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Automakers need to make money on entry-level cars to survive the trend to smaller vehicles.
High gasoline prices are not just hurting consumers—they can be financially lethal for automakers too.
Big vehicles can cost more to build, often with more features and content, but they also generate more revenue, as customers are used to paying more for them, says Ron Harbour in releasing the Oliver Wyman’s 2008 Harbour Report, an annual report card on the productivity of automakers based on how long it takes to build vehicles (read our story on this year’s results here.
In the past, the volume for the Big Three was in big trucks, SUVs, and luxury vehicles, all of which have proven quite profitable over the last 10–12 years. But they also tend to be the thirstiest vehicles and the ones consumers are least interested in today with sticker shock at the gas pump. Recent months have shown a drastic decline in sales of big trucks and a rise in small cars.
More specifically, the full-size pickup traditionally has been the biggest segment by volume, and it’s the one dropping dramatically, says Ron Harbour. Nissan’s Titan has not been a success by any measure, and Toyota has had to scale back aspirations for the Tundra. So the effect of high gas prices on big trucks and SUVs is not just a Big Three problem, Harbour says.
With the consumer push to smaller vehicles, automakers must be able to build them profitably, Harbour says. In Europe, 80 percent of vehicle sales are small A-, B-, and C-segment cars and the companies make money on them—so it can be done.
But in North America, many small “econoboxes” of the past acted as loss leaders—actually costing the automaker money on every transaction—but deemed worth it to bring customers to the brand in the hopes they would stay loyal and move up to more profitable models.
In some cases, an automaker needs to sell 10 small cars to make the same profit as one big vehicle, Harbour says. Going forward, companies need to be able to produce small and mid-size cars profitably to succeed.
For Ford, many of its hopes ride on the global B-segment Fiesta—coming as both a sedan and a hatchback in 2010—and increased production of the C-segment Ford Focus, while reducing F-150 and large SUV capacity.
GM is also paring truck and SUV production; reevaluating the need for Hummer; developing a new compact car; making plans to build the Chevrolet Volt plug-in electric car; and increasing production of current small and mid-size cars.