SUVs Are Hotter Than Ever, But Jeep May Be Building Too Many Wranglers
(Bloomberg) -- An unexpected spike in inventory of Fiat Chrysler Automobiles NV’s most iconic Jeep is stoking concern that the American SUV boom that’s fueled Detroit automakers’ profit is reaching its limits.
Dealers had 166 days’ supply of Jeep Wranglers at the beginning of this month, up from 116 days at the start of the year, and 120 days a year ago, according to data from Automotive News. Inventory of the rugged off-road sport utility vehicle was almost double the days’ supply of cars and light trucks industrywide.
The Wrangler glut is worrisome because Fiat Chrysler has been going almost all-in on trucks and SUVs, killing off many of its sedans to pad profit margins. Ford Motor Co. and General Motors Co. are following suit with similar moves. But with new models now filling every nook and cranny of the SUV market, industry sales are slowing and rising interest rates are making it tougher to afford new vehicles that have never been costlier.
“Auto companies used to be in a position where demand outstripped supply,” Adam Jonas, an analyst at Morgan Stanley, said by phone. “Supply is now keeping up with demand, and possibly getting to a point where it exceeds demand. We’re probably not there yet, but we’re getting closer.”
Fiat Chrysler doubled down on its SUV and truck bets, announcing Tuesday it will invest $4.5 billion to produce three new Jeep models and a next-generation Grand Cherokee. It’s also extending production of its Ram 1500 pickup, all at plants in Michigan. Chief Executive Officer Mike Manley said adding new vehicles to segments where the company doesn’t have offerings now will help the automaker grow through a sales slowdown.
Anxiety that Detroit automakers may be overbuilding has weighed on the companies’ shares, Jonas said. All three slumped by more than the S&P 500 last year, and Fiat Chrysler has trailed the benchmark index in 2019. The stock fell 1.5 percent to close at $14.73 on Tuesday.
Fiat Chrysler says it has intentionally built up supply of Wranglers. Its factory in Toledo, Ohio, has downtime scheduled for the first half of the year to prepare assembly lines for a new plug-in hybrid version. There’s also a seasonal uptick in demand during the spring and summer months, when drivers can enjoy warmer weather by removing the roof and doors.
“We’re going to continue actions to manage dealer inventories in Q1 and Q2,” Manley said during Fiat Chrysler’s Feb. 7 earnings call. “By the end of the first half, I expect our retail days of supply to be in line with our sales run rate.”
Dialing back output at another factory might also help matters. Fiat Chrysler said later Tuesday that its Jeep Cherokee plant in Belvidere, Illinois, will move to two shifts, from three, starting May 6. This will lead to indefinite layoffs for 1,371 workers.
Wrangler inventory has kept creeping up, even as the model had its best January ever and set an annual sales record in 2018. The model, which traces its roots to World War II-era all-terrain vehicles, is emblematic of American consumers’ growing preference for more rugged autos -- and car manufacturers’ efforts to cash in.
Deliveries keep climbing despite a hefty mark-up for new tech features and powertrains boasting better fuel economy. A new Wrangler cost $42,473 on average in 2018, up from $37,460 in 2017 and $26,721 in 2008, according to market researcher Edmunds.
This is part of a broader trend that will be difficult to keep up as borrowing costs rise. Edmunds said new-vehicle average-transaction prices climbed to $36,576 last month, a January record. Interest rates also rose to the second-highest level in 10 years.
Fewer bargains and cheap-financing options may be pushing some buyers out of the market for new cars, said Jeremy Acevedo, an analyst with Edmunds
“These facilitating factors that have really been a boon for the industry and in a lot of ways shaped our choices -- those are drying up,” Acevedo said.
Stepped-up production has raised some dealers’ eyebrows -- even in markets where buyers aren’t complaining about sticker shock.
“I’m in a more affluent area, and we haven’t seen any issue, although we’ve got plenty of stock,” said David Kelleher, a Philadelphia-area Jeep, Ram and Chrysler dealer. “I think the production schedules are very aggressive right now, on all vehicles.”
Fiat Chrysler retooled its Wrangler manufacturing line in Toledo to boost capacity as SUV sales surged. Former CEO Sergio Marchionne said in October 2017 he would crank up production to more than 300,000 units.
But the SUV boom will be tested as total sales moderate. The National Automobile Dealers Association expects industrywide deliveries to dip to 16.8 million cars and trucks this year, down from about 17.3 million in 2018.
And as the market shrinks, showrooms will be more crowded with new models. LMC projects that automakers will be offering 191 SUV models by 2024. That’s up from just 100 in 2014.
Fiat Chrysler is expanding the Jeep line with a Wrangler-based pickup called the Gladiator debuting this spring, and the company has three other new SUVs planned by 2022: a three-row version of the Grand Cherokee, and the revived Wagoneer and Grand Wagoneer.
Ford will roll out redesigned versions of its top-selling SUVs, the Escape and Explorer, this year. Next year, it’ll bring back the brawny Bronco off-road SUV. GM also is bolstering its SUV range with a new Chevrolet Blazer coming to market now, and the Cadillac XT6 arriving this summer.
All this new product could help SUVs and trucks continue to capture a greater share of the market. Morgan Stanley predicts light trucks could reach 80 percent of the U.S. sales by the early 2020s.
Still, Fiat Chrysler’s stock swoon when the company reported earnings earlier this month signaled nervousness about how much longer automakers can continue banking on demand for -- and outsize profits from -- SUVs and trucks, Morgan Stanley’s Jonas said.
“That’s the stock market’s way of saying, ‘Enjoy it while it lasts, because it ain’t going to last much longer,” Jonas said.
©2019 Bloomberg L.P.