Detroit Increases Pickup Capacity; Signs of Market Peak Appear

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The Wall Street Journal  /  October 24, 2016

Detroit’s truck wars are heating up with auto makers pledging billions of dollars for pickup truck and sport-utility vehicle production over the next three years despite fears that the U.S. auto market is peaking.

General Motors Co. , Ford Motor Co. and Fiat Chrysler Automobiles NV plan to invest heavily to boost output of existing models and make room for new ones. While Ford said this month it is trimming some pickup production, it still plans to add new SUVs to its lineup and reintroduce a midsize pickup by 2019.

The auto industry’s annual full-size pickup capacity is expected to grow 5%, or by 206,000 vehicles, by 2019. Large SUV capacity could increase about 16%.

Detroit auto makers have been reluctant to add capacity following years of costly plant closings, and analysts are concerned the market will cool by the time the new output hits dealer lots. Popular when fuel is cheap and the economy is good, heavier vehicles suffer when gasoline prices spike or the housing and jobs markets soften.

Being overly cautious, however, can limit profits. Pickups and large SUVs deliver much of the profit at domestic auto makers. Citigroup estimates the vehicles contribute as much as 67% of North American operating profits at Ford and GM, equivalent to nearly $9 billion in the first half of 2016. Full-size pickups and large SUVs accounted for about 16% of total U.S. vehicle sales during the first nine months of 2016.

GM last month agreed to boost pickup production in Canada as part of a labor deal, people familiar with its plans said. Ford will begin building a new version of the Bronco SUV and Ranger pickup in Michigan starting in 2018, replacing the Focus small car it is moving to Mexico. And Chrysler is phasing out small- and medium-size sedans to make room for more pickup trucks and new versions of its popular Jeep SUV.

There are already signs light-truck production is outstripping demand. In addition to Ford’s production trims, Fiat Chrysler’s Ram pickup division in September began a two-month promotion it called the “strongest truck program EVER.” The discounts were as much as an $11,600 price cut on certain models.

One customer at Rentschler Chrysler Jeep Dodge near Allentown, Pennsylvania, this month landed a $56,000 Ram for $41,000, taking advantage of various promotions. Those deals “really drive our Ram traffic,” dealer Greg Rentschler said.

GM responded this month with an $11,000 discount on a popular version of the Chevrolet Silverado. “When you start taking 11 grand off a truck, I can’t sell a used one for what I’m selling some of the new ones,” said Steve Rayman, owner of a large Chevrolet dealership in Marietta, Ga.

Ford recently said it would idle a Kansas City, Mo., F-150 plant to better match production with supply. Its F-series pickup sales for the first three quarters were up 6% from a year earlier.

Detroit has a lock on the U.S. markets for full-size pickups and large SUVs with 94% and 62% market share, respectively, despite efforts by Toyota Motor Corp. , Nissan Motor Co. and others to gain in these lucrative segments.

The average price for full-size pickups has climbed 33% since 2010 to about $46,700 this year, nearly triple the growth rate for the entire market.

Inventories, however, are rising after six years of steady sales gains. The U.S. supply of large pickups in September was 11% higher than a year earlier.

In part, Toyota and Nissan have relatively new versions of their trucks and are beefing up supply in a bid to take market share.

Analysts say filling dealer lots with more Rams, Chevy Tahoes or Ford F-150s could upset the oligopolistic pricing power enjoyed by the Detroit Three if demand doesn’t rise with the greater supply.

Full-size truck demand also may be threatened by the success of smaller trucks like GM’s Chevrolet Colorado, a brisk seller since its introduction two years ago. Ford and Fiat Chrysler are developing midsize trucks for near-term introduction.

GM has suffered from tighter dealer inventories, so the company’s immediate plan is to recapture lost sales.

“We could sell more if we had more,” GM North America President Alan Batey said recently. “I’d be happy to have 10 to 15 more days’ supply.” GM typically carries 80 days of sales of full-size trucks at dealers.

Mr. Batey said GM is confident its products can compete. “If we don’t have the best truck, more capacity is not going to help me,” he said.