Ford Motor Co is rolling out a new ad campaign with the slogan: “Built to be a better big.” If nothing else, it evokes the sense of a 2-tonne truck rolling right over the English language.
It also fits with Ford’s direction: Earlier this week, the company announced it was boosting production of sports utility vehicles (SUVs) for the second time in two years. Plus, it has been almost a year since Ford said it was effectively exiting cars, apart from a couple of brands, including the Mustang.
Ford is not alone in going all-in on “big.” Fiat Chrysler Automobiles NV went that way with its North American business in 2016. General Motors Co in November last year announced that it was ditching most of its car models as part of a sweeping restructuring.
Photo: Reuters
There is a simple reason for this: Americans prefer bigger vehicles and are willing to pay more for them. On average, they paid about US$51,000 for a large truck last month, according to Edmunds.com Inc data, and almost US$42,400 for a midsize SUV, up 22 percent and 15 percent respectively over the past five years.
Midsize sedans, meanwhile, fetched about US$26,400, up just 3 percent.
The premium for “big” is now the highest it has been in at least a decade: Even as overall vehicles sales in the US seem to have topped out, the proportion of heavier models has kept on climbing — much to the manufacturers’ relief.
While volume eked out a gain of just 0.5 percent last year, retail revenue climbed 1.6 percent, Bloomberg Intelligence senior automobiles analyst Kevin Tynan said.
That relatively simple math is why US manufacturers “will keep pushing transaction prices higher until the consumer pushes back,” Tynan said.
There are some signs of fatigue on this front.
Bloomberg Intelligence has noted that discounting of new vehicles has picked up amid bloated inventories; supply of Ford’s F-Series trucks, for example, has averaged 104 days so far this year, versus an ideal level of about 55 to 65 days.
The average interest rate on new vehicle loans increased from about 5.3 percent at the end of 2017 to 6.7 percent at the end of last year, according to US Federal Reserve data, and there are uncomfortable rumblings in the auto-loans business, with 30-day delinquencies hitting their highest level since 2012, according to Capital One Financial Corp data.
Subprime auto loans, especially, are a cause for concern, although that might have something to do with being associated with a certain word beginning with “s.”
Rising price multiplied by rising rates equals higher monthly loan payments; up about an extra US$24 to almost US$600 on average in the US since the end of 2017.
However, low unemployment and rising wages have blunted the impact thus far, keeping those payments at about 15 percent of per-capita disposable income.
Rising wages, along with better fuel efficiency, have also made the more frequent visits to the gas station that SUVs and trucks necessitate more palatable.
The retreat to the fortress of big makes sense in terms of squeezing as much out of the current business cycle as possible.
However, with that strength comes a certain fragility.
The US automakers have largely ceded the car market to foreign firms such as Toyota Motor Corp and Honda Motor Co at this point.
If there is a recession or a jump in gasoline prices, then premium gas-guzzlers will look less tempting, and customers will have to look elsewhere if “smaller” is suddenly in vogue again — as happened in the last crash.
As an aside, the popularity of bigger vehicles raises the political risk associated with higher pump prices; something that clearly irks US President Donald Trump.
All manufacturers are juggling the challenge of making profits on traditional vehicles, while investing in various electrification and autonomous-driving technologies.
Ford, playing catch-up on both fronts, this week also announced a US$900 million investment to build electric and self-driving vehicles at its Flat Rock plant south of Detroit.
It is, like its peers, effectively betting that today’s trucks can fund both dividends to appease shareholders and spending on new products to keep the company relevant in tomorrow’s transportation market.
This might work — if the consumer remains resilient and macro forces encompassing everything from the Fed to OPEC play ball. As ifs go, that is a big one.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He was previously editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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