For Detroit automakers, Myers is more than simply one that got away. He’s part of a trend that threatens Detroit’s unparalleled prosperity. It might look like fat city in Motown these days, with record sales and profits expected this year. But buyers like Myers represent a problem that could make Detroit’s money machine throw a piston rod. Automakers are facing a double whammy: sport utility vehicle (SUV) sales are slowing down and the Japanese are coming–again. But this time they are gunning for the last bastion of Detroit’s dominance, the profit paradise known as the light-truck market that includes SUVs, pickup trucks and minivans. Already there are signs that sheer muscle is losing its appeal: as aging baby boomers crave a more cushy ride they are ditching Detroit’s truck-size offerings in favor of more civilized Japanese models like the Lexus RX300.
If SUVs fall out of fashion, it would be a costly blow to Detroit’s bottom line. The oversize vehicles that have clogged the nation’s highways this decade have also fueled Detroit’s financial renaissance. U.S. carmakers actually lose money selling cars, making up for it on hugely profitable truck and SUV sales. (The profits on Lincoln’s luxurious Navigator are a staggering $15,000 per vehicle.) But the runaway sales of new Japanese trucks, minivans and car-truck hybrids are quickly changing the rules of the road. Buyers are waiting up to six months and paying thousands over sticker price for wildly popular new models like the Honda Odyssey minivan, the smooth-riding Tundra and the Gen-X-attracting Nissan Xterra SUV. The sales of the Japanese models this year are growing at more than twice the rate of Detroit’s offerings. Cynthia Passero of Newton, Mass., gave Detroit’s SUVs a look, but she couldn’t find the price or style she was looking for. “They were just so outrageously priced,” gripes the 25-year-old software technician. So she traded in her Jeep Wrangler for a black $25,000 Xterra .
Defections like that caused previously unstoppable behemoths like the Chevrolet Suburban to sputter earlier this year. GM was forced to jump-start the Suburban by offering a $1,500 rebate–its first since 1991. Even stalwarts like the Jeep Grand Cherokee and the Ford Explorer require discounts to attract customers. That might be good news for car buyers, but rebates are a red flag in the auto business, a troubling indicator that a hot model has cooled. Indeed, overall SUV sales are on pace to increase by only 6 percent this year, compared with a blistering 20 percent growth rate three years ago.
The pressure to discount is already taking a toll on profits. Ford’s Explorer generates about $1,500 less in profit per vehicle than it did three years ago, according to some estimates. That translates to an annual bottom-line drain of $650 million. With profits falling and the Japanese surging, it’s enough to give dealers that deja vu–all over again feeling. “It’s history repeating itself on the truck side,” moans Delaware dealer Frank Ursomarso, who can offer you a $1,000 rebate on the Sierra pickup at his GMC store, but don’t bother asking for an Odyssey at his Honda store. He’s sold out for the rest of the year.
So is there panic in Detroit? Hardly. “The SUV market has slowed down, but it’s still growing. I wish I could build more,” gushes Michael Grimaldi, GM’s vice president for North American sales. “We’ll keep the Japanese at bay,” he vows. After all, the Detroiters boast, their SUVs, minivans and pickups outsell the Japanese offerings by more than five to one. Over at Ford, the SUV champion, there is a similar air of confidence. “We don’t see a major threat,” says James O’Connor, president of the Ford Division. “We don’t look in the rearview mirror.”
That sounds familiar to Japanese auto execs. “Detroit thinks, ‘We invented this market and nobody can do it better’,” says Honda executive Vice President Thomas Elliott. “As long as that kind of attitude exists in Detroit, they’re going to find themselves in a difficult situation.” Twenty years ago, U.S. automakers dismissed the competition from Japan, and that grave miscalculation allowed foreign competition to gobble up nearly half the car market. American car buyers embraced the high-quality Japanese cars, forcing Detroit to resort to painful price cuts to sell its models, driving its car business into the red. But the Big Three still ruled the road in trucks, and for years Japan failed to dent Detroit’s domain with puny pickups like the Toyota T100 or extravagant SUVs like the $51,000 Toyota LandCruiser. That made the market for minivans, pickups and SUVs a throwback to the days when Detroit commanded premium prices and reaped rich rewards.
That all began to change three years ago when the Toyota RAV4 and Honda CR-V arrived. Built on small-car frames, the inexpensive little “sport-cutes” were an instant hit and proved Japan had finally cracked the code of the truck market. Coming next year from Honda and Toyota are bigger SUVs, but with the carlike ride that boomers now demand. It was the debut of the Lexus RX300 last year that steered the SUV market in a more comforting direction and blurred the boundaries of cars and SUVs. Now the domestic automakers are playing catch-up on their own turf and plan to launch their own carlike SUVs next year. Detroit is too late for Bruce Eglin. “I’m getting older and I wanted more comfort,” says the 55-year-old Cleveland home builder, who swapped his Ford Explorer for an RX300 last year.
While the Japanese redefine SUVs, Detroit’s outsize offerings, like the hulking new Ford Excursion, seem increasingly out of touch. “We’ve reached a point of absurdity and irresponsibility,” says Jerry Hirshberg, Nissan’s chief U.S. designer. Hirshberg predicts America will reject big “land barges” as soon as the overheated economy cools. “When America feels good about itself, we respond with bigness–big houses and big cars,” he says. “But when the good times go away, that evaporates very fast.”
For now, Butch Myers is turning a lot of heads when he drives his forest green Toyota Tundra around Memphis. “Everywhere I stop, it draws a crowd,” marvels Myers. For Detroit, that may be too crowded for a market it once had all to itself.
