Toyota, Nissan take aim at Detroit's prized pickups
Japanese automakers are about to make another run at challenging Detroit’s dominance in trucks, and they will bang head-on into John Lucchese.
When it came time to replace his nine-year-old Ford pickup, Lucchese, 49, a software engineer from Los Angeles, drove Chrysler’s new Ram truck and even gave Toyota’s Tundra a try. He ultimately ended up right where he started, buying a $48,000 F- 150 with leather seats and a 360-horsepower V-8.
“I’ve been a Ford guy all along,” he said.
When it comes to pickups, loyalty runs deep. There is no model more important or more zealously defended by Detroit. The $8,000 to $10,000 in gross profit each truck hauls in for U.S. automakers accounts for the majority of their earnings — 90 percent for Ford and two-thirds for GM, according to Morgan Stanley.
Pickup sales are poised to soar this year, thanks to a parade of new products from Detroit and a surge in housing starts, which jumped 28 percent last year to the fastest rate since 2008, according to U.S. Commerce Department data.
U.S. pickup sales will top 1.7 million this year, up more than 50 percent from 2009’s low of 1.1 million, according to forecasts by researchers IHS Automotive and LMC Automotive. Sales could eventually reach the historic high of 2.5 million set in 2005, said Fred Diaz, president of the Ram truck brand.
Toyota Motor Corp. will reveal a redesigned Tundra this week at the Chicago Auto Show. Nissan Motor Co. also is updating its Titan truck. So far, the Japanese have barely put a dent in the last bastion of U.S. automotive hegemony. General Motors Co., Ford Motor Co. and Chrysler Group LLC control 93 percent of the full-size pickup market, according to Barclays.
The billions in profits trucks haul in finance the U.S. automakers’ entire business plan — fixing Europe, expanding in Asia, engineering electric cars. That’s why the arrival of new Ford, Chevrolet and GMC pickups over the next 18 months, on the heels of last year’s Ram 1500 refresh, are the most important introductions Detroit has on its calendar.
“It’s like an annuity stream that helps underwrite their less-profitable ventures,” said Adam Jonas, analyst for Morgan Stanley. “It’s the product where they know the customers best because they have generations of experience. There’s tremendous brand loyalty and it’s a relatively protected market.”
That doesn’t mean it’s not hotly contested. GM is rolling out a new Chevrolet Silverado and GMC Sierra in the second quarter and Chrysler’s new Ram 1500 was voted North American Truck/Utility of the Year at the Detroit auto show last month. Those new models are aimed squarely at Ford’s F-Series pickup, the top-selling truck line in the U.S. for 36 years.
Ford responded by unveiling a brawny new F-150 concept at last month’s auto show — lowering it from the rafters of the Detroit Red Wings hockey arena amid a shower of acetylene sparks — 18 months before it goes on sale.
“You can’t get timid,” Chief Operating Officer Mark Fields said as he stood beside the massive Atlas concept pickup with an imposing chrome grille. “The minute you get timid is the moment your competitors overtake you.”
Even before Detroit’s pickup profit growth became clear, investors had warmed to GM and Ford as they laid out plans for European turnarounds and boosted earnings in North America. GM’s shares are up 10 percent since Oct. 31, while Ford rose 17 percent during that time. Both outpaced the S&P 500 Index’s 7.2 percent rise.
GM has 19 buy recommendations on its shares, four holds and one sell, according to data compiled by Bloomberg. Ford has 14 buy recommendations, 10 holds and two sells. Three analysts lowered Ford in the last two weeks because the shares have risen so much.
U.S. automakers sound more confident than ever that they can defend their truck turf from interlopers such as the Tundra and Titan.
“There are some things that are endemic to the American carmakers; this is one of them,” Sergio Marchionne, chief executive officer of Chrysler and majority-owner Fiat SpA, said in an interview. “All three of us will defend the area tooth- and-nail. It’s our business, period.”
Without truck profits, Detroit would be out of business. Big pickups accounted for almost one in four sales by the Detroit automakers last year. More important, they are “the most profitable vehicles in modern history,” according to Max Warburton, an analyst at Sanford C. Bernstein Ltd.
Morgan Stanley’s Jonas figures the F-Series trucks accounted for 70 percent of Ford’s record $8.34 billion in pretax auto profits in North America last year. The truck’s contribution to global profit swells to 90 percent because Ford is losing money in Europe and Asia.
The Chevy Silverado and GMC Sierra and their sport-utility vehicle derivatives also constitute as much as 70 percent of GM’s North American profits, Jonas said. On a global basis, that drops to about 65 percent when factoring in GM’s Asia profits and losses in Europe, he said.
“Ford and GM might debate the specifics,” Jonas said of his estimates. “But it ain’t frickin’ 30 percent. It’s a big number.”
While the automakers declined to reveal profit by vehicle, executives of the U.S. automakers don’t discount the financial contribution pickups make.
“It’s a big part of our corporation and where we derive our profits,” Chrysler’s Diaz said in an interview. “It’s become a big part of the financial well-being of all” U.S. automakers.
Detroit has protected those profits better than any other vehicle category. When Nissan started selling the Titan in 2003 and Toyota rolled out the second-generation Tundra in 2007, they each built factories capable of producing more than 200,000 trucks a year. Last year, Toyota sold 101,621 Tundras and Nissan sold 21,576 Titans. Ford sold 645,316 F-Series, GM sold 575,497 Sierras and Silverados, and Chrysler sold 293,363 Ram pickups.
“I drove the Toyota and thought, ’Are you kidding me?”’ said Lucchese, the software engineer. “For a couple thousand less, you’re getting a lot less truck.”
