Big trucks still rule Detroit in energy-conscious era

Reuters

(Repeats INSIGHT with no changes to headline or text)

* Pickups, SUVs account for 71 pct of global profit atDetroit 3

* Risks include oil price spike, tightening regulations

* Ford staggers launch of 2015 F-series pickup

By Paul Lienert

DETROIT, Nov 21 (Reuters) - Five years into a remarkablerebound from near-disaster, the Detroit 3 automakers still counton sales of pickup trucks and SUVs in the North American marketfor the bulk of their global profits, despite efforts to shiftbuyers into smaller, greener vehicles as part of a broader moveto remake the Motor City.

Promotion of green technologies, notably hybrid and electricvehicles, has been a signature policy of the Obamaadministration, which oversaw the $80 billion taxpayer-fundedbailout in 2009 of General Motors and Chrysler.

Those same U.S. taxpayers, however, have shown a markedpreference for big trucks such as the best-selling Ford F-150over cleaner, more economical "electrified" vehicles such as theChevrolet Volt.

Full-size pickups and SUVs remain a pillar of profitabilityin Detroit, accounting for more than two-thirds of U.S.automakers' global pre-tax earnings, a Reuters analysisindicates, even though they make up just 16 percent of NorthAmerican vehicle production.

"There is no doubt that full-size trucks are still thesingle largest component" of pre-tax profits at General MotorsCo, Ford Motor Co and Chrysler Group LLC, a unit ofItaly's Fiat SpA, according to Sterne Agee auto analystMichael Ward.

Representatives at the three automakers confirmed thatassessment but declined to provide specifics.

Even so, the Obama administration does not see the trend ascounter-productive to its green-tech initiatives. Since GM andChrysler emerged from bankruptcy, U.S. automakers and partssuppliers have added tens of thousands of jobs and invested inadvanced technology, said White House spokesman Keith Maley.

"At the same time, the administration has put forward newfuel-economy standards that have helped drive down oilconsumption and save consumers money at the pump," Maley said inan email when asked whether the popularity of trucks runscounter to the goal of putting more green cars on U.S. roads.

SALES JUMP

Still, with the notable exception of the Toyota Prius, manyof the electric and hybrid vehicles on sale in the United Statesremain money-losers, say analysts and executives, with thesector this year accounting for less than 4 percent of totalvolume, despite price wars and government tax incentives.

The continued strength of big trucks is remarkable in an eraof tightening fuel-economy regulations and public policy movesintended to promote green cars. In a rising U.S. auto marketthat was up 8 percent in the first nine months, sales offull-size pickups jumped 20 percent from the previous year.

The automakers have been able to maintain higher margins ontheir trucks, in part, because they have been in relativelyshort supply - a consequence of cuts in North Americanproduction capacity over the past five years.

"In the past, truck profits masked a lot of rot in Detroit'score business - overcapacity, weak brands, lousy quality," saida former Ford official who asked not to be identified.

But Detroit has cleaned up its act since the GreatRecession, sweeping away weaker brands, slashing overhead,boosting quality and adding premium products and features.

Consumers are responding by buying more expensive trucks.Ford said nearly 40 percent of its F-series pickups in the U.S.market sell for $40,000 or more; the figure at GM is 30 percentand rising. As a result, pre-tax margins are flowing straight tothe bottom line.

Reuters calculated the pre-tax contribution of trucks tocompanies' EBIT - earnings before interest and taxes - using aconservative per-vehicle profit estimate of $6,000, multipliedby the number of large trucks and SUVs produced by each companyin North America, where nearly all those vehicles are sold.

For a graphic comparing EBIT of the three companies, clickon http://link.reuters.com/syn74v

MASSIVE PROFITS

Using that formula, big trucks and SUVs at the Detroit 3last year contributed an estimated $13.7 billion, or roughly 71percent, of the automakers' combined global EBIT of $19.2billion. The percentage remained the same through the first ninemonths of 2013: $11.7 billion, or 71 percent of the combinedglobal EBIT of $16.5 billion, according to Reuters calculations.

