After digging out my car from a huge snow storm that hit us last weekend, I started thinking about the declining sales of SUVs in United States. As first table above shows, SUV and Light Truck sales have creped up from below 20% in 1980 to over 50% by 2005. SUVs are much more profitable than regular cars because manufacturers have been able to charge a premium for a larger car. This became an important source of profits for Big 3 as over 80% of all light trucks are manufactured by domestic car companies.
However this summer all hell broke lose for US manufacturers. Hurricane Katrina seemed to be the last straw for US consumer. Oil rose above $3 per gallon and everyone started complaining about falling SUV sales. It’s true that light trucks fell from 60% of overall sales to 51% in October. However from a long term perspective we can see that demand for SUVs did not significantly deviate from historical levels. In December of 2005, light trucks sales spiked to 58% of overall vehicles confirming that demand for such vehicles remains strong.
In my eyes this means that US car manufacturers are trying to partially mask their issues by complaining about SUV sales. Most likely initial profitability related to SUVs got competed away as the time went by. Similar thing happened to the initial advantage US manufacturers held in luxury car manufacturing in the ‘70s.
I started this research hoping to justify that last week’s snowstorm will result in recovery of demand for SUVs. I now realize that the demand never really fell, it’s just the market finally reached saturation. Absolute numbers fell, but only because Big 3 accelerated a lot of their demand through incentives this summer. Even with this summer’s big sell off Ford’s and GM’s finished goods inventories have increased between December and September. No matter how cheap they seem, I recommend avoiding the car manufacturers. Until they fundamentally change their development and selling process, investors are unlikely to see anything than fickle short term gains.