Unsteady Load: Can Economy Bear Weight of Pickup Sales?
July 28, 2010

By Dale Buss

Pickup-truck sales have strengthened a bit so far this year, and there's a nascent confidence in  Detroit - which makes nearly all of the pickups sold in North America - that the segment's recovery from a deep trough will acquire still more steam through the end of 2010.

General Motors, for instance, is calling for trucks to grab 0.3 percent more of the overall U.S. market by the end of the year than in the first half.

"Our dealers still remain very optimistic, particularly on pickups, for the next six months of the year; they're a big part of our media spend and our promotional focus," said Brian Sweeney, general manager of GM's GMC truck brand. "In some of our big pickup markets, the economy is bouncing back, so we're very positive about the next six months with Sierra sales."

George Rogers, head of Ford's Team Detroit advertising agency, believes that "there is still a tremendous amount of pent-up demand in the [pickup] market that isn't reflected in current figures."

 

 

But Ken Simonson is willing to pop their balloon. As chief economist for the Associated General Contractors of America, it's his job to gauge the economic factors affecting the corporate buyers and small-company owners who comprise the most important market for the pickup trucks produced for the U.S. market by GM, Ford and Chrysler, as well as Toyota and Nissan.  

And Simonson is bluntly bearish. "Most of our members are still battening down the hatches," he said of the 20,000-some general and specialty contractors that comprise the roster of the Arlington, Va.-based trade group. "I doubt they'll be investing much in equipment in the near future, including trucks.

"With fewer people on the payroll, and fewer job sites to drive to, there isn't much going on in terms of buying pickups - or the expectation that they'll be able to do more of it in the second half."

Source: Edmunds.com

Not Whistling Dixie

Like the U.S. auto market as a whole, pickup-truck sales are at a crossroads at this point in the nation's recovery. And while Big Three executives and others wait for the overall economic crosscurrents to resolve themselves, they're increasingly whistling through the graveyard not only about general sales but especially about pickups.

Manufacturers always have demonstrated outsized concern about pickup sales because the trucks remain the one segment of the mainstream U.S. auto market where they've very effectively held off all competition. And for several years ending in the middle of this decade, sales of big, burly, snarling, mud-flinging Ford F-150s, Chevrolet Silverados, GMC Sierras and Dodge Rams were the biggest and most reliable engine of Big Three profitability.

But all that changed radically with the onset of the Great Recession and the cratering of the overall auto market.

Among the automotive recession's first casualties were so-called "lifestyle" buyers of pickup trucks, who collectively had purchased the vehicles mainly because they were trendy even though the vehicles offered relatively little to them in terms of practical value.

"Consumer are buying vehicles, and a truck, particularly for lifestyle purposes, is anything but," said Edmunds.com analyst Ivan Drury. Trucks run about16 percent more expensive than the average vehicle sold in the United States and 38 percent more than a midsize car, according to Edmunds.com's analysis of its True Market Value pricing data. "Combine the higher price with low gas mileage, you have have a lousy value proposition," Drury said.

Car vs. Truck Sales

Source: Edmunds.com

The second part of the double whammy for pickup sales came as the U.S. housing market collapsed. After most lifestyle buyers fell away, trucks fell back into their traditional reliance on professional purchases by construction contractors, small-business owners, handymen and the like.

As the underpinnings were knocked out from the American housing market over the last two years, housing starts fell from a record seasonally adjusted annual rate that hit 1.7 million in 2006 to starts that fell as low as 477,000 in April 2009 on a seasonally adjusted basis. Even in the just-completed June, housing starts occurred only at the seasonally adjusted annual rate of 549,000.

The Correlation Illustrated: Truck Sales and Housing Starts

Source: Edmunds.com

Stuck in a Rut

As a result, according to Edmunds.com analysis, pickup sales nosedived from 2.5 million units in 2005 to just 1.1 million last year as the segment's share of the overall market deteriorated to just 10.9 percent from 15.1 percent in 2005.

