Upside of Downsizing Begins

Like soldiers who have endured an extended shelling, survivors of the North American auto industry's last few years are peeking out of their foxholes to see what remains as the smoke clears.

Devastation is everywhere. A stunning 25 auto assembly plants have been closed since 2005, hundreds of thousands of good auto industry jobs have vaporized and production capacity for 4.5 million vehicles has been eliminated.

But now, the worm has turned. The upside of shuttering factories, closing dealerships and laying off workers is better capacity utilization, smaller inventories and higher profits.

Suddenly, it's easier for auto makers to make money with an 11 million or 12 million-unit seasonally adjusted annual rate in the U.S. than it was with a 15 million or 16 million SAAR just two years ago. And it is beginning to show on the bottom line.

Ford raked in record profits in the third quarter, and numerous other global auto makers are doing well with what would have been considered disastrous sales levels only a couple of years ago.

Ward's is predicting U.S. sales to end up at 11.3 million to 11.5 million units this year and 13 million to 13.3 million in 2011. That kind of jump has most auto makers optimistic about next year. But as we look to 2011 and beyond, the automotive landscape looks permanently altered. Tomorrow will not be a lower-volume version of yesterday.

A new group of hot brands and a changing product mix is transforming the U.S. into an almost surreal vision of its former self. Previous niche brands such as Hyundai, Subaru, Buick and Volkswagen are becoming major forces in the battle to win the hearts and minds of U.S. consumers.

Yet, stable, relatively low fuel prices continue to muddle the outlook. Just as auto makers are making an aggressive push into small cars with platoons of diminutive fuel-sippers amid tightening corporate average fuel economy regulations, the U.S. small-car market has grown cold and cross/utility vehicles and old-school muscle cars are flying out of showrooms.

Most of these trends tilt in favor of auto makers such as Hyundai Motor America.

“We'll break through the 500,000 unit mark for the first time in 2010, so we'll begin our march toward 600,000 next year,” says HMA CEO John Krafcik.

The Hot Brands

Among the top seven auto makers, Hyundai Group (including Kia) showed the most year-to-year growth in the just-completed '10 model year running from October 2009 through September 2010. Hyundai was up 20.6%, while the market overall was up 9.2% compared with the '09 model year.

Hyundai is followed by Ford, which is up 19.1%. GM however easily maintained its No.1 position in the U.S., hanging onto 19.4% of the market compared with second-place Ford's 16.4% share.

Toyota Motor Sales U.S.A. Inc. finished the '10 model year with 15.9%, up just 3.7%, well below the overall market uptick of a little less than 10%.

Here's where it really gets interesting: GM had the three fastest growing brands in the '10 model year, led by Buick and Cadillac, up a whopping 49.2% and 34.9% respectively.

GMC also is up 25.4%, with GM's volume-leading Chevrolet brand up 15%, handily outperforming the overall market's rise.

However, to keep all the GM happy talk in perspective, it must be pointed out the auto maker's closing of four brands in 2009 took its toll, giving the company as a whole a behind-the-market increase of just 4.8%.

The Ford brand was the largest-selling marque in the U.S., up a hefty 20.4%, followed by Chevrolet and the '09 MY leader, Toyota.

Subaru and Hyundai were the fourth and fifth fastest-growing brands for the '10 model year, rising 24.5% and 23.8%, respectively.

Japan's Fuji Heavy Industries Ltd., maker of Subaru vehicles, is one of the niche players that has succeeded against all odds during the worst of the recession, gaining sales and market share while most others have struggled.

Subaru has managed to connect with the psychology and emotions of its customers like few other auto makers, and it has made the brand almost recession-proof, says Alexander Edwards, president-Strategic Vision Inc. “It has captured what is most important to their customers.”

Look for many other auto makers to try to capture Subaru's magic.

Hottest Vehicles/Segments

Light truck sales grew 13.4% in the '10 model year, but the gains came entirely through the continued growth of CUVs.

Collectively, pickups, SUVs and vans underperformed, though certain traditional truck segments experienced some growth.

