Columns

Personal Business

Profits by the truckload

Ross Laver May 5 1997
Columns

Personal Business

Profits by the truckload

Ross Laver May 5 1997

Personal Business

Profits by the truckload

Ross Laver

The history of economics is full of irrational buying frenzies and other such examples of the madness of crowds. There was the notorious tulip bulb craze in 17th-century Holland, the South Sea Bubble of 1720, the 1920s stock market frenzy and the speculative real estate binge of the late 1980s.

To that list, add one more: the great fourwheel-drive truck craze of the 1990s.

The evidence is on every downtown street and suburban parking lot. Where once there were cars, now there are hulking GMC Suburbans, Ford Explorers, Jeep Grand Cherokees and Land Rovers— gas-guzzling, wildernessconquering sport utility vehicles that in the hands of most owners never venture farther off-road than the local car wash.

For the auto industry, the sport utility fad is a gold mine. In 1990, North Americans bought 700,000 SUVs. Last year, the total hit two million, and some manufacturers believe it will swell to 2.5 million in three years, representing one out of every six vehicles sold.

Not only that, but there seems to be no limit to the cost increases that image-conscious truck buyers are willing to absorb. In 1993, the sticker price on a Jeep Grand Cherokee Limited, with leather seats and other luxury appointments, was $33,555. Today it’s $42,305, and buyers still can’t get enough of them. In the same period, the list price of a Chevy Blazer SLE jumped from $20,898 to $30,335, while the Nissan Pathfinder SE went from $25,790 to $35,998.

To be fair, almost every sport utility on the market has been substantially upgraded in recent years, with new equipment and safety features like airbags and protective sidedoor beams. But even allowing for that, the price increases for SUVs have far outstripped those for cars. The Ford Explorer XLT, for example, now lists for 35 per cent more than the 1993 model, compared with the 27 per cent increase on a redesigned Ford Taurus GL sedan. “It’s like everything else in this world—it’s what the market

The wild popularity of four-wheel-drive vehicles is a gold mine for the auto industry

will bear,” says a spokesman for a rival automaker, acknowledging that his company, too, has been quick to exploit the SUV craze.

But how long can it last? The manufacturers’ profit on a sport utility currently runs anywhere from $5000 to $13,000—an astonishing margin by industry standards. Traditional four-door sedans, by comparison, have become commodity products, yielding a few hundred dollars at best after rebates and lowinterest lease deals. Many smaller car models actually lose money and are kept in production only to satisfy U.S. government standards for average fleet fuel economy.

The optimists in the car industry predict that four-wheel-drives will remain lucrative for years to come. As proof, they point to surveys of younger car buyers. Among those born since the end of the baby boom, well over 60 per cent select an SUV as their preferred vehicle. (Minivans are out because their parents drove them.)

But that only takes account of the demand side of the equation. Those fat profit margins ultimately depend on a shortage of supply, which won’t last forever. Last month, Chrysler announced a $1.3-billion investment in six Detroit factories, primarily to increase truck production capacity. Chrysler is also converting a car plant in Delaware to begin production this summer of the Dodge Durango, a new midsized SUV. Meanwhile, Ford will soon launch the highend Lincoln Navigator—with polished walnut dashboard and acres of chrome—to compete against Mercedes-Benz’s new Mclass. Chrysler, Ford and GM are also mulling plans for compact sport-utes that could go up against the recently launched Toyota RAV4 and Honda CR-V, as well as the forthcoming Subaru Forester. All told, says Jim Hall, vice-president of the market research firm Au to Pacific Inc., the number of sport-utility models is forecast to grow from 34 in 1996 to 55 in the year 2005.

With profits so high, it’s not surprising that everyone wants in on the action. But if history teaches anything, it is that markets this hot inevitably flame out.