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Chevy Tahoe sales boomed 88% in 2014. But this SUV boom won't leave GM in bankruptcy court when it fades. Source: General Motors.
The trend was hard to miss in January's U.S. sales numbers: SUVs are back -- in a big way.
Jeep Cherokee? Sales were up 44%. Ford Explorer? A 28% gain. Chevy Tahoe? Up 88% over year-ago results.
For investors who own shares in Ford, General Motors , and Fiat Chrysler , that's welcome news, at least in the short term: SUVs generate big profits, so booming sales should boost the Detroit automakers' bottom lines.
But looking a couple of years into the future, it also raises some big worries: Is this SUV boom setting Detroit up for another bust?
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The last SUV boom ended really badly for Detroit
You don't have to be an old-timer to remember how this story ended last time around. It was less than 10 years ago that a sharp increase in gas prices put an abrupt end to Detroit's profitable SUV boom.
That was a disaster for the Detroit Three. Faced with sharply increased running costs, Americans who had been using Detroit's big truck-based SUVs as family haulers traded them in for fuel-efficient sedans -- a category in which Detroit wasn't competitive.
That was fine for Toyotaand Honda, whose dealers were happy to take SUV trade-ins on new Camrys and Accords. But it cost Detroit dearly once the economy started to head south: Ford had to mortgage everything it had to get the loans it needed to revamp its product line, while GM and Chrysler crashed into bankruptcy court.
But now, gas is once again cheap -- at least for the moment -- and SUV sales are soaring again. Will this new SUV boom be remembered as the ramp-up to another epic Detroit bust?
I don't think so. Here's why.
Could things be different this time around?
First, the SUVs themselves have changed. The old Explorer from 10 years ago was built on a truck frame, while the new one is a mechanical sibling of Ford's Taurus sedan.
What does that mean? For one thing, better fuel economy. A 2005 Explorer with four-wheel-drive and the most fuel-efficient engine available was EPA-rated at 13 miles per gallon city, 18 highway, and 15 combined. But a new 2015 model, similarly configured, gets 17 mpg city, 23 highway, and 19 combined.
It also means that today's Ford Explorer has more car-like handling and amenities -- or put another way, the experience of driving one is a lot more like that of a minivan than a truck. That's also true of GM's Chevy Traverse, the Jeep Cherokee, and many of the other SUV-like "crossover" models that saw sales soar in January. (It's not true of Chevy's Tahoe, which continues to be truck-based. But even the Tahoe and its siblings get much-improved fuel economy, and are much safer and nicer to drive.)
Today's Ford Explorer is very different from the truck-based Explorer of a decade ago. That's a good thing. Source: Ford Motor Company.
But here's the thing: Those improvements in efficiency and driving experience drove good sales numbers for the Explorer even when gas was close to $4 a gallon. If gas prices go back up, sales are unlikely to collapse.
But even if SUV sales do collapse, Detroit is far better prepared this time around.
Japan no longer has a monopoly on good fuel-efficient cars
Want to trade in your Detroit-brand SUV for a sensible sedan? Ford dealers would be delighted to show you a Fusion, or a smaller Focus if the Fusion is too big. Chevy dealers have the compact Cruze -- and if you'd like something bigger, the well-regarded Impala should fit the bill. Most Jeep dealers share a showroom with Dodge and Chrysler -- perhaps a Dart or a Chrysler 200 would interest you?
The point is this: The Camry and Accord -- and other import-brand sedans -- have a lot of strong Detroit competition that they didn't have last time around.
Ford's current Focus isn't a lowest-common-denominator model sold to meet fuel-economy regulations -- it's a highly regarded product, engineered in Germany, with a quiet ride and an interior that raised the bar for the segment.
Want a roomy sedan instead of a big SUV? The Chevrolet Impala deserves very strong consideration. Source: General Motors.
Likewise, the Impala is an impressive and surprisingly plush highway cruiser, and Chrysler's 200 is a smooth-riding luxury car for mainstream money. And all three -- Ford and GM especially -- are boasting much-improved reliability and customer-satisfaction scores.
You might choose a Camry anyway. But if the market shifts back to cars, Detroit's products are now good enough to get a fair share of sales. And post-restructuring Detroit's cost structures are now good enough that all three automakers can make decent profits on small and midsize cars.
The upshot: Things are different this time
The flip side of Detroit's much-improved small cars, of course, is that the import brands have caught on to the SUV game. It's not just Detroit posting big sales numbers with crossovers and SUVs: Toyota's SUV lineup posted a 15.5% gain in January, Honda's CR-V was up 27% (and its Pilot almost doubled year-ago sales), and BMW'sX5 was up 17%.
Long story short: If consumers suddenly start buying more sedans and fewer SUVs, that'll hurt profits at most of the automakers, domestic and otherwise -- but today's much-improved SUVs will likely still sell well, and all of the automakers -- not just the imports -- can compete for those sedan sales with profitable, up-to-date car models.
The article Why This SUV Boom Won't Crush Ford and GM originally appeared on Fool.com.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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