"The pickup segment drifted lower beginning in 2006, when you began to see some cracks in the housing market, but it really became severe beginning with all the home foreclosures in 2008," said George Pipas, Ford's head of U.S. industry analysis.

Rebecca Braeu, senior economist for Santa Monica, Calif.-based Edmunds.com, noted that "truck sales fell further than car sales during the downturn - at the cyclical lows, car sales were 38 percent off pre-recession levels, while truck sales were down 47 percent.

Since President Obama took office early last year, he has tried at least a couple of major gambits to reignite construction spending, understanding its importance to the overall economy from pickup sales to appliance sales to lumber sales. One was the one-time tax credit of $8,000 for first-time home buyers and $6,500 for repeat buyers. Another was the $787-billion economic stimulus bill passed by the Democratic Congress a few weeks after he took office, which was aimed in part at spawning hundreds of public-infrastructure construction projects nationwide.

Both of those stimuli helped pull the U.S. economy out of the Great Recession and ignite a very gradual recovery that began about a year ago. But the home-purchase tax credits expired in April, so the U.S housing market appears to be back on thin ice; new-home starts have recovered only to the seasonally adjusted rate of nearly 600,000 units.

And the stimulus package has been less effective in creating jobs and generating long-term growth than many had hoped. Meanwhile, cutbacks in state- and local-level government spending - such as school construction - have deteriorated the market further.

"Some [members] have won federal stimulus projects including highway contracts," said Simonson of the contractors' group, "but they tend to be fairly short-lived projects - not enough to give them the confidence to go out and make long-term investments." Moreover, he said, Congress has waffled on expanding or even extending its regular highway-construction funding this year.

Adding to contractors' woes, public expenditures haven't been nearly enough to offset the broad downturn in privately financed commercial construction such as office buildings, hotels and stores.

Now, overall U.S. non-residential construction is expected to end 2010 about 15 percent lower than the dismal levels of 2009, said Simonson. As a result, most of the nation's pickup-truck buying cohort seems to be stuck in economic neutral.

"Our members tend to be more worried - even desperate, depending on how bad off they were - than a year ago," Simonson added. "If anything, they've been selling assets and closing offices."

Ripples in Detroit

Pipas was among Big Three executives who acknowledged that troublesome portents remain for primary pickup buyers. Many business-truck buyers "have mortgaged their homes to keep their construction-related businesses afloat," he said. "And until they get orders for new housing and starts pick up more than today, they're not going to make that leap on the come. They want to have some forward orders for work before they invest in a truck."

One result of the moribund pickup market is that the Big Three have had to maintain huge levels of incentives just to get traditional customers to take a look, and to hold on to market share.

In a sense they could afford to do so because pickups still carry among the highest margins of any vehicles. "They can sustain pickup incentives in the short run," insisted George Magliano, director of the North American automotive consulting practice at IHS Global Insight, in Lexington, Mass. "They're putting their money where they're getting the biggest bang back out of it. They still make a nice profit off those vehicles."

And despite their long and intense efforts to penetrate Detroit's stronghold on pickup sales, Toyota and Nissan never have achieved huge success. Toyota Tundra's share of the segment was 5 percent in 2005 and rose to 7 percent last year; and Nissan Titan's share was 3.4 percent in 2005, falling to only half that in 2009.

Meanwhile, F Series now holds a nearly 38-percent share of the U.S. market. GM's models combined hold 36.5 percent. And Ram has 13.6 percent.

But Edmunds.com analysis shows that, in 2005, the True Cost of Incentives (TCI) for pickup trucks - a proprietary Edmunds.com formula - was an average of $3,646 per vehicle, almost $1,200 more than the average for the overall market. By 2007, that differential premium for trucks had grown to about $1,400, according to this analysis.

