Pickups for GM

Pickups for GM

Pickups for GM

Moneybox
Commentary about business and finance.
Jan. 12 1999 6:31 PM

Pickups for GM

One of the more curious things about the auto industry is that the most popular vehicles--sport-utility vehicles and pickups--are also the most profitable. I don't mean that auto companies make more money on SUVs and pickups because they sell so many of them, but rather that the profit margins on what you might call "non-cars" are significantly higher than those on your average Taurus or Accord. And there's no real sign on the horizon that this is going to change anytime soon.

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General Motors, for instance, announced Friday that its new full-size pickups should earn profit margins two points greater than those the company had been making on its older pickups, which in turn had higher margins than most of GM's cars. In 1999, GM said, the new pickups could add as much as $400 million to its bottom line, which is a hefty boost, even for a company as big as GM.

In one sense, of course, the high margins on SUVs and pickups are not especially paradoxical. If demand is high, automakers should be able to keep prices up and avoid the discounting that has eaten into their profits from cars. But in another sense the non-car market is an anomaly in this consumer's paradise we now inhabit, in which prices never go up and often go down. (Nothing makes an advertisement seem more out-of-touch than a reference to how expensive everything is these days.) In fact, the non-car market is an anomaly within the auto industry itself. That industry essentially constructed itself around the idea of regular price increases and of consumers' ascent up the ladder of quality. Today, auto manufacturers have reconciled themselves to the reality of stable prices and of consumers who will be happy to drive an Accord for the rest of their lives. The only real exception to this rule appears to be SUVs and trucks. (Well, and Ferraris, I guess.)

What's surprising about that exception is that it's lasted as long as it has. Although SUV mania did reach a crescendo this year, especially as the price of gasoline continued to tumble, the Big Three have been selling Navigators and Jeep Cherokees as fast as they could make them for years now. And these vehicles have been high-margin all along. Whenever an SUV plant goes on strike, for instance, you're sure to read about the thousands of dollars that the company is losing on every vehicle that isn't rolling off the line. So why hasn't price competition been the inevitable result of high demand? If an opportunity for profit exists, competitors should emerge to fill it. So what's missing?

The simplest answer is also probably the most accurate one, which is that the Big Three have faced less global competition in the SUV and truck market than in the market for cars. While the Camry and Accord have surpassed the Taurus in U.S. sales, and while U.S. luxury cars are under significant pressure from Lexus, Infiniti, and Mercedes Benz, there are many fewer competitors in the SUV market, and those that do exist are often recent competitors. The truck market, meanwhile, is even more dominated by the Big Three. In part, that's because the market for cars is more global than the market for pickups (there aren't too many pickups in Japan). And in part it's because foreign car companies have been slow to realize both that they have the technical capabilities to compete in these markets and that these markets are only going to get bigger.

With the introduction of the new Mercedes and Lexus SUVs and the recent arrival of the new Honda Odyssey, though, the relative insulation of the Big Three from price competition should change. That's more than just a good thing for consumers, too. The experience of the 1970s and 1980s scarred Detroit, and ensured that the Big Three wouldn't take U.S. consumers for granted. But memories, no matter how bad, are no substitute for some real competition in the present.