Automakers are pushing new investment in U.S. production of trucks, crossovers and SUVs to tap into the higher profit margins these vehicles yield.
They make an awful lot of money.
General Motors, for example, generates 100 percent of its U.S. profit from large SUVs and pickup trucks Adam Jonas, an analyst at Morgan Stanley Research, said in a report to investors Wednesday.
“If it looks bigger, customers will pay more for it,” said Dave Sullivan, manager of product analysis at the AutoPacific consulting firm.
Automakers spend about the same amount to make a vehicle, whether it’s a crossover or truck or sedan, Sullivan said.
Yet a full-size pickup truck has an average transaction price of almost $40,000, according to market research firm J.D. Power. A large SUV has a transaction price of $58,000 and even a mid-size crossover moves off the dealership at nearly $35,000. But the average transaction price of a compact sedan is less than $19,000 and a mid-size family car is less than $22,000.
An automaker earns about $1,500 to $2,000 for a passenger car, said Jeff Windau, an auto industry analyst at investment house Edward Jones & Co.
“You contrast that with $10,000 to $13,000 on a truck,” Windau said. “You can definitely see that the trucks and SUVs are driving the profitability of the automakers.”
That’s why automakers are doubling down on brisk-selling trucks and SUVs, he said. Light trucks – which include pickups, crossovers and SUVs –accounted for nearly 60 percent of U.S. auto sales last year, up from about 55 percent in 2015. The investments include:
- General Motors will invest $1 billion in U.S. factories in 2017, including the decision to move axle production for new full-size pickups from Mexico to domestic plants, creating 450 U.S jobs.
- Ford cancelled construction of a new plant in Mexico. Instead, it will invest $700 million to upgrade its facility in Flat Rock, Mich., and add 700 jobs to build new vehicles there, including a hybrid F-150 pickup truck and an all-electric SUV.
- Earlier this month, Fiat Chrysler Automobiles pledged $1 billion to improve plants in Michigan and Ohio that will add 2,000 jobs to build a new pickup truck and two new SUVs – all of them Jeeps. In a CNBC interview, FCA chief executive Sergio Marchionne said: “I think one of the cornerstones of what we’ve done here in the last seven years with Chrysler was to try and turn Jeep into a global brand, and we need the U.S. manufacturing footprint to get that done.”
- Toyota Motor Corp. will invest $600 million to modernize its plant in Princeton, Ind., to build 40,000 additional Highlanders annually starting in fall 2019. The upgrade will also create 400 new jobs.
Rising Price Reflected in Profits
The popularity and profitability of the big vehicles has prompted automakers to pack them with high-priced features and options, which in turn, contribute to the higher transaction prices.
“We haven’t really hit the theoretical ceiling for what consumers are willing to pay for pickup trucks,” Sullivan said. “So the margins just keep growing.”
The starting price of the highest trim levels on an FCA Ram 1500 or Chevrolet Silverado easily surpass $50,000.
The base price of a Ford F-150 Limited 4WD is even higher: more than $63,000. More capable Super Duty and Heavy Duty models sell in smaller numbers, but provide still greater returns.
“Trucks and SUVs have been a bright spot in the industry for several years now and they’ve been a key driver of sales volume and profit growth for automakers,” said Efraim Levy, an analyst at Standard & Poor’s Global Market Intelligence. “Margins are much richer for pickups and SUVs than they are for sedans, especially when people are buying fewer of those sedans.”
Missing out on the potential for profits can be costly – in more ways than one. In December, Hyundai fired its U.S. chief executive, Dave Zuchowski. The brand had struggled to produce enough crossovers and SUVs to feed rising demand, Sullivan said.
“Part of the reason [Zuchowski] didn’t meet sales targets was because they don’t have the capacity to build what consumers want,” he said.
Less than one month later, Chung Jin-haeng, a president at Hyundai Motor Co. – which owns both the Hyundai and Kia brands – said the company plans to invest $3.1 billion that could include a new U.S. plant to build an SUV.
The varying profit margin on different types of vehicles plays a distinct role in determining where they’re built, which plants get expansions and where jobs are located, analysts said.
It makes sense to build more profitable vehicles – like crossovers and trucks – in the U.S., where recent union agreements have elevated labor costs compared to other countries. Lower margin vehicles, Levy said, are better made in areas like Mexico, with lower labor costs and fewer trade restrictions to other foreign markets.
That’s why Nissan builds its $11,990 Nissan Versa sedan in Aguacalientes, Mexico.
“You probably would not break even if you did it in the U.S.,” Sullivan said.
A Rush to Capitalize
The higher profit margins on trucks and SUVs, plus closer proximity to dealer networks and heavy U.S. demand, make them perfect for domestic production, said Michael Ramsey, the automotive analyst at Gartner, Inc.
The announcements hit a fever pitch at the time of the North American International Auto Show in Detroit this month as automakers came under fire from the Twitter account of President Donald Trump to increase U.S. investment. However, planning for the expansions started prior to the November election, Windau said.
Back in 2015, GM announced a $1.3 billion expansion including hundreds of new jobs to its Arlington, Texas plant that produces the Chevrolet Tahoe and Suburban, GMC Yukon and Cadillac Escalade. With construction expected to complete next year, sales of those models increased by 17.9 percent increase in 2016.
In 2016, Volkswagen revealed plans for a $900 million expansion and hundreds of new jobs to its Chattanooga, Tenn., plant to make room for the new Atlas three-row SUV, the largest vehicle it will sell in the U.S. market. Production began in December and the Atlas goes on sale this spring.
“I don’t think it’s all Trump,” Sullivan said. “But I think it at least gets him off their backs for a little while.”
Selling Investors on Trucks
Senior automotive industry executives emphasized the importance of truck profit margins at a recent Deutsche Bank investor conference in Detroit.
GM is seeing “significant” increases in revenue per vehicle thanks to trucks, said Dan Ammann, president of GM.
“Every year we have grown the transaction prices,” Ammann said. “And we’ve grown profitability and the profit contribution every year through the lifecycle.”
Ford said it also is increasing its high margin items and will reintroduce the Ranger mid-size pickup to the U.S. market and bring back its rugged Bronco SUV. To free up manufacturing capacity, it is moving the less profitable Focus and C-Max compact cars to an upgraded Mexico plant.
Automakers also are expanding production of popular trucks and crossover to the U.S. for logistical reasons.
Toyota’s expansion is part of its localization strategy to build vehicles where they are sold, said Jim Lentz, chief executive for North America.
Plants in Mexico can be remote and far from company headquarters, and automakers that build in Asia or Europe risk tying their revenue to fluctuating currency rates, Ramsey said.
That why German automakers BMW and Mercedes build their SUVs in the U.S.
“If 50 or 60 percent of the sales for that vehicle are going to be in that market, it makes more sense to build them here,” Ramsey said.