So here comes General Motors (GM
) getting ready to launch a whole new family of big utes -- and doing so right when gasoline prices are staying high and car buyers are rediscovering cars or flocking to smaller, "crossover" SUVs.
Does that mean GM's new trucks are doomed? Not exactly. GM's engineers spent countless hours and plenty of money to rid their new trucks -- such as the Chevrolet Tahoe, GMC Yukon, and Cadillac Escalade, which hit showrooms starting in January -- of many of the compromises that SUV owners have had to put up with.
PROFITS OF YESTERYEAR. Make no mistake. The big SUV business is shrinking. It's down 10% this year, and that's despite employee-pricing deals and big rebates. In the long run, it seems likely the market will continue eroding in terms of both size and its ability to deliver big profits. GM acknowledges that buyers won't snap up the nearly 1 million large SUVs they did in 2002 and 2003.
GM and other auto makers also will be hard-pressed to make the $15,000-plus in per-vehicle profits they made back then. "We aren't riding on these [new] vehicles to save the company," says Gary White, GM vice-president and vehicle line executive for full-sized trucks. "There are a number of other attractive alternatives in the market."
GM figures some 750,000 large SUVs will be sold each year. Since GM has 62% share of that market, the company expects to sell close to 500,000. Vice-Chairman Robert Lutz says the new trucks are good enough to steal market share from competitors like Ford (F
), Toyota (TM
), and Nissan (NSANY
). Says Lutz: "It's realistic to assume the segment won't grow, but we will be taking share."
SMOOTHER RIDE. Given the improvements on the new models, GM has a shot at winning some converts. All of the SUVs in the family are more aerodynamic. And mileage is slightly improved.
A new family of engines -- which include a feature that shuts down four of the eight cylinders when cruising at highway speeds -- will boost fuel economy to 20 miles per gallon for a four-wheel drive Tahoe. That beats any competitor. Ford's four-wheel-drive Expedition gets 18.3 miles on a gallon of gas, while both the Toyota Sequoia and the Nissan Armada get 18.7 mpg.
White says GM also pushed his team to smooth out the ride. The frame is now stiffer, and a new suspension will enable the large utes to better absorb bumps. The stiffer frame also allows for a wider body, making it more stable. Add in a new, more precise steering system, and White says the new trucks should drive as smoothly as some of the crossover SUVs.
INTERIOR DESIGN. GM is packing the new Tahoe and its stablemates with more standard safety features. Each one offers Stabilitrak -- GM's stability-control system --standard. GM is also offering side-curtain air bags as protection in case of a rollover -- they're standard on the Cadillac Escalade and the GMC Yukon Denali, but not on the Tahoe.
Inside, the new Tahoe looks and feels at least a generation beyond the trucks sold today. There are metallic accents around the vents and wood surrounds the center console. The current trucks have cheap-feeling plastic buttons and knobs, but inside the new models the controls are more solid and the craftsmanship is much improved.
"The trucks look great," says Joseph Phillippi, a former Wall Street analyst who now runs his own consulting firm called AutoTrends. "A lot of the things we used to fault them on have been fixed."
All these improvements cost money, however. White says GM was able to offset some of the added cost of upgrades in fuel economy and handling with efficiencies in purchasing and assembly. But that doesn't cover the whole tab. "The trucks have more content, but we offset the cost with some savings elsewhere," White says. "It's not thousands of dollars more."
PRICING PRESSURE. Still, GM will have to get a better price or significantly reduce incentives to boost profits. Lutz says the new SUVs should have better margins than the ones the company is currently selling.
The challenge will be selling the new models with lower incentives. Right now, GM is offering employee prices plus another $3,000 cash back, says one Dallas dealer. That adds up to $11,000 off a SUV with a sticker price of $36,000 to $37,000.
GM hopes the fact that the SUVs are all-new will allow the company to lower incentives and increase profits. The current trucks have been on the market for seven years and are starting to feel tired. Says Mark LaNeve, GM-North America's vice-president of sales, service, & marketing: "Any time you have new product, you get better pricing."
But with higher costs and the possibility of lower sales, GM will still have to reap profits from the rest of its lineup. "The profits won't be as great," Phillippi says. "It's going to have to come from crossover SUVs or its passenger car lineup." For a company that has relied on big trucks to carry the load for so long, that won't come easy.
Welch is BusinessWeek's Detroit bureau chief