From pint-size Jeep Wranglers to Chevrolet Suburbans the size of a garage, sport-utility vehicles have been the mainstay of profits at Detroit’s Big Three automakers since the late 1980s. But a small traffic jam of new models is arriving, and auto executives predict that the profits, though still enormous, will start to erode.
Ford Motor Co. rolled out its largest offering, the three-bench, nine-passenger Ford Expedition, at its annual meeting in May in Kansas City, Mo., where Expedition is built. This year, Toyota has introduced the small RAV4 sport-utility and the Lexus LX 450, Nissan has redesigned its Pathfinder and Chrysler has come out with a new Wrangler.
Stock analysts predict that the new models, particularly the Expedition, should initially be big moneymakers. Expedition, selling for as much as $40,000 with options, could prove to be the nation’s most profitable auto, adding up to $1 billion a year to Ford’s after-tax profits by 1998, said David Bradley, an analyst at J.P. Morgan Securities Inc.
“I haven’t been a huge, rah-rah supporter of Ford stock,” said Bradley, referring to the fact the No. 2 automaker’s shares has performed poorly. “But this could make a difference,” he said. Ford has not officially priced the Expedition, which goes on sale in September as a replacement for the Ford Bronco, but it is likely to sell for $30,000 to $36,000.
For hot-selling, full-size sport-utility vehicles such as the Suburban, profit margins approach $10,000 apiece, but that is likely to shrink, auto executives say, as more models go on sale.
“Clearly the profits will come down in that segment; there’s a lot of capacity coming in,” said G. Mustafa Mohatarem, chief economist at the General Motors Corp.
Executives are concerned, even at Chrysler Corp., which owns the Jeep trademark and has been posting record sales for several models. “To say that Jeep is not looking over its shoulders at some of the people coming into the market would be incorrect,” said Ed Brust, general manager of Chrysler’s Jeep and Eagle division. “The competition is coming and it’s going to be a real dogfight.”
J.D. Power & Associates, the auto consulting company, calculates that the number of sport-utility vehicle models on the market grew by one, to 30, in the last five years. But in the next several years, there will be a net increase of 18 models, to 48 models in 2000.
A few analysts say that is a recipe for trouble for the Big Three. “You’re talking about flat sales and increased competition,” said Paul D. Ballew, the chief economist at Power, who estimates that sport-utility vehicles accounted for half the profits at Detroit’s Big Three last year.
But executives at domestic and foreign automakers said they expect the sport-utility vehicle market to continue growing over the next several years, as new, more comfortable models entice more customers to switch from cars. “What we’re still seeing right now is an increase in that market,” said Brad W. Larsen, national manager of trucks and sport-utility vehicles for Toyota Motor Corp.
Only one of every 16 cars and light trucks sold in 1990 was a sport-utility vehicle. By last year, the figure was one in nine.
Japanese automakers invested heavily in the late 1980s to make midsized luxury sedans such as the Acura and the Lexus LS 400, while Detroit placed its bet on a rising sport-utility vehicle market. Having initially bet wrong, Japanese carmakers are developing many more sport-utilities.
Auto executives and dealers said that rising gas prices seem to have had little affect so far on the demand for even the biggest, fuel-thirsty sport-utilities, which get as little as 13 miles to the gallon in the city–less than a Cadillac. “These are expensive vehicles, more than $30,000 a vehicle, and for the people that buy these vehicles, 10 cents a gallon or more doesn’t have any effect on them,” said Henry Valencia, a Pontiac-GMC and Buick dealer in Santa Fe.
The California market may be an exception, GM’s Mohatarem said. Gas prices are likely to stay high in California because of its requirement for specially formulated gasoline to reduce air pollution, he said, and that eventually will discourage some sport-utility sales.
“You will begin to see the mix of sport-utility vehicles in California is less than in Texas, say,” Mohatarem said.
While advertised for their rugged ability to ford streams and charge up hills, sport-utility vehicles are mostly used by affluent families hauling children around the suburbs. The larger models are surprisingly rare in rural areas, where many people cannot afford them.
Don Smolek, a farmer in Monterey, Ind., said that though he and his wife would like a larger sport-utility vehicle to replace their 1993 Ford Explorer, they were unlikely to buy the Expedition because of the price. “Mid-20s is about as high as I’d go,” he said.
But the recent experience of automakers has been that though many middle-class customers pinch pennies on car purchases, affluent buyers have been snapping up the most expensive mini-vans, pickup trucks and sport-utilities without waiting for rebates and other incentives.
Dianne C. Craig, marketing plans manager for the Expedition and Explorer, said Ford expected only 10 percent of the Expedition sales to come from Explorer sales, while the rest would come from various other companies’ sales of luxury cars, expensive mini-vans and very large sport-utilities.
The Expedition will challenge the near monopoly GM has had on very large sport-utilities. The Chevrolet and GMC Suburban, which is in tight supply, has three rows of seats, like the new Expedition, a feature that has drawn buyers with large families or with children who participate in car pools or group outings. Last year, GM introduced the strong selling GMC Yukon and Chevrolet Tahoe, which are big enough for three rows of seats but not engineered to hold them.
The Expedition is roughly the size of a Yukon or Tahoe and is designed to be easier to park than the Suburban. Bradley at J.P. Morgan said that with the market for very large sport-utility vehicles growing briskly, GM was unlikely to be hurt seriously by Ford’s entry.
