US carmakers betting on big

A Ford Expedition sport utility vehicle being produced at the carmaker's Kentucky Truck Plant in Louisville, Kentucky.
A Ford Expedition sport utility vehicle being produced at the carmaker's Kentucky Truck Plant in Louisville, Kentucky.PHOTO: REUTERS

Americans prefer bigger vehicles and are willing to pay more for them

DETROIT • Ford is rolling out a new advertising campaign with the slogan, "Built to be a better big".

If nothing else, it evokes the sense of a two-tonne truck rolling right over the English language.

It also fits with Ford's direction: Earlier this week, it announced it was boosting production of sport utility vehicles (SUVs) for the second time in two years.

Plus, it has been almost a year since Ford said it was effectively exiting cars, apart from a couple of brands, including Mustang.

Ford is not alone in going all-in on "big".

Fiat Chrysler went that way with its North American business in 2016. General Motors announced in November it was ditching most of its car models as part of a sweeping restructuring.

There is a simple reason for this.

Americans prefer bigger vehicles and are willing to pay more for them. On average, they paid about US$51,000 (S$69,000) for a large truck last month, according to data from Edmunds, an online resource for car information, and almost US$42,400 for a mid-size SUV, up 22 per cent and 15 per cent respectively over the past five years.

Mid-size sedans, meanwhile, fetched about US$26,400, up just 3 per cent.

The premium for "big" is now the highest it has been in at least a decade.

Even as overall vehicles sales in the United States seem to have topped out, the proportion of heavier models has kept on climbing, much to manufacturers' relief.

While volume eked out a gain of just 0.5 per cent last year, retail revenue climbed 1.6 per cent, according to Mr Kevin Tynan, Bloomberg Intelligence's senior automobiles analyst.

That relatively simple mathematics is why US manufacturers "will keep pushing transaction prices higher until the consumer pushes back", said Mr Tynan.

There are some signs of fatigue on this front. Bloomberg Intelligence noted recently that discounting of new vehicles has picked up amid bloated inventories.

Supply of Ford's F-Series trucks, for example, has averaged 104 days so far this year, versus an ideal level of around 55 to 65 days.

The average interest rate on new car loans increased from about 5.3 per cent at the end of 2017 to 6.7 per cent at the end of last year, according to data from the Federal Reserve.

There are uncomfortable rumblings in the car-loan business, with 30-day delinquencies hitting their highest level since 2012, according to data from bank holding company Capital One.

But low unemployment and rising wages have blunted the impact thus far, keeping those payments at around 15 per cent of per-capita disposable income.

Rising wages, along with better fuel efficiency, have also made the more-frequent visits to a petrol station that SUVs and trucks necessitate more palatable.

The retreat to the fortress of big makes sense in terms of squeezing as much out of the current business cycle as possible. But with that strength comes a certain fragility.

US carmakers have largely ceded the car market to foreign rivals such as Toyota and Honda at this point.

If there is a recession or a jump in petrol prices, then the premium fuel-guzzlers will look less tempting and customers will have to look elsewhere if "smaller" is suddenly in vogue again.

All incumbent manufacturers are juggling the challenge of making profits on traditional vehicles while investing in electrification and autonomous-driving technologies.

Ford, playing catch-up on both fronts, also announced this week a US$900-million investment to build electric and self-driving vehicles at its Flat Rock plant south of Detroit.

It is, like its peers, effectively betting that today's trucks can fund both dividends to appease shareholders and spending on new products to keep the company relevant in tomorrow's transportation market.

This may work - if the consumer remains resilient and macro forces play ball.

As ifs go, that is a big one.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 30, 2019, with the headline 'US carmakers betting on big'. Print Edition | Subscribe