Joe White of the Wall Street Journal, in his piece "A Comeback for SUV’s? Not Really (subscription required)," shone the harsh light of reality on October sales figures showing gains for Ford and GM SUV and Pickup trucks. He concluded that the gains were deceiving, since sales were propped up by huge discounts averaging $4,849 for large SUVs compared with $685 for compact cars. He also pointed out that an upsurge in loyalty (owners trading for the same vehicle) rather than new converts to SUV-ism was a big part of the October picture.
How long can the automakers count on the loyalty of SUV-ists to prop up their sales? Not much longer, according to my analysis of data on sales of used vehicles at auctions (see ADESA Analytical Services). New-vehicle dealers attend auctions to buy the used vehicles they also sell.
New-vehicle dealers, because they are closer to the retail market than the automakers are, have more accurately read the market’s shift away from gas-guzzlers than have the automakers. Dealers have only indirect influence on the new products they get from the automakers, but they directly control the mix of used vehicles that they sell alongside the new vehicles. Prices at wholesale auctions reflect dealers’ collective judgment about what consumers are willing to pay (before adding a competitive mark up). Since January 2000, the auction price of used full-size SUVs has fallen from 185% of the average auction price of all vehicles to 132% (October 2006)—a 53-percentage point drop—while the real price of gasoline rose from $1.55/gallon to $2.27/gallon.
Looking at the last two years, we see that the real price of gasoline spiked twice, in September 2005 ($2.97) and July 2006 ($2.98). Both spikes were followed by rapidly falling gasoline prices. By December 2005 the real price of gasoline had fallen to $2.23/gallon. By October 2006 the real price of gasoline had fallen to $2.27/gallon. So, gasoline prices followed very similar patterns following the last two spikes. How did auction prices of fullsize SUV’s change in the months following the last two gasoline price spikes?
In August 2005 the average auction price of fullsize SUV’s was 145% of the average auction price of all vehicles. With the $.40 jump in the real price of gasoline in September 2005, the average auction price of fullsize SUV’s fell to 134% of the average auction price of all vehicles. As the price of gasoline fell by $0.74 to December, the relative fullsize SUV auction price recovered ground, rising to 140%. By March 2006, the relative price of fullsize SUV’s had recovered to 146%.
Since July 2006, the real price of gasoline has fallen $.70/gallon, paralleling the September to December 2005 pattern. How is the recovery in relative auction price of fullsize SUV’s going? Much more weakly than last year. The October 2006 relative auction price of fullsize SUV’s was 132%, up a bit since July, but to be on pace with last year’s recovery it would need to be 136%.
The automakers are relying on trade-ins by SUV-loyalists to keep their sales up. But as the value of what the SUV-loyalists have to trade (their used SUV) continues to fall in the auctions, their ability to keep buying one SUV after another also falls.
Walter is the Director of the Automotive Analysis Division of the University of Michigan Transportation Research Institute (UMTRI). He studies the adoption by consumers and automakers of new powertrain (electric, hybrid, clean diesel, fuel cell, alternative fuels), safety, and telematics technologies. Walter worked for General Motors for 9 years in sales forecasting, product development, marketing, and manufacturing (1993 found him on the floor of one of GM’s component factories). Prior to joining the University, he was Executive Director of Forecasting and Analytics for J.D. Power and Associates. He earned his doctorate in Economics from UCLA in 1983.