Pump Prices Deal Blow to GM, Chrysler

Source: Detroit Press
Jun 05, 2006

Rising gas prices kicked Detroit in the gut last month -- encouraging consumers to dump their fuel-hungry trucks, where local automakers make most of their money, in favor of small-engine cars that are fuel efficient but far less profitable.

The Dearborn-based Ford Motor Co. picked up a substantial number of those car sales. But Detroit-based General Motors Corp. and the Auburn Hills-based Chrysler Group missed the wave, despite their new fuel-efficient compact cars, the Chevrolet Cobalt and Dodge Caliber.

The May sales results gave concrete support to the theory that higher gas prices would make it harder for GM and Ford to stop losses in North America and for the Chrysler Group to keep its momentum.

Sales for all three Detroit automakers fell, causing GM and Ford to announce production cuts. That will mean less work for tens of thousands of autoworkers and yet another blow to the state's economy.

Michiganders can blame gas prices. It may not be the energy crisis of 1979, but the average price of a gallon of regular unleaded fuel nationwide climbed to $2.85 on Thursday, up 75 cents from a year ago.

Those prices are having a "corrosive impact" on the market, the University of Michigan monthly survey of consumer confidence found. Vehicle buying plans, U-M reported, fell to their lowest level in 15 years, and record numbers of consumers complained that gas prices had hurt their financial situation.

Consumers still bought 1.5 million new cars and trucks in May -- down about 10,200 vehicles from a year ago. But the makeup of those sales was striking: Truck sales fell 6.7%, while car sales grew 6.4%.

Automakers with a strong reputation for fuel-efficient vehicles posted big gains in the market. Monthly sales were up 17.0% for Toyota Motor Corp. and 16.1% for Honda Motor Co., a fierce performance in a down market.

Detroit automakers -- known for their big, powerful trucks and engines -- suffered in varying degrees, meanwhile, and all said they would work this month to promote their fuel efficiency.

Ford, with its stable of attractive new fuel-efficient cars and its hybrid compact SUVs, fared best among local automakers, with sales down 2.0%. But sales were off 12.5% at GM and 10.9% at the Chrysler Group, pulling down DaimlerChrysler AG sales by 8.4%.

Car sales were up 6.4% at Ford and 2.6% at Chrysler, but they were down 15.9% at GM.

Truck sales, meanwhile, were little comfort to any of the local automakers. Sales of pickups, SUVs and vans were down 14.9% at Chrysler, 10.2% at GM and 6.7% at Ford.

Ford seemed content with its results, even though the company's share of the U.S. market kept sliding. Ford sales fell to 18.5% of the market through May, down from 19.1% a year ago.

Still, Ford's top sales analyst, George Pipas, boasted during a conference call with journalists that Ford is well-suited for the sweeping market change.

The company has several hot new cars on the market, such as the Ford Fusion and crossovers such as the Ford Freestyle and a growing stable of vehicles with hybrid gasoline-electric engines.

Crossovers are vehicles that look like SUVs but are built like cars and offer better fuel efficiency.

"We've never been in a better position to compete with all the manufacturers in this environment of higher gas prices," Pipas said.

The company also kicked off a new promotion that offers zero-interest financing on most Ford vehicles with a $1,000 debit card that can be used to purchase gasoline, diesel or E85 fuel.

At GM, the mood was more somber.

Paul Ballew, executive director of global market and industry analysis at General Motors, called the rise in gas prices "an accelerant" on the consumer shift away from trucks toward cars, and he noted that it was a challenging shift for GM and other automakers to navigate.

"We knew we'd have a rocky month, and the performance does reflect that," he said.

GM, though, was able to continue lowering its fleet sales and incentives substantially. The company reported that fleet sales, typically less-profitable sales to the rental-car companies, businesses and the government, were down 16%.

GM's incentive spending kept plummeting, partially explaining the falling sales. GM's incentive spending declined 30.6% in May compared with a year ago, for an average of $2,781 per vehicle, said Autodata Corp., a research firm in Woodcliff Lake, N.J. Automakers do not publicly report how much they spend on incentives, which eat into profits, so several firms estimate the spending.

At crosstown rivals, however, incentive spending was up. Ford spent 3.7% more than a year ago, or about $3,863 per vehicle. Chrysler increased incentive spending by 1%, to about $3,900 per vehicle.

Gary Dilts, Chrysler Group's senior vice president for sales, said the company was planning on pushing the company's fuel efficiency in advertising, and he gave foreign automakers credit for getting their fuel efficiency message to the market "a little quicker than we did."

"This fuel headline is still out there and we have to deal with it," he said. "So the existing product that we've got, we will dial up the message significantly."

For example, the Chrysler 300 full-size sedan, which had a sales drop of 8.5% in May, gets 19 miles per gallon in the city and 27 m.p.g. on the highway with a 3.5-liter, V6 engine.

Getting consumers to appreciate the improved fuel efficiency of today's vehicles might help consumers return to dealer showrooms.

Last month, the seasonally adjusted selling rate for new auto sales was 16.1 million -- the lowest level in six months.

The seasonally adjusted annual selling rate indicates what sales would total for the year, given that certain months, such as May, tend to have higher sales than others. It is considered a more accurate way to compare how the market is performing month to month.

Ultimately, the gas price squeeze will have an impact on autoworkers. GM said it planned to build 1.05 million cars and trucks in the third quarter, an 8.4% decline from a year earlier. Ford said it would make 710,000, down from 728,000 during the same July-September period a year ago. Chrysler does not release production forecasts.

Despite rising gas prices, Sarah Knight, 23, of Detroit bought a silver 2006 Jeep Grand Cherokee on Thursday at Southfield Chrysler Jeep.

An education adviser at the University of Phoenix, Knight said she was not too worried about the economy and gas prices.

"It was time for me to get a new car. And I thought, 'If you can afford it, why not?' "

She decided she could afford the $270-a-month payment, and she is budgeting $200 per month for gas.