And by last year, Edmund.com found, the incentives differential for trucks over all vehicles had grown to an average of more than $1,600 per pickup. For 2010 so far, the differential in Edmunds.com's Total Cost of Incentives has grown further, to about $1,700 per vehicle,  or about $4,300 for pickups on average to about $2,600 overall.

Trucks have always had higher incentives spending compared to the industry average, between 2002-2004 the average amount was 17 percent, noted Edmunds.com's Drury. Jump ahead to 2005-2010 and these same trucks are averaging 64 percent of industry incentives.

"Market share losses since 2005 despite higher-than-ever incentives tells the story that consumer demand has shifted away from trucks," said Drury, noting the only time truck incentives have been higher than now in the past five years was during the 2008 gas price spike.

Hefty Truck Incentives

Source: Edmunds.com

Getting in Gear?

At least Ford's pickup-segment experience has become somewhat encouraging.  F Series' 38-percent share so far in 2010 is about three percentage points higher than for all of 2009, according to Edmunds.com analysis. Ford executives like to attribute the F Series' better share performance than GM and Chrysler models to superior products.

That could be part of it. But analysts also acknowledge that Ford has benefited to some degree from an ideological favoritism by many truck buyers toward the company and its products and away from truck models offered by the other members of the Big Three, each of which became wards of the state.

And Big Three executives point to some reasons for optimism about pickup-truck sales for all of them even for the near future.

For one thing, as Pipas noted, pickups' share of sales of the overall U.S. market - a general market that still is projected to improve by about 10 percent for the year as a whole -- crept up during the second quarter. It was 11.1 percent overall compared with 10.7 percent a year ago, and it improved each month during the just-completed period, from 10.6 percent in May to 11.2 percent in June to 11.6 percent in July.

This growth came despite some negative economic underpinnings, said Pipas and other industry analysts, and probably stemmed in large part from "pent-up demand" for trucks after two or three years of slow sales. Sales of used pickups have been very strong lately. But in other words, at some point even a down-on-its-luck contracting company must invest in new vehicles if it wants to service its customers.

"Pent-up demand for full-size trucks is being released into the market today, which is an important indication that fundamental segments of the economy are recovering," said Steve Carlisle, GM's vice president of global product planning, in early July.

Nevertheless, while Edmunds.com's Breau acknowledged that "truck sales should bounce back faster" than car sales because they fell further, she didn't see "any particular reason for trucks to do better than autos" going forward - "there is likely remaining pent-up demand in both markets."

The Bigger the Better

Each of the Big Three has been hatching new "super-duty" or "heavy-duty" versions of their staple pickup marques, and these models - with beefier engines, bigger payloads and better accessories than standard versions -- have been adding some juice to the market lately as well.

Ford's F Series Super Duty, for example, accounted for 38 percent of total F Series sales in June, almost 10 percentage points higher than in the first quarter, before the new model was introduced. And the Super Duty accounted for 52 percent of F Series sales that month, the highest share since 2000.

GM will be launching its new heavy-duty pickup models soon. "We expect to do well with them because the core truck buyer is starting to come back into the market," said company spokesman Tom Henderson.

Indeed, going forward, some analysts suggest, the pickup segment will benefit from the purification process that took place in the market a few years ago - and which is underscored by the fact that each of the Big Three has been focusing on bringing new heavy-duty models to market for consideration by their core pickup constituency.

"The volume isn't there, but we got rid of all those aspirational buyers who drove their pickups to the country club," said George Magliano, director of North American automotive analysis for IHS Global Insight, a Lexington, Mass.-based research firm. "So what you've got left are guys who really need these things."

And Magliano is among experts who believe that a housing recovery at some point soon will fuel a significant bounce-back in pickup sales.

"I think it's going to pick up steam because the housing market still stinks right now," he said. "It's at the bottom. But it's been there for quite a while. If pickups are reasonably strong without that recovery, we can think about what's going to happen in the future when that [housing] market does finally come around."

Dale Buss is an Edmunds' AutoObserver.com contributing writer.

 

 

 

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