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US carmakers face recession as buyers dump traditional sedans for SUVs

Keith Naughton, David Welch & Gabrielle Coppola | / 14 Jan 19 | 02:42 AM

These should be boom times for Detroit. Unemployment is at a half-century low, gasoline is cheap and auto sales in the US were near record levels last year. Yet US carmakers are  closing factories, cutting shifts and laying off thousands of workers. The industry is behaving like a recession has arrived. In one segment of the market, it has.

Detroit is in the grips of a car recession marked by the collapse of demand for traditional sedans, which accounted for half the market just six years ago. Buyers have made a mass exodus out of classic family cars and into sport utility vehicles (SUVs). Sedan models such as the Honda Accord and the Ford Fusion made up a record low 30 per cent of US sales in 2018.

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Sales of the passenger-car body style that’s dominated the industry since the Model T will sink to 21.5 per cent of the US market by 2025, according to researchers at LMC Automotive, relegating sedans to fringe products. That leaves firms with excess factory capacity that can turn out about 3 million more vehicles  than buyers want. And overcapacity is precisely what spurred losses the last time a recession wracked the industry.

It’s a situation that promises to put a damper on the North American International Auto Show in Detroit this week, the last to be held in January. In a bid to reestablish relevance, the conclave is moving to June next year and will be reimagined as a chance for show-goers to drive new models in warm weather. The dealers who organise the show hope the format will entice dropouts — a group that now includes Mercedes, BMW and Audi — to return.

An optimist might seek solace in the better-than-expected profit prediction issued Friday by General Motors. But a deeper look at the numbers reveals that the biggest contribution to the company’s rosy forecast was it plans to close five North American plants, which it said will help boost profit this year by as much as $2.5 billion.

The overcapacity plaguing US automakers is the equivalent of 10 excess plants, which would account for at least 20,000 jobs directly, and thousands more as it ripples through the suppliers and support services to the massive industry. 

One strategy for dealing with the collapsing market has been to stuff unwanted sedans into rental lots and other commercial fleets. That has only delayed today’s capacity crisis. Those lower-profit fleet sales have inflated the market, keeping US vehicle deliveries above 17 million for the last four years, even as sales to retail customers peaked three years ago.

“The car recession and the retail recession have already arrived in the sense that retail sales peaked in 2015 and have gone down ever since," said Mark Wakefield, head of the automotive practice at consultant AlixPartners. “Cars have just been crushed."

Many passenger-car buyers have flocked to crossover SUVs that offer more room and, these days, competitive fuel economy. There are signs drivers are even ditching sedans for big trucks. “Pickup buyers are trading in crossover SUVs and sedans," said Sandor Piszar, director of marketing at Chevrolet. Total US pickup sales grew 2 per cent last year, to 2.4 million vehicles, in a market that was otherwise flat. 

Outside Detroit, auto executives are sticking with sedans. Between the US, Canada, Mexico and Puerto Rico, Toyota sells 375,000 of its Corolla compacts each year. “We are not going to get out of that business," Jim Lentz, chief executive officer of Toyota Motor North America, said. “We still see an opportunity there."

Ironically, automakers have the last recession to blame for their current plight. A decade ago, when high gas prices and a crashing economy left little demand for SUVs, the auto industry suffered through layoffs, plant closings and, ultimately, the bankruptcies and bailouts of GM and Chrysler. Detroit  flipped its factories from making hulking SUVs to sensible, gas-sipping sedans.

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Wakefield’s firm helped guide GM through its 2009 bankruptcy. “It felt like gas prices would go up and stay high," he recalled. But the market has flipped back, thanks to consistent low gas prices, and much of Detroit is again building too many of the wrong products.

Fiat Chrysler Automobiles, which anticipated sedans’ death spiral by culling its car lineup in 2016, has largely sidestepped the restructuring pain GM and Ford are experiencing now. Instead of shuttering plants or cutting shifts, it’s  converting an engine factory in Detroit to make room for a three-row Jeep Grand Cherokee and tying its fortunes to an onslaught of SUVs. The Jeep Gladiator, a truck version of the Wrangler,  is due out in the second quarter of 2019. A retooled plant in Warren, Michigan, will produce the revived Jeep Wagoneer and Grand Wagoneer SUVs.

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