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GM Proves America Can Still Drive Big

2015 Chevrolet Suburban 2015 GMC Yukon XL - GM Proves America Can Still Drive Big

By Ross Kenneth Urken

Today at Cedar Lake Studio in New York, General Motors unveiled its Chevrolet and GMC 2015 SUV line-up with a focus on the all-new Chevy tanks, the Tahoe and Suburban.

GM holds about 75% of the full-size SUV market, and it’s selling the land yachts in droves: thus far in 2013, Chevy and GMC have sold more than 180,000 Tahoe, Suburban, Yukon, Yukon XL, and Denali SUVs with revenue on full-sized SUVs alone equal to that of a Fortune 400 company.

Of course, in a world of CAFE standards where fuel efficiency is king, it would seem gas-guzzlers are beset by manifold challenges. Amazingly, though, GM is dismantling that expectation.

Of course, SUVs in total are only 6.5% of the U.S. light vehicle market this year compared to 18% in 1999, according to Sean P. McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. Sales this year of SUVs are up only 1.4% this year compared to 9.5% for the overall market.

Still, GM has legacy on its side, having produced the Suburban as a profitable niche vehicle since 1935, and in a sense it could be viewed as efficient, not just an industrial haul vehicle.

“It can hold seven people and produce better fuel mileage for seven occupants than three equivalent sub-compact cars to do the same job,” McAlinden said.

Perhaps that’s in part why GM — with dealers delivering 275,847 vehicles in the United States in August, up 15% compared with a year ago—has been a hit with household consumers: retail sales increased 22% while fleet sales were down 8%. The large SUV segment was up 29% in August compared to the previous year.

“So the Suburban and Tahoe are now profitable niche vehicles like expensive ‘gas guzzling’ German sports cars, not used in construction but used by hedge fund managers to get to two power lunches a day,” McAlinden said. “That doesn’t mean these vehicles are very profitable – it just means that their competition has withered away and the surviving models are the best of the bunch – so they think in Texas.”

Part of GM’s strategy, indeed, has been sheer inertia to outlast others in the segment. Japanese competitors Toyota and Nissan are expected to exit the large-size SUV segment, leaving GM the opportunity to capture as much as 11 percentage points of market share, according to GM CFO Dan Ammann. Given that the average SUV has been on the road for 11 years, there’s all the more opportunity for a new crop of buyers.

Though the fanfare abounds around the Tesla Model S and other electric options like the BMW i3, the sales of electric and efficient hybrid drivetrain vehicles are comparatively miniscule stateside.

“Despite strong encouragement from the U.S. government and the environmental lobby, American consumers are not migrating to hybrid—3.5% market share—or electric vehicles—0.75% market share—in large numbers just yet,” said Scott D. Upham, president and CEO of Valient Automotive Market Research in Rochester, N.Y. “Despite higher fuel prices and increased Federal CAFE standards, American consumers still have a strong demand for larger SUVs for transporting their families and enjoying the comfort, convenience and lifestyle flexibility that these vehicles offer.”

As the demand lasts for full-size SUVs, vehicles like the Tahoe and Suburban will offer a higher profit margin for the GM.

“Even if the customer base is smaller than it used to be and it is not a growth segment, it is still possible to develop and sell a vehicle that meets those customers’ needs and make a profit,” said Stephanie Brinley, an analyst at HIS Automotive.

IHS Automotive forecasts that the combined GMC and Chevrolet sales for their full-size SUV family to be in the 183,000-unit range in both 2013 and 2014 in the U.S. and north of 220,000 worldwide.

This is not a growth segment, but it is still a sizable and profitable segment, Brinley said. Certain customers have prioritized their size and vehicle use needs over a pint-sized package.

Of course, that in turn could provide the means for the efficiency, even beyond the EcoTec 5.3L V8 the Suburban and Tahoe will sport.

“The profit that GM—and Ford and Toyota—make from selling these full-size trucks helps pay for the technology needed to make more fuel efficient vehicles to meet current and future CAFE standards,” said Mike Omotoso, senior manager of global powertrain at LMC Automotive.

“There wouldn’t be a Chevy Volt without the money generated from full-size SUVs and pickups and the Cadillac Escalade.”

So those who can afford to buy these vehicles will inevitably make the future more buoyant for GM with innovative petrol-sipping options.

“Rich and upper middle class people with large families and/or towing needs will always buy larger vehicles, and we will see these vehicles get lighter by using light weight steel or aluminum in the future,” Omotoso said. “And we will also see powertrain changes such as hybrids, diesels, stop-start systems, and 8-, 9- and 10-speed automatic transmissions to improve fuel economy without sacrificing size and comfort.”

To adhere to CAFE standards, GM has to improve Suburban and Tahoe fuel economy at the same percentage as the rest of its fleet. That strategy hasn’t always been successful thus far, as GM spent $2 billion to develop dual mode hybrid Suburbans and Tahoes while no one but the government bought them at the $70,000 price point.

Instead, GM will get the job done with better ICEs and light production materials. And ironically, these heavy duty vehicles will be a driving mechanism in realizing that plan.

–Written by Ross Kenneth Urken for MainStreet