The resilience of big trucks - and the U.S. automakers'dependence on them for the bulk of their profits - raisesquestions about Detroit's ability to mitigate future risks tothose vehicles, from spikes in oil prices to more restrictivefuel-economy standards.

Detroit's reliance on trucks "has burned them in the pastwhen market shifts occurred," said Jeff Schuster, senior vicepresident of forecasting at research firm LMC Automotive.

As a hedge, more product diversification "is critical tocapture new buyers, expand scale and grow volumes," said MichaelRobinet, managing director of IHS Automotive Consulting.

But U.S. consumers do not seem inclined to walk away justyet from big pickups, which are providing a brisk business atdealerships such as Joe Rizza Ford in Orland Park, Illinois.

"We're seeing all types of folks - blue-collar workers,retirees, single mothers," said Rizza sales manager BrianSchwarz. "The older buyers want all the goodies on their trucks.The moms like the fact that they're big and safe, and they ridelike a car, not a Mack truck."

STILL DEPENDENT

Some companies are more dependent on trucks than others, theReuters analysis shows.

Big trucks and SUVs at GM, from the Silverado to theSuburban, last year contributed an estimated $5.66 billion, orroughly 67.7 percent of the company's global EBIT. The figurefor the first nine months of 2013 was an estimated $5.06billion, with share of global EBIT rising to 71.6 percent.

GM earlier this year introduced redesigned versions of itsstandard Silverado and Sierra pickups as 2014 models. The truckscarry higher transaction prices, which could climb even moreonce the new range-topping Silverado High Country and SierraDenali versions reach U.S. dealers this month.

And because the automaker has lowered its break-even pointin North America and will introduce new heavy-duty pickups andredesigned SUVs early next year, if demand continues to rise asexpected, "GM will be printing money," wrote Morningstar autoanalyst David Whiston in an October client briefing.

The company also invested heavily in Cadillac, expanding itsrange of premium products and promoting the brand outside NorthAmerica, especially in China.

"This is a much healthier company - more efficient and moregeographically diverse in terms of earnings," said GM spokesmanJames Cain.

In the meantime, the U.S. Treasury Department plans to sellits remaining stake in GM - a legacy of the 2009 bailout - byearly next year. Treasury did not respond to a request forcomment on large trucks as the principal source of GM's profits.

HEDGING RISK

Ford, whose F-series pickup has been the best-selling U.S.vehicle for more than three decades, relies less on trucks forits profit, although the contribution remains significant.

Last year, trucks and SUVs contributed an estimated $5.53billion, or 69.4 percent of Ford's global EBIT. This year, asdiscounts have risen as high as $9,000 on the aging F-series,the profit contribution has dipped to $4.55 billion, or about62.4 percent of global EBIT.

Analysts are less certain Ford can maintain or increase thatlevel because it is introducing a redesigned F-series pickupthat's expected to make extensive use of aluminum. The newdesign and the lighter material could turn off consumers,especially construction workers and others who value the ruggedlooks and durability of the current 2014 F-series.

To help hedge the risk, Ford has staggered the introductionof the new F-series at its two U.S. trucks plants, according tosuppliers familiar with the automaker's plans. It will beginbuilding the all-new 2015 model at its Dearborn, Michigan, plantnext August, they said, while carrying over the mostly unchanged2014 model at its Kansas City plant until March 2015.

Chrysler's case is unique. For one, its fortunes arecontrolled by parent Fiat, which continues to rack upsubstantial losses in Europe. For another, big trucks accountfor a much smaller portion - just 19 percent - of the company'sNorth American vehicle production.

But truck profits have a maximum impact at Chrysler,contributing an estimated $2.53 billion last year, or about 86.9percent of Chrysler's 2012 EBIT. That number in the first ninemonths was $2.10 billion - virtually 100 percent of thecompany's EBIT so far this year.

Small wonder that Fiat CEO Sergio Marchionne is so eager toconsolidate the two companies. (Editing by Frank McGurty and Grant McCool)

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