With gasoline prices hovering near $3 a gallon and the housing market in a slump, large pickup sales should be suffocating.
Instead, a price war among the major players in the sector is boosting sales and market share for gas-thirsty vehicles such as the Toyota Tundra, Chevrolet Silverado and Dodge Ram. The increased truck sales contributed to last month's mixed overall auto-sales report, which offered the industry hope that a months-long sales slide could be coming to an end.
Still, the battle among General Motors Corp., Ford Motor Co., Chrysler LLC and Toyota Motor Corp. has created demand that some analysts say is both artificial and unsustainable, calling into question how much sales of high-profit trucks will contribute to the bottom lines of industry players contending with intense competition.
"We're all watering down this truck market," Ford sales-analysis manager George Pipas said. "There's only so many buyers here, and we're not going to get more buyers from Mars."
Through the first nine months of the year, large-pickup sales as a share of the total U.S. light-vehicle market have stabilized at about 13.5 percent, after a blistering decline last year, when they fell from 14.7 percent at the beginning of the year. In August, discounts pushed the segment to a 14.9 percent share, a 20-month high, according to research firm J.D. Power & Associates, of Westlake Village, Calif. In September, large pickups grabbed 14.2 percent as automakers spent an average of $4,000 on incentives such as no-interest loans and rebates for each large pickup they sold, compared to $2,700 on the average vehicle, according to consumer-information firm Edmunds.com.
This month, the Big Three and Toyota are offering 0 percent financing on five-year loans for last year's model trucks still on the lots, the equivalent of at least a $4,000 to $6,000 discount per truck. In many cases, the automakers are combining the free loans with lump-sum rebates of $1,000 or more.
The rebates and financing deals effectively put in consumers' pockets a subsidy to offset higher fuel costs. At $2.65 a gallon, a base Chevrolet Silverado costs on average $2,210 to fill up annually. At $3, the annual tab jumps to $2,500.
Given the pervasiveness of no-interest 60-month loans, which he calls "the new norm," Ford's Pipas sees the only logical next step as offering 72-month loans at no charge. Even if the automakers move in that direction, "payback is inevitable," he says. Pipas predicts a "rough fourth quarter" for pickup sales, especially if the deals don't increase to keep luring people who aren't necessarily buying pickups out of necessity.
Pipas insists Ford has tried to maintain a steady, modest spending approach relative to pickup incentives. But the company should theoretically be spending more than certain rivals because its F-150 truck is set to be replaced by the end of 2008, he said. Modesty has hurt Ford; its best-selling F-Series lineup is off 13 percent this year.
It is unclear when or whether the deal-making will dwindle. Each of the major players in the full-size truck market is fighting to maintain market share in a segment that still offers substantially more profit opportunity and revenue than most other market segments. Chrysler, intent on stabilizing sales of its outdated Dodge Ram as some of its recently launched products stumble, is ladling out discounts worth $6,000 or more on the truck. The result: a 20 percent sales increase last month. Analysts say Chrysler likely will keep its foot on the gas because development costs on the Ram, last given an extensive makeover early in the decade, have been amortized, giving profit margins some cushion.
Nissan Motor Co., which entered the large-truck segment in 2004 with its U.S.-made Titan model, isn't offering discounts as deep as its rivals at this point. Nissan's discounts amount to less than $3,500 per Titan sold, according to Edmunds. Nissan is offering 0.9 percent financing for 60 months. Sales of the Titan are off 10 percent this year.
For people who need big pickups, the price war and the entry of Toyota as a serious contender in the market is a bonanza. When George Smith's Ford pickup truck hit 106,000 miles in late summer, he decided it was finally time to buy a new model. The 63-year-old retired hospital administrator and horse owner from Harrisburg, Pa., knew there were "attractive" model-year-clearance deals floating around in the market, and he had his eye on GMC's newly revamped Sierra pickup. But he had trouble finding the Sierra he wanted and the ones he could find weren't priced attractively.
After decades of buying American trucks and sport-utility vehicles, Smith walked into a Toyota dealer, was offered a 0 percent loan for 48 months, and took the deal.
"They gave me a very good price," he said. Though he says he was uncertain about buying a Japanese truck to haul horses around America's heartland, six weeks into owning the Tundra he says, "I'm thrilled to death that I bought it."
Toyota's aggressive efforts to sell production from its new factory in San Antonio and establish itself in the large pickup market represent a big challenge for Detroit's three struggling auto makers, particularly GM. Sales of the Tundra have boomed 55 percent since Toyota unveiled its redesigned Tundra, and started offering no interest loans to move it.
GM, which launched redesigned Silverado and GMC Sierra trucks late last year, had hoped to use a new pricing strategy to keep rebates and financing discounts to a minimum, thus bolstering resale value and profits. Pricing to minimize rebates and boost revenue per vehicle was a major part of its turnaround strategy. When Toyota began discounting the Tundra, GM officials complained the Japanese auto maker was "throwing hand grenades."
Now, GM has matched Toyota's deals. The Sierra Smith wanted is much less expensive, thanks to GM's offer of free five-year loans on the models.
The success puts automakers at a crossroads, J.D. Power Chief Economist Bob Schnorbus said.
"The decline in the housing market is clearly having an impact on the auto industry, and pickups may be the most directly affected segment," he said in a report issued late last month. "With consumers fearing further declines in the housing market, the large pickup segment will continue to face considerable challenges, and incentives will be critical in softening the blow in the months ahead."