But CUVs are on fire, rising 22.6% overall. The Ward's Middle CUV segment is up 27.2% and became the largest single segment for the first time, displacing the Ward's Upper Middle Car segment.

Among Middle CUVs, the hottest vehicles are the Chevrolet Equinox and Subaru Outback, up 92.5% and 103.4%, respectively. The GMC Terrain, based on the same platform as the Equinox, also is selling well.

Strategic Vision's Edwards sees no letup in demand as consumers come back into the market because CUVs offer the best combination of interior room, functionality and style.

Large Cars, led by a 95.2% surge from the Ford Taurus, also are experiencing a sizable 16% comeback.

Luxury cars as a whole underperformed the market, but key Ward's luxury segments such as the Middle Luxury Car (15.5%) and Upper Luxury (35.2%) were big winners in '10.

Upper Luxury was boosted by a 57.7% spike in BMW 7-Series sales, which nearly displaced the Mercedes-Benz S Class, up 18.3%, as the segment's top-seller.

Modern-day Detroit muscle cars also are seeing something of a renaissance. The Chevy Camaro sold briskly in its first full-year of production, outselling by more than 15,000 units the Ford Mustang, which nonetheless saw its own sales rise 15.2% in the '10 MY. Dodge Challenger sales are strong, too, up 24.8%.

Coldest Vehicles/Segments

Brrrrrrrrr. On the opposite side of the burner are cold brands that are seeing hard times and a number of vehicles that once were on fire and now have fallen out of favor, mainly because consumers have ceased fretting about rising fuel prices.

Putting aside the recently deceased Pontiac, Saturn, Hummer and Isuzu (in the U.S.) — the coldest brands from October 2009 through September are Daimler AG's Smart (-63.2%), Saab (-54.4%) which suffered from several months of malaise during its ownership transition from GM to Spyker Cars, and Suzuki (-49.5%)

Toyota's once-hot Scion brand also saw '10 MY sales plummet 30.7% while Mitsubishi's already tiny sales numbers slid an additional 12.3% during the same period.

On a volume basis, Chrysler's newly formed Ram brand lost the most sales year-to-year, dropping 25,826 units in the '10 model year, representing a 12.3% drop.

But the Ward's Small Car segment is the coldest of the cold. Down 1.2% from disaster-struck MY '09, it is the only segment to see a volume decline even as the market expanded in MY '10.

Small Specialty Cars fell a horrific 37.8%, the biggest loss among Ward's segments. But the bread and butter Upper Small Segment's (0.6%) failure to rise with the market is where small cars really lost their mojo.

Plummeting sales of the Honda Fit (-26.6%) and Toyota Yaris (-30.7%) illustrate how stable gas prices undercut sales of smaller vehicles whose value proposition is based largely on fuel efficiency.

Nevertheless, there is some hope for small cars in general for MY 'll. The new Chevy Cruze and Ford Focus are attractive, roomier small cars that promise to be strong sellers and carry the new American small-car banner forward.

Lower Luxury (up just 3.6%) probably suffered from a trend in which consumers opted for higher trim levels on Upper Middle Cars and Large Cars.

With sales up only 7.1%, pickup trucks underperformed the market, but the story is interesting. Large pickups (up 10.7%) outperformed the market, but small pickups were dramatically off-pace, down 7.7% in MY '10.

This continues the trend away from SUVs and pickups for personal use in favor of the utility and flexibility of CUVs.

Hybrid-electric vehicles also are taking it on the chin. Across all segments, HEVs were down 3.8% during MY '10. Once again, the Toyota Prius led all hybrid vehicles, making up 51.9% of all hybrid sales in the U.S.

The Ford Fusion Hybrid was a relatively big winner though, with sales jumping 77.5%, making it the third-biggest selling hybrid, behind the Prius and the Honda Insight, whose sales climbed an impressive 30.5%.

Although volumes will be very low at first, the Chevy Volt and Nissan Motor Co.'s Leaf will help form America's first impressions of electric vehicles, along with numerous other EVs promising to enter the market.

All in all, for the first time in a long while, consumers and auto makers alike have a lot to look forward to in the coming year. It finally looks safe to crawl out of the foxhole.