Change of mix needed after the stampede

Tag : Tool With Light
A three-letter word - mix - is suddenly casting a long shadow overthe financial stability of the Detroit carmakers and their suppliers .
Mix is the industry term for the proportion of various vehicletypes in a carmaker's line-up . Its importance as a measure of the industry's financial healthhas grown as Americans stampede from gas-guzzling sport-utility vehicles and pick-up trucks to more fuel-efficient -but far less profitable - cars and crossover vehicles.
Carmakers do not disclose the profitability of individual models, but it is no secret thatvehicles such as General Motors' Chevrolet Silverado, Ford Motor'sFSeries and Chrysler's Dodge Ram pick-ups are by far their biggest money-spinners . A Mercury Mariner Hybrid is checked in the factory - hybridvehicles are becoming more popular in the USA Chris Ceraso, an analyst at Credit Suisse, estimates that eachlight truck contributes an average of $9,000 to pre-tax profit,while the average car earns only $3,000.
The shift in mix has accelerated dramatically in recent weeks. Cars accounted for 57 per cent of US light vehicle sales in May, up from 53 per centin April and the highest proportion in 12 years.
The smallest cars, such as the Honda Fit, Toyota Yaris andChevrolet Aveo, soared from 8 per cent in May 2007 to a quarter ofall sales last month.
The financial pain is exacerbated by sliding volumes. Light vehicle sales in May fell to anannualised 14.3m units, from 16.3m a year earlier.
Offering incentives
Carmakers - including Toyota - are also sacrificing profit by offering generous sales incentives to move gas-guzzlers off dealer lots . Ford said this week that it was reviving anemployee-discount-for-everyone promotion on the F-Series trucks tobring down inventories.
The three Detroit companies are far more vulnerable than their foreign rivals to the shift in mix. According to LehmanBrothers, light trucks, including minivans, made up 72 per cent ofChrysler's sales last month, but less than a third for Honda andNissan.
Mr Ceraso concludes that the savings to General Motors of closingfour truck assembly plant , announced earlier this week, and a higher contribution frompassenger cars will be outweighed by lost profits from the 700,000trucks that the plants build each year. USA consumers are showing a preference for newer, cleaner, moretechnologically advanced cars. Credit Suisse has cut its estimate of GM's 2009 earnings from a $351m profit, equal to 62 cents ashare, to a $1.25bn loss, or $2.21 a share.
Fritz Henderson, GM's president, said earlier this week that "weneed to be able to produce more profitability from our passengercars because we'll be under pressure in terms of revenue ".
The big question is how.
The success of BMW's small 3- and 1-series and its Mini subsidiaryshows that it can be done, says John Hoffecker, managing directorat AlixPartners, a consultancy .
Differentiate to the consumer
Rebecca Lindland, an analyst at Global Insight, says that "youstart praying for a strong dollar if you're General Motors",referring to the potential for importing more small cars from itsSouth Korean affiliate, GM Daewoo, which produces the Aveo.
More broadly, Mr Hoffecker advises carmakers to "find someinnovation that allows you to differentiate to the consumer".
High-margin and luxury accessories can boost a vehicle's popularityand price tag. In the past year, several Ford models, notably thesmall Focus, have been equipped with Sync, a system developed byMicrosoft that uses voice activation technology to operatecellphones and play digital music.
According to Ford, Focus cars equipped with Sync typically sell inhalf the time than those without.
Retail demand for the Focus more than doubled last month from a year earlier. MrHoffecker predicts that alternative powertrain technologies , such as hybrid petrol-electric cars and plug-in hybrids, willbecome an increasingly important marketing tool.
"The company that can get to market with the best balance of costand technology will have a real advantage," he says.