As Go SUV Buyers, So Goeth Detroit

Andrew Dederer
by Andrew Dederer
as go suv buyers so goeth detroit

Since this summer's sales slump, Detroit's stopped bitching about the so-called "perception gap." That's the alleged difference between consumers' idea of their vehicles' quality– relative to their Asian rivals– and "the reality." Suddenly, the concept is a lot less important than finding something, anything fuel-efficient to sell. Besides, there's a far more catastrophic "gap" in play, one that threatens Motown's very survival: the "gap" between what a SUV is worth new and its value come trade-in time.

For most of the SUV boom, U.S. truck resale values bucked the domestic passenger car trend toward higher (not to say killer) depreciation. These SUV residual values allowed the boys from Detroit to deploy a whole list of sales tricks no longer available in the car market, especially leases.

It also made it much less painful to get an SUV owner into a new loan before the old one was paid off. Resale values stayed high both because of demand (aspirational buyers who couldn't afford the full price) and general ruggedness (they WERE trucks after all). When the boom was in full swing, SUVs were both selling at huge mark-ups and "selling-on" to new owners long before the vehicles wore out. It was a license to print money.

SUV resale values held up well during the incentive wars of the last five years or so. You would have thought increased incentives would draw more "second-buyers" to buy new, but no. The most likely explanation: increasingly easy credit stretching the resale market ever lower. The Big 2.8 held their market share, at an ever-increasing cost to profits.

There was no way that the recent run-up in gas prices would NOT impact SUV demand. That said, the drop for The Big 2.8 has been dramatic, past the point of catastrophic. Some of this is due to the SUV market's violent contraction, making the domestics a victim of their old success. But the truth is rather darker, and does not bode well for any near-term recovery of light-truck sales.

There are two essential problems. First, obviously enough, supply and demand.

Just about everyone who wanted to buy a truck in the last five years has one. Aside from vehicles wearing out and people reaching driving age (or truck-love age), there is little "need" for more vehicles new or used– especially as the "fashion" SUV owners, looking for a way out, outnumber the new blood. This surfeit of sellers is driving SUV and pickup truck prices into the basement, and then padlocking the door.

This is bad enough. But the second factor makes the situation much worse.

These days, most truck owners are "upside down" or "backwards" on their loan; they owe more than the vehicles' resale value. As re-sale prices continue to crater, their numbers are swelling into the millions. As the "gap" in value grows in a predictably ruinous way, truck leasing becomes practically impossible.

The only way to lure more buyers is with lower prices. This lowers resale value– again, more, still– and shuts more current owners out of the new market, as the depreciation exceeds the discounting. Again, the fact that these trucks/SUVs are quite durable (one reason they held value) is a bad thing.

At some reasonable level of industry production, it will probably take five years to get the glut through the market, and perhaps another three to get prices back up. BUT the domestic truck makers can't afford to throttle back on light truck production. The Big 2.8 have counted on trucks to bring home the bacon for over a decade. As we've said here many times before, don't have a plan B ready to go.

Toyondissan are a little less exposed to this light truck debacle– they can count on making money in cars. Aside from pickups, they stayed out of the most vicious price wars. While this kept their sales volumes comparatively low, the strategy maintained resale values at a survivable rate.

The Dai-san can shuffle factories, sell to the "choir" and maintain a presence in the U.S. market– until the sales environment recovers enough to sell to the "other" truck owners. Toyota can afford to take the long view on the Tundra. Honda can get by selling 200K "trucks" (Pilots, Ridgelines, Odysseys) to their loyal customers. Nissan can't afford the same luxury with the Titan; it's days are numbered.

For The Big 2.8, circles don't come any more vicious. They are STILL collectively building far more trucks than the U.S. market can absorb at a profit. If they cut production, they allow their competition to raise their prices just a little at the old volume. Cutting pickup production to salable levels would help the doer, but it would help the other two even more.

In other words, Detroit's game of Last Man Standing is also a matter of waiting for the other guy to blink. When one U.S. SUV/pickup truck manufacturer cuts back, bails out or goes under, the others will prosper. Relatively speaking. Realistically speaking, in the next five years, this is the only way Detroit's truck glut could turn back into a short term asset.

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  • Robert Robert on Jul 27, 2008

    I received a dose of reality today caused by "THE SKY IS FALLING" syndrome. I purchased a 2003 Honda Accord from a neighbor...only 18k miles. I own a 2004 Lincoln Aviator with 38k miles and is LOADED AND SPOTLESS. My wife and I were talking about trading this vehicle. We went to CarMax for an appraisal...they will only give me $10,000 for it. What is ABSOLUTELY ridiculous is that the 2003 Honda is worth $5,000 MORE than my 2004 Lincoln. Just wait and see....the speculators are now backing away from oil, Americans are not only driving less, but buying cars with better mileage. Which MAY further reduce consumption. Gas prices will retreat and people with larger families will want larger vehicles again, an so the cycle continues.

  • 50merc 50merc on Jul 27, 2008

    robert: "a 2004 Lincoln Aviator with 38k miles and is LOADED AND SPOTLESS. ... went to CarMax for an appraisal…they will only give me $10,000 for it." Ouch! My sympathies. It seems your CarMax quote is about 2/3 Edmunds' trade-in estimate and roughly half the supposed dealer retail. Gas has fallen to $3.59 here; maybe SUV values will come back some. In the late 30's the classic Packards, Pierces and such became unwanted, too. But it's not practical to put the Navigator in a barn and wait fifty years.

  • Kcflyer The solution is harsh punishment, long prison terms, for car thieves. I suggest two weeks for first offense (unless they run from the cops or commit other offenses. Second offense, thirty years hard labor. That should do it.
  • Oberkanone Installing immobilizer is the answer. It's not hard. It's not expensive.
  • MrIcky Out of the possible Jeep recalls to bring up on this site, I'm surprised it's this one and not round 2 of the clutch recall.
  • Dukeisduke I saw a well-preserved Mark VII LSC on the road not too long ago, and I had to do a double-take. They still have a presence. Back when these were new, a cousin of mine owned an LSC with the BMW turbo diesel.
  • Dukeisduke I imagine that stud was added during the design process for something, and someone further along the process forgot to delete it after it became unnecessary.