Both New and Used Models Suffer as Drivers Seek
Fuel-Efficient Options; Turning Away Trade-Ins
By GINA CHON
Staff Reporter of THE WALL STREET JOURNAL
October 4, 2005
Rising gas prices and a shift to more fuel-efficient models sharply cut into sales of sport-utility vehicles in September.
At the same time, falling resale values for traditional SUVs are making it harder for car owners who want to trade for less gas-thirsty vehicles.
General Motors Corp. and Ford Motor Co. were hit particularly hard by the shift away from large SUVs. GM sales fell 24% from a strong year earlier, while Ford sales dropped 19.5%.
U.S. car and light-truck sales fell 7.6% in September. The seasonally adjusted annual selling pace eased to 16.36 million vehicles from 17.46 million units a year earlier, when Detroit's Big Three pumped up sales with model year-end clearances.
The September sales are the strongest evidence to date that consumers are looking for smaller, more fuel-efficient vehicles. Gasoline prices have jumped to $3 a gallon in the aftermath of two hurricanes. Industry executives say it's still unclear whether the abrupt shift toward cars and small to midsize crossover SUVs will become a long-term trend.
By contrast, DaimlerChrysler AG's Chrysler Group, which is less dependent on large SUVs, reported a 3.7% increase in sales compared with September of last year, riding strong demand for its lineup of large cars and its heavily discounted Ram pickup.
The major Japanese auto makers improved U.S. sales last month over a year ago. Toyota Motor Corp. said sales rose 10%, as demand for its cars, including the gas-electric hybrid Prius, jumped nearly 23%.
But even Toyota suffered from the SUV slump, as sales of its large Sequoia SUV -- which lags GM's Chevy Tahoe SUV in government fuel-economy ratings -- plummeted 47%.
Nissan Motor Co. said sales rose 16% and Honda Motor Co. said sales increased 11.7%, boosted by a 37% increase in demand for its compact Civic models.
Slumping values for SUVs could complicate Detroit's efforts to wean customers off employee discounts.
Today, Chrysler is expected to roll out a new discount program that will return to a more traditional approach of ads flagging innovative features, and cash rebates.
Analysts predict that sales will remain slow in October, as GM and other car makers shift to value-pricing strategies and try to reduce discounts. Paul Ballew, GM's chief of industry analysis, predicted GM's discount, or "incentive," spending will be flat or down in October.
That means GM will effectively be trying to raise prices.
Mr. Ballew said October sales could be "rocky" as the company navigates the transition from employee-discount deals.
In the short term, car makers aren't the only ones getting hurt by the decreasing interest in full-size SUVs.
The prices of used sport-utility vehicles have fallen by roughly 10% in the past few months, leaving many consumers stuck in rides they can't profitably trade in.
According to Kelley Blue Book, the value of a 2004 Ford Expedition fell by 9.8% to $22,200 from January to October, while the price of a 2004 GMC Yukon fell by 6.9% to $25,700 in the same period. The 2004 Hummer H2 was worth $41,700 in January but is now valued at $39,000.
SUVs have lost their shine as consumers look more to hybrids, vehicles powered by gas-electric motors, as the latest must-have product.
"Right now, it's a buyers market for SUVs and people who are looking to trade those in are facing a very low trade-in value," says Lisa Aloisio, a spokeswoman for Autotrader. com, one of the largest automotive classified advertising companies, with more than 10 million shoppers per month.
According to Autotrader.com, listings for economy vehicles for sale fell by 18% through September of this year to 84,764, while the number of economy shoppers rose 31% to 757,245.
The number of SUV listings rose 8% to 364,016 and the number of SUV shoppers fell 36% to 731,098.
To push sales, GM Certified Used Vehicles announced yesterday that it would offer 3.9% APR financing on 2000 to 2005 models of Chevrolet TrailBlazers, Suburbans and Tahoes, and GMC Envoys and Yukons for as much as 60 months.
Mark McCready, director of pricing strategy and market analysis at Carsdirect.com, an online car-buying service, said consumers usually get less than they expect when selling a used vehicle.
But now consumers are getting $2,000 to $3,000 less than what they had expected, whereas in the past, it was $1,000 less.
"We've heard from a number of dealers that say they aren't taking SUVs as trade-ins any longer," Mr. McCready said. "Dealers see themselves in a risk position now because they already have a number of SUVs on their lot."
Tom Kontos, vice president of analytical services at Adesa Inc., one of the largest providers of vehicle wholesale auctions for dealers, said used vehicle sale prices were already soft because of the employee-discount program, which caused a glut in the used-vehicle supply as consumers traded in vehicles to buy a new one under the incentives plan.
"When SUVs go down the auction lanes, dealers are being much more selective in what they buy," Mr. Kontos says. "Before, they bought less selectively because they wanted to get access to these vehicles."
Paul Taylor, chief economist of the National Automobile Dealers Association, said the shift away from SUVs was already happening before gas prices topped $3 a gallon in the wake of Hurricane Katrina as consumers moved toward crossovers and large cars.
"The higher gas prices just accelerated a trend that was already taking place," Mr. Taylor said. "It shows that people are having a sensible, rational adjustment to the gas prices. It's not like the 1970s when people were putting limits on how many gallons of gas they would buy. People are still buying vehicles but they are buying different ones that still meet their needs."
The volatility of energy prices is likely to remain a wild card in the auto industry's marketing efforts.
Both auto makers are struggling to overcome "junk" credit ratings. Standard & Poor's Ratings Services said yesterday that it placed both Ford and GM on CreditWatch with negative implications, reflecting concern about the car makers' ability to turn the companies around. The debt of both GM and Ford was downgraded to junk status in May.
"We believe soaring gasoline prices after Hurricanes Katrina and Rita are leading to an accelerating decline in demand for SUVs," Standard & Poor's analyst Scott Sprinzen said in a statement. "GM will soon launch a family of all-new midsize and large SUVs. But given its disproportionate reliance on SUV-related earnings, its ability to return to meaningful profitability in its automotive business will be heavily influenced by the success of these new models, despite efforts the company is taking to strengthen its product offerings in other segments."
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