guzzler-heavy product line in the face of increased competitiveness from foreign automakers' fleet diversity. Yesterday, Moody's downgraded Ford's credit to its lowest level as well.
"Detroit automakers have put themselves in a poor competitive position," said Walter McManus, author of the study. "Their dependence on these SUV profits is a gamble that does not seem to have paid off."
GM's light truck sales, which include SUVs, fell 14 percent in April and are down 5.5 percent this year. Sales of three of GM's largest gas guzzlers -- Chevy Tahoe, Chevy Suburban and GMC Yukon -- all fell 30 percent or more. For Ford, the news was the same: last month Ford Explorer sales dropped 15 percent. Toyota's Prius hybrid, meanwhile, has outsold Ford's premier product release this year, the Five Hundred sedan. Overall, in the first quarter of 2005, demand for full-size SUVs fell 21.5 percent from 2003, according to Autodata.
While Ford has released a hybrid vehicle, the Ford Escape Hybrid, GM has failed to do so. Meanwhile, Honda and Toyota are introducing hybrid systems in nearly all classes of vehicles, from luxury SUVs to compact cars and have engaged horsepower-hungry, gas-pump weary American consumers with high performance hybrids like the Honda Accord V6 hybrid. These companies, along with Nissan and other foreign automakers, have gained considerable market share over Detroit over the past few years as more customers have chosen more nimble, fuel-efficient cars and crossover vehicles.
Jobs on the Line
GM's troubles have already been well documented. Their total losses last quarter totaled $1.1 billion. GM has been forced to close plants for a total of 121 weeks over the past 16 months due to excess unsold inventory and slow sales, according to an analysis by the Detroit News. Analysts are predicting more layoffs and plant closings if the trends continue.
Detroit could stand a boost from Washington to retool their factories to compete with new technologies like hybrid systems now chiefly made in Europe and Japan. Manufacturing incentives for American automakers to retool their factories could help them compete and produce jobs. The National Commission on Energy Policy found that $1.5 billion in incentives over the next ten years would produce nearly 60,000 jobs and would pay for itself in four to five years from maintaining domestic manufacturing jobs.
"By retooling their factories, Detroit can win back the high ground on technology," said Hwang. "Our economy should not be subjected to another replay of the 1980s, when our automotive industry lost so much ground to foreign competitors."
The Natural Resources Defense Council is a national, nonprofit organization of scientists, lawyers and environmental specialists dedicated to protecting public health and the environment. Founded in 1970, NRDC has more than 1 million members and online activists nationwide, served from offices in New York, Washington, Los Angeles and San Francisco.
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