Buyers who didn't need big SUVs and pickup trucks in the first place play a role in the dramatic consumer shift away from those vehicles.
So says industry veteran Raj Sundaram, a senior vice president atInc., who is amazed at the suddenness of the swing to smaller vehicles.
“The speed in which it happened is unprecedented for the auto industry,” says Sundaram, past president of residual-setting Automotive Lease Guide and a former strategic planner forNorth America Inc.
Certain consumers need fullsize trucks. But that group doesn't include a lot of people who now are bailing out of those expensive vehicles in the face of rising fuel prices, falling residual values and tighter financing, says Sundaram.
“There are true SUV and pickup customers who really need them, but a lot of people were buying them because of the ‘cool’ factor,” he says. “It started in the 1990s, when gasoline was under $2 a gallon.”
Does a guy commuting to a white-collar job really need a $40,000 extended-cab pickup truck with four doors, leather interior and a CD player?
“No,” Sundaram says. “And that is the type of buyer who is not coming back to the segment. That buyer is history.”
Does a 2-person family with conventional driving habits need a super-sizedExpedition or Land Cruiser with off-road capability and lots of seats?
“Those people can probably say, ‘I can live with a smaller cross/utility vehicle,’” Sundaram says.
Most of those consumers won't leap from an Expedition to a compactFocus or Fit, he says. “The shift isn't that extreme.”
But many are adding up rising costs of ownership for big vehicles.
“The Expedition had a residual drop of $6,000 from 2007 to 2008,” Sundaram says. When people see declines like that and increases in fuel prices, they start doing the math. Suddenly, they're looking for smaller vehicles.
“We're seeing a move down and a stabilization to true needs,” he says. “The industry will adapt and come back. But we're going to look back at 2008 and say, ‘Wow.’”
The swing from large to small vehicles surprised many people, none more so than the dealers whose supplies suddenly were out synch with demands.
“Some dealers are in shock because of what is happening to their inventories,” says Sundaram. “They're ordering smaller vehicles now, but first they have the problem of getting rid of the inventories they had.”
Near-term, the mix shift likely will have a negative effect on new-vehicle margins and grosses “as retailers strive to clear inventory,” says Rick Kwas, an auto analyst for Wachovia Bank.
Publicly owned dealership chains “remain overweight” with trucks in their inventories, Kwas says.
Some dealers sensed what was coming and reacted accordingly, Sundaram says. “I knowdealers who doubled their orders for the Fit.”
In recent weeks, he has visited with dealers who say they are ordering wisely and placing more emphasis on their used-car operations that offer potentially greater profits.
More dealers are using inventory-management software to systematically track demand of used cars by make and model in their particular markets.
“It helps in knowing what cars to obtain that will sell the fastest and for the most money,” Sundaram says. “Dealers need to leverage technology to deal with a changing market.”
Fullsize trucks' falling residuals are creating ironic transactions at dealerships. “Some dealers say they are selling fullsize SUVs for less than compact cars, as crazy as that sounds.”
Sundaram headed ALG when leasing was wildly popular in the 1990s, then lost favor around 2000 as auto companies and financial firms suffered big residual losses on vehicles coming off lease.
Leasing began making a comeback a few years ago but suffered a setback whenFinancial announced last month it would no longer lease vehicles. Other captive financing arms and banks have indicated they are cutting back on leasing, as well.
“There are differences between what happened in the early 2000s and now,” Sundaram says.
Before, there was a leasing frenzy that got out of hand, he says. “This time, the credit markets really are challenged.”
Back then, residual losses were more general, with a wide range of vehicle makes and models taking hits. “This time, SUVs are really getting hammered,” he says. “They are standing out in a big way.”