Toyota and Nissan build their trucks in the U.S. because of a Cold War-era law known as the “chicken tax” that levies a 25 percent tariff on any imported light truck. The law was established in 1964 by President Lyndon B. Johnson in retaliation for duties France and West Germany levied on U.S. chickens. It helped establish and preserve Detroit’s dominance.
Nissan is aiming to boost Titan’s annual sales to 100,000 with a redesign coming in 2015, Pierre Loing, vice president of product and advanced planning and strategy for Nissan North America, told Edmunds.com. Nissan may offer more engine choices and cab configurations in the new Titan, said Dan Bedore, a spokesman. The truck now comes only with a V-8 engine and in crew cab and extended cab. No low-priced short cab is offered.
The Titan doesn’t offer a V-6 engine at a time when fuel- efficiency has become more important to truck buyers. Ford began offering two V-6 engine options in 2011 and they account for more than half of F-Series sales.
Fuel-efficiency wasn’t a top 10 reason to buy a truck when Nissan was first developing the Titan a decade ago, said Larry Dominique, who was the Japanese automaker’s product development chief back then.
“We did more research in preparation for that truck than any other vehicle Nissan had ever produced,” said Dominique, now president of ALG, an auto-lease researcher. “I give Nissan and Toyota a lot of credit for sticking with it. It’s a tough segment. For the foreseeable future, the domestics are going to own this segment.”
Toyota hasn’t revealed details of its redesigned Tundra. It failed to achieve its sales goal of selling 200,000 annually because “just as we were introducing our vehicle, the financial crisis hit,” said Bob Carter, senior vice president of U.S. auto operations. “We’re going to be a bigger player in the pickup market.”
Detroit sees it differently. Toyota and Nissan struggle to attract buyers because they don’t have the experience or fully understand the needs of the ranchers and hardhats who depend on their trucks to making a living, Ford’s Fields said.
“We’ve been at this for 70-plus years,” Fields said. “There’s a whole culture within our company. Engineers who join the company on the truck side stay on the truck side.”
And trucks engender fierce loyalty among their owners, who adorn the back windows of their rigs with decals depicting the comic-strip character Calvin, of Calvin and Hobbes, urinating on a rival’s logo.
“People chose sides — you are either a Ford truck buyer or a Chevy truck buyer,” said Jessica Caldwell, an analyst with researcher Edmunds.com. “My dad is a Silverado owner and once he identified himself as a Chevy buyer, that was it.”
Among Silverado buyers last year, 39 percent were repeat customers, according to Edmunds. For Ford, 36 percent of F-150 buyers were trading in an F-150. Chrysler’s Ram 1500 pickup had repeat business from 27 percent of its buyers. By comparison, 11 percent of Ford Fusion buyers were repeat customers and 15 percent of Chevy Malibu buyers traded in the same car.
The Chevy and Ford pickups even top the most loyal sedan buyers on the market: Toyota Camry customers, who had a 33 percent loyalty rate last year, Edmunds said.
“Having that same buyer decade upon decade, you kind of get an idea of what they’re looking for,” Caldwell said.
Truck buyers are usually looking for very specific features to suit their needs. This enables the automakers to boost profit margins by pricing up the dizzying array of available options, she said.
“People want a truck for a specific purpose,” Caldwell said. “So there’s not as much flexibility in pricing because they’re using it for something: towing or being a plumber.”
Selecting the specifications on your truck can take several days, given the expansive array of choices. On the F-Series, Ford offers light-duty and heavy-duty versions with five engines, six cab sizes, four bed lengths and 10 wheelbases, ranging in price from $23,670 to more than $65,000. An F-Series can be configured in millions of combinations, said Mike Levine, a company spokesman.
Ted Labbe, an Army pilot, just traded in his seven-year-old Ford F-350 for an F-150 with a shorter bed and more fuel- efficient V-6 engine. The Oxford, Michigan, man recently sold a 24-foot (7.3-meter) travel trailer and said he no longer needed a heavy-duty truck “that you needed two football fields to turn around in.”
“It’s got a lot of giddy-up-and-go and it gets good gas mileage,” Labbe, 55, said of his new “vermillion red” F-150, for which he paid more than $40,000. “I went crazy and got the FX4 version with everything on it.”
All those configuration choices make pricing opaque, Caldwell said. Like snowflakes, no two trucks are alike, making it difficult to comparison shop.
The Detroit Three also reap huge profits because of the economies of scale they receive from producing so many trucks, Dominique said. GM and Ford each have three factories devoted to full-size pickup production. Chrysler has two pickup plants.
Those big profit margins help explain why U.S. automakers can deeply discount pickups, such as the $7,000 to $8,000 discount on the old model Silverado, and still earn a decent return on the truck, Jonas said. GM is also idling its pickup factories for 10 weeks so it doesn’t have too many of the old model on the ground when the new version arrives.
“Trucks are a cash cow for the Detroit Three,” Jonas said.
Detroit remains dependent on trucks, though not as much as they were a decade ago when they were the sole source of profits, Dominique said.
“Five years ago, Ford’s profit on F-150 was 150 percent of their total profit because they were losing money on so many other vehicles,” Dominique said. “The good news for the domestics is that the profit contribution from full-size trucks is much less than it used to be.”
Japan’s big bet on trucks a decade ago was driven by an expectation that Detroit was on the road to ruin, which would put the pickup profit paradise up for grabs, Jonas said.
“There was a case to be made back then that all three of the D3 would go bust,” Jonas said. “Now it’s been reset. And the D3 have more protection in full-size pickups than ever.”
After test-driving Detroit’s latest trucks, Lucchese was impressed with the improvements he noticed in ride and fuel economy, especially after the automakers’ near-death experience.
“I’m happy to see them coming back with good products,” Lucchese said. “It took ’em long enough to wake up, for God’s sake.”