The American car buying public has turned away from sedans to crossovers, SUVs and pickups, but Detroit would be foolish to severely curtail sedan offerings as planned.
In recent years, improvements in vehicle materials and engine efficiency boosted MPG for just about every platform, and the gas-cost penalty of driving car-based SUVs relative to sedans fell. Along with greater visibility and ease for hauling kids and stuff around that gave impetus to Detroit’s sales of larger offerings.
In 2011, automakers got a break on mileage standards — although MPG requirements are rising, the Obama administration permitted automakers to meet separate standards on a size of platform basis — the bigger the perimeter of the four wheels the lower the MPG target.
Add the drop in oil and gas prices from $3.30 in 2008 to $2.25 in 2017 and car sales were only 37 percent of total auto sales in 2017, down from 47 percent in 2007.
More recently, Ford CEO Jim Hackett decided Ford will phase out virtually all sedans in favor of more gas guzzling SUVs and pickups — Chrysler has already done mostly the same and GM soon to follow.
Detroit has had less competition from imports and transplants on those bigger vehicles — the higher tariff on those categorized as trucks helps; hence those command higher prices and yield bigger profits.
The average price of a vehicle is about $36, 000, and above $40,000 for Ford even though it sells, for now, a lineup of lower-priced sedans. With the median household income around $60,000 a year, that is simply too expensive for at least one-quarter of families, and they will have to continue buying sedans or older used SUVs and trucks.
Though facing tough times selling sedans too, foreign competitors continue to invest in those less expensive vehicles, and not all of the domestically branded sedans canceled will be replaced by new sales of Detroit’s SUVs and light trucks. If Detroit stays on course, it will lose considerable market share to Japanese, Korean and German manufacturers and eventually the Chinese as folks on limited budgets seek their sedans.
Lots of young people enter the market buying a sedan and if their experience is favorable, they buy up to SUVs and light trucks within that brand as their incomes and families grow. Ceding the Dodge Dart, Chevy Malibu and Ford Focus market to Toyota and Honda, just about guarantees fewer customers 10 years from now for Chrysler, Ford and GM SUVs down the road.
Look for the Asians to beef up SUV and crossover offerings too and to gain some market share even as they boost their sales more immediately through the sedan market.
Investors are placing tougher demands these days on shale producers and although they responded to OPEC and Russia cutting production, America remains a net petroleum importer and U.S. gasoline consumption is rising again. Add in the state entropy in Venezuela and U.S. sanctions limiting Iranian exports when those become fully effective later this year, and gas prices could rocket to $3.50 a gallon.
That’s good news for the much awaited plug-in hybrid and all electric revolution, but even those technologies are more workable in lighter sedans than heavier SUVs and pickups.
Gas, hybrid or electric, sedans have lower oil price tags, and should oil prices jump, an automaker without sedans could be as out of place as baseball equipment on Super Bowl Sunday.
These days more moderate sized SUVs and crossovers may be made on the same platforms as cars but despite what you may have read about flexible manufacturing, rolling out new sedans would take years once those are gone from Detroit’s lineup.
Shifting regulatory requirements and competition to incorporate newer technology precludes simply taking old vehicle designs off the shelf. It could take many years to get back into the sedan market with a competitive product.
Essentially, Jim Hackett and his colleagues at GM and Chrysler are betting the price of gasoline will permanently ease from recent highs of about $3.00 a gallon. To be less polite, they are gambling the stockholders’ money on the price of oil.
That’s an odd preoccupation for folks paid to make cars, not speculate.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.