The American Sedan Is Dying. Long Live the SUV
Why the American Sedan Is Marked for Death
(Bloomberg) -- With lucrative sport utility vehicle and truck sales on the ascent, Detroit automakers are racing to ditch slow-selling cars in favor of the big rigs that mint them money.
Chief Executive Officer Sergio Marchionne started it off by killing the Dodge Dart and Chrysler 200 to reorient Fiat Chrysler Automobiles NV around Jeep SUVs and Ram pickups. The profit boom that’s followed has emboldened Detroit’s other CEOs to consider snuffing out sedans such as the Ford Fusion and Chevrolet Impala.
“The industry thought Sergio was a mad man when he did that, and now he looks like a genius,” said Jeff Schuster, an analyst with LMC Automotive. “He paved the way for everyone. Now, with the Detroit brands, virtually every car is under review.”
A slew of sedans on the floor of this week’s North American International Auto Show may well be missing or on death row by the time the industry gathers again next year in Detroit. U.S. automakers would effectively be waving the white flag after decades of ceding share in these segments to Japanese and Korean car brands. President Donald Trump’s vow to relax fuel economy rules could add momentum to the SUV and truck boom and invite General Motors Co. and Ford Motor Co. to pull the plug on some passenger cars.
Ford, already moving production of its Focus compact from Michigan to China, is considering euthanizing the Fusion family car, according to people familiar with the deliberations. The automaker has already notified suppliers it plans to stop building the Fusion in Mexico. The debate among CEO Jim Hackett and his top lieutenants is whether the sedan is worth saving as a more upscale ride sold in low numbers at a higher price, said one of the people, who asked not to be identified revealing internal discussions.
GM is weighing the fate of increasingly irrelevant Buicks, Chevys and Cadillac cars, while boosting its offerings of SUVs and rolling out a big new pickup truck this week in Detroit. And Fiat Chrysler may not be done, with models like the big Chrysler 300 sedan—once the preferred ride of rap stars—now looking vulnerable.
“Being accused of madness for the right reason is not a bad thing,” Marchionne said in an interview ahead of the Detroit show. “Even if we become the best operator of the passenger-car business, we will never even remotely get close to what we are making out of a big truck. So the question is, do I shrink volume in favor of profiability? The answer is yes.”
Asked whether he has more models to ditch, Marchionne answered: “No, we are done.” The Dodge brand has whittled down its lineup to Charger and Challenger muscle cars. When asked about the Chrysler 300, he noted it has “very small volume,” but stopped short of calling it a goner.
Cars that probably won’t survive are large sedans like Ford’s Taurus and its competitors, said Stephanie Brinley, an analyst with researcher IHS Markit. She said mid-size sedans like the Chevrolet Malibu and Ford Fusion have gotten bigger, making the Taurus or Chevy Impala less necessary. A consumer who needs more space will just buy an SUV.
“In another couple of years, you just won’t see these cars being developed for another generation,” Brinley said. “There’s a good chance that in eight years, this segment of the market doesn’t even exist.”
Other GM models with uncertain futures in the U.S. include the Buick LaCrosse, while Cadillac plans to whittle down its sedan lineup to just three nameplates. But Detroit’s passenger cars won’t completely die off, said Alan Batey, president of GM’s North American business.
“You’ve got to look at compact cars and mid-size cars still being very large volume,” Batey said in an interview.
Going all in on SUVs and trucks got Detroit in trouble at the turn of the century, contributing to the 2009 government-backed bankruptcies of GM and Chrysler. Back then, choosing an SUV over a sedan meant significant compromise on fuel mileage. When gas prices soared above $4 a gallon, Detroit’s short-sighted strategy was exposed and the American auto industry imploded.
These days, pump prices average about $2.50 a gallon. But cheap gas isn’t the only driver of the SUV boom: Today’s models bear little resemblance to the hulks of yore. Built on smooth-riding, lightweight car frames, many crossovers get mileage close to the equivalent cars.
“The fuel economy trade-off is not nearly as much of a trade-off as it used to be,” Raj Nair, head of Ford’s North American operations, said in an interview. “We anticipate SUVs becoming more and more popular, which is why we are focusing a lot of our investment in that segment.”
Ford is moving $7 billion in engineering funding away from cars and into developing SUVs. Nair declined to say whether that will result in the Fusion going away.
Even if gas prices soar—which energy analysts don’t forecast—consumers are more likely now to switch to a smaller, more fuel efficient SUV, than abandon their beloved bigger rigs, Schuster said.
“This market is going SUV and not looking back,” Schuster said.
American auto executives might be happy to see passenger cars go. For decades, they’ve struggled to make money selling sedans while raking in profits from SUVs and trucks. They’re rapidly rewriting business plans to shift production of traditional cars offshore. China, the world’s largest auto market and home to some of the lowest labor rates, is poised to become the place where American sedans are built.
“Car companies will make a business case based on producing and selling cars in China alone,” said Karl Brauer, executive publisher of Cox Automotive. “Then they’ll throw a few our way just for our increasingly dwindling car market.”
Asian automakers that have come to dominate U.S. sedan segments over the last three decades aren’t going anywhere. The Toyota Camry remained the top-selling car in America last year, though it was outsold by the RAV4 crossover for the first time. Toyota recently revamped the Camry and debuted a redesigned Avalon sedan in Detroit, while Honda Motor Co. kicked off the show by accepting the North American Car of the Year award for its revamped Accord. Nissan Motor Co. is expected to roll out a refreshed Altima sedan soon.
Essentially ceding the car market to Japanese and the Korean brands may have once been heresy for the companies that used to fill American highways with Chevy Bel-Aires, Ford Falcons and Plymouth Furys. But those days have receded into the rearview mirror, and U.S. auto execs learned painful lessons in the last decade about clinging to past glories.
Executives including GM CEO Mary Barra have shown a willingness to part with the past when the long-held approach is no longer working—the automaker exited Europe and India last year. Ford Executive Chairman Bill Ford and his board switched CEOs, firing Mark Fields in May.
Similar bold moves shouldn’t be surprising as those executives determine the fate of their fading car lines.
“You can call 2018 the death of the car,” said Mark Wakefield, head of the auto practice at consultant AlixPartners. “Just look at all the new model launches in crossovers and the dearth of launches in cars. You can see where people are putting their money.”
—With assistance from John Lippert.
To contact the editor responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Kevin Miller
©2018 Bloomberg L.P.