Small-Car Demand Explodes

The dramatic market shift in past months away from large SUVs and trucks to small cars has caught many auto makers and suppliers off guard.

It's raising concerns over whether there is enough capacity in place near-term to meet demand.

In fact, one industry insider requesting anonymity, speculated that June sales could come in at a seasonally adjusted annual rate of just 13.0 million units as a result of the dearth of small cars on dealer lots.

The demand-North American capacity imbalance was evident in May sales, inventory and production data.

Posting strong sales results in May were the Honda Civic (48,453 units, excluding imports), Ford Focus (32,579), Toyota Camry (50,495, excluding imports), Chevrolet Cobalt (26,702) and Dodge Caliber (12,856).

Days' supply of those models on May 31 were well below the norm, with the domestic Civic at 21, Focus at 24, Caliber at 20, Cobalt at 27 and U.S.-built Camry at 38.

If small-car sales continue at this frenetic pace, some auto makers will be hard pressed to meet demand, says George Pipas, Ford Motor Co.'s top U.S. sales analyst.

“If you think about the magnitude of the shift, we can't keep doing this for too long because there's not enough car capacity in the system,” he says, noting it would not be possible for Ford to sell more than 30,000 Focuses again in June.

“We only have 22,000 Focuses in stock, so we aren't going to sell 30,000,” he says.

Ward's data show Ford had 28,500 Focuses in inventory at the end of May.

Pipas' comments echo sentiments expressed by Joe Hinrichs, Ford group vice president-global manufacturing, who told Ward's earlier this month the auto maker was exploring all options to expand small-car capacity, including moving production to some of its truck plants currently operating on one shift.

Additional press reports citing unnamed Ford sources say the auto maker plans to hold a top-level manager meeting this week to discuss plans to boost capacity.

But Ford is not the only auto maker facing a small-car supply shortage.

Honda of American Mfg. Inc. produces Civics in three North American plants, including two in Alliston ON, Canada, and one in East Liberty, OH. Combined, the three facilities have the capacity to build 35,654 Civics per month, far below last month's U.S. sales volume, Ward's data shows. Some of that production is allocated to other markets, such as Canada.

Where possible, Honda has made production adjustments to accommodate soaring demand for the Civic. In the current quarter, Honda is allocating an estimated 79.0% of the capacity at its Alliston No.1 plant, which also builds the Acura CSX, to Civic production, Ward's data shows. Alliston No.1 is tooled to build 250,000 vehicles annually on two shifts.

At its Alliston No.2 plant, which builds the Civic and the Acura MDX and Honda Ridgeline cross/utility vehicles, Honda upped the Civic mix from first-quarter's 37.8% to an estimated 51.5% in the second quarter. Alliston No.2 has an annual 2-shift, straight-time capacity for 208,800 vehicles.

However, at East Liberty, Civic output was reduced from first-quarter's 63.6% of the mix to a projected 42.6% in the second quarter, largely to accommodate production of the hot-selling CR-V CUV, also built at the plant. East Liberty is tooled for 250,000 vehicles annually.

Honda spokesman Ed Miller says Honda can continue to shift production at its flexible plants or increase Civic imports from Japan, but it isn't yet convinced the current pace of demand for the small car will continue.

“To ramp up now for 53,000 units a month wouldn't be a prudent thing to do,” Miller tells Ward's. “But long-term, if we see a trend forming, (we'll adjust to) meet customer demand.

“We don't know if 53,000 a month could be sustained or not, but we're not making any assumptions that 53,000 is a trend yet.”

Like Honda, Toyota Motor Corp. has built its reputation on building quality, fuel-efficient cars. Yet, Toyota Motor Engineering and Mfg. North America Inc. also is facing a situation where demand for its small cars may outpace capacity.

Keeping up with demand for the popular Corolla compact car and its Matrix derivative may pose the most significant challenge if sales continue at May's pace.

Toyota assembles the Corolla at two North America plants — the New United Motor Mfg. Inc. joint venture with General Motors Corp. in Fremont, CA, and a wholly owned facility in Cambridge, ON, Canada. The Matrix also is built in Cambridge.

The two plants produce 29,061 Corolla/Matrix models a month on average, far below the 41,928 units sold last month, Ward's data shows.

