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Battered by recalls, GM buoyed by its large SUVs

By Aaron M. Kessler

New York Times News Service

Published: Thursday, July 24 2014 9:40 p.m. MDT

A customer looks at vehicles at a General Motors dealership in Burlingame, Calif.

Paul Sakuma, Associated Press

Enlarge photo»

When the redesigned 2015 Chevrolet Suburban started coming off the assembly line this year, Mike Quinto made sure he was one of the first to buy one, ordering it, sight unseen, two months ahead of time.

Quinto, a technology consultant from Blowing Rock, North Carolina, is well aware that the fuel economy of his four-wheel-drive Suburban, a large sport utility vehicle, is low, officially rated at a combined 18 miles a gallon. But it is a trade-off he is willing to make for something that can handle his work travel and weekends in the mountains with his children.

“I didn’t buy the vehicle for the gas mileage,” he said. “I bought it for everything it can do for me and my family.”

Tens of thousands of buyers have similarly flocked to buy GM’s largest SUVs — and buoyed the company’s bottom line just when it needs it most. Mired in a recall scandal over defective ignitions that has now, along with other safety-related charges, cost the automaker $3.8 billion, GM has been hammered on its income statement. On Thursday, the company said its earnings in the second quarter dropped 85 percent from a year ago.

But GM would be in worse shape financially without the surging sales of its large sport utility vehicles, which many once wrote off as artifacts of pre-recession excess.

GM emerged from bankruptcy in 2009 with $49.5 billion in taxpayer money and a promise to diversify its lineup of vehicles. Gone would be the days of relying on the huge — and hugely profitable — sport utility vehicles that sold so well when the economy was booming. Instead, the new GM, facing collapsing sales of its largest vehicles, would build fuel-efficient, smaller cars to compete with foreign automakers that had gobbled up market share.

And GM did take action toward that promise, introducing a host of new gas-sipping cars like the Chevrolet Cruze and the subcompact Chevrolet Spark. It even shuttered its assembly plant in Janesville, Wisconsin, one of two that built the Suburban and GM’s other large sport utility vehicles, the GMC Yukon, Chevrolet Tahoe and Cadillac Escalade.

But as GM finds itself embroiled in an endless wave of recalls that now stands at around 29 million vehicles worldwide, the company has, by design or not, embraced its old playbook of marketing cavernous SUVs — a segment it dominates even more today than in previous years. While competitors like Ford and Nissan have largely shifted resources away from such large vehicles, GM has stayed with them, and it now commands more than 70 percent of the market.

“I don’t think SUVs will ever get back to their heyday, but GM absolutely owns the big SUV space and right now they’re relying on that,” said Tim Fleming, an analyst for Kelley Blue Book, the auto research firm.

That translates to big profits. With prices that can approach $65,000 for a full-feature Suburban, and even more for a Cadillac Escalade, big sport utility vehicles can increase GM’s bottom line in a way smaller vehicles cannot.

While GM would not provide profit margins, analysts estimate the company has to sell five small cars like the Cruze to equal the profits of just one Suburban. GM’s largest SUVs reach profits of up to $10,000 a vehicle, said Jesse Toprak, an analyst with Cars.com. By contrast, its smaller cars make about $1,500 to $2,000. Altogether, the large SUVs have added about $1 billion to GM’s bottom line this year.

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