Currently about 72% of the Cambridge plant's monthly production is allocated to Corolla/Matrix production, up from 34% in January. Cambridge also builds the Lexus RX and has an annual capacity for 330,000 vehicles.

NUMMI has been allocating more capacity toward Corolla production, as well, increasing its percentage build from 29.7% in the first quarter to 36.9% in the second quarter. NUMMI has a 480,000-unit annual capacity and assembles the Pontiac Vibe and Toyota Tacoma small pickup alongside the Corolla.

“They should be able to get more Corollas” out of the Cambridge plant, Toyota spokesman Mike Michels says. However, squeezing more production out of NUMMI isn't as easy.

“Tacoma is doing well, so there's not a lot of opportunity there to make dramatic shifts from truck to car (at NUMMI),” he says. “We have some flexibility at our Indiana plant, which makes the Tundra, Sequoia and Sienna, but two of them are body-on-frame and only one is unibody, front-wheel drive. At this point, it's a matter of getting more out of the plants we have.”

Particularly troubling to Toyota is any inconvenience potential supply-and-demand issues could cause its customers, plus the toll the shift in the market could take on the auto maker's truck sales, Michels says.

“The concern is mostly for customer satisfaction,” he says. “We don't like it when people have to wait for hot-selling cars.

“It's too early to tell if passenger-car sales will offset the reduction in SUVs and trucks,” he adds. “We hope it will, but it probably won't happen completely.”

As with its domestic competitors, the bulk of GM's revenues have come from its strong lineup of fullsize SUVs and trucks, and that's where a large part of its plant capacity resides.

Last month, GM sold 26,702 Cobalt small cars, outstripping its average monthly production of 19,661 units by 26%, Ward's data show.

Currently, 66.1% of GM's Lordstown, OH, plant capacity is devoted to Cobalt production, with the rest divided between the Pontiac G5 and Pursuit derivatives sold in Canada.

To meet demand, GM says it is increasing output at Lordstown and other car plants, and says it hopes to shift its light-vehicle mix to 60% passenger cars by 2011.

“One of the issues we're wrestling with is the American Axle (Mfg. and Holdings Inc.) strike and local disputes that were going on that impacted days' supply,” says GM spokesman John McDonald. “Those are now resolved and settled, so they won't be a problem going forward.

“We are continuing to look at our capacity and find ways to maximize production and adjust truck production to better meet market demand,” he says.

Although auto makers are doing what they can to address small-car demand, they can move only as fast as their supply base.

“Suppliers focused on truck components are shutting down operations and slowing down, and those producing components for small- and medium-size cars are working all kinds of overtime to meet demand,” says Neil De Koker, managing director of the Original Equipment Suppliers Assn.

Everyone in the industry was caught off guard by the rapid market shift toward smaller vehicles, he says, noting the situation could have been avoided.

“If we had (an energy policy), we would have had higher gas taxes, so gas would have been selling at a higher level over a period of years, and we would have had more time to adjust,” De Koker says. “But this has been so fast, the industry can't react fast enough and consumers are overreacting. It's a bad combination.”

Analyst Erich Merkle, a vice president at IRN Inc., agrees consumers have been overreacting to rising fuel prices ever since gasoline eclipsed $3.50 a gallon.

“As gasoline goes higher, it's more of a tax on the overall economy, and that slows down economic growth and demand for gasoline,” he says. “As that happens, (gasoline) prices should start to recede.”

Even if that happens, it's unlikely SUVs and large trucks ever will regain the popularity they once enjoyed in the U.S., Merkle says. “I don't see body-on-frame (trucks) coming back. There will always be a market, but it's going to be very small.”

Unfortunately for auto makers, particularly the Detroit Three, the profit margin currently is far less on small cars than large pickups and SUVs.

And although the strong demand has all but eliminated the need for heavy incentives on small cars, that hasn't made up for the declining revenues on the truck side, says Annette Sykora, chairman of the National Automobile Dealers Assn. and dealer principal of two Texas dealerships.

“I think we are witnessing the classic example of supply and demand,” she says. “Supply is not quite keeping up with demand as far as Focus sales, so our transaction price has increased.

“Even still, with the skinny margin on small cars, it hardly makes up for lost revenue from declining SUVs and trucks.”