Auto Giants Find Themselves Firing on Just Four Cylinders

Aware of Shift in Consumer Spending, Carmakers Are Doing Likewise With Their Ad Dollars

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DETROIT ( -- Automakers are switching their national-ad dollars into flogging fuel-efficient, flex-fuel or hybrid vehicles, recognizing that today those are the few sunny spots in an otherwise dismal car-sales market.

This week the industry will release U.S. sales figures for May, and they won't be pretty. Auto site forecasts that the industry will report a 10.8% slide in new-vehicle sales. Jesse Toprak, executive director-industry analysis at Edmunds, predicted that May sales would tally 1.4 million units vs. the traditional averages of between 1.5 million and 1.55 million. May historically has been one of the industry's hottest sales months.

Of the six leading carmakers, Detroit's trio will see the biggest declines. Edmunds projected that General Motors will see total sales drop 22% vs. May 2007. Chrysler will be off 21%, and Ford will be down 12%. (Mr. Toprak did point out that, to Detroit's credit, the three "are moving away from blindly going after market share" and instead are pursuing profits.) Even Toyota will feel the pain, with a sales drop of 6.7% compared with May last year. Nissan will be down 0.1% in the U.S. Honda is the only big automaker expected to report a gain for the month, 3.2%, Edmunds projected.

You can blame the increasingly gloomy outlook on what Mr. Toprak called a "perfect storm": record gas prices, the housing crunch, tighter reins on lending and general economic uncertainty. The one upside is that the same factors have sparked a seemingly dramatic shift in the American mind-set when it comes to the kinds of vehicles they want to buy.

Bigger not better
Demand for more fuel-efficient vehicles with four-cylinder engines is sizzling. Of all new cars sold in the first 26 days of May, 45% were four-cylinder models, according to J.D. Power and Associates' Power Information Network. That's the highest percentage since PIN started tracking the numbers in January 2003. In May 2007, 39% of all vehicles sold were four-cylinders. Go back a few more years to May 2004, and the number was only 28%. Of all midsize cars sold in May, an eye-popping 76% had four cylinders, said PIN.

The automakers are well aware of this shift in consumers' thinking and are matching it in the way they spend their ad dollars. Truck and SUV budgets are being slashed -- even as they try to clear them off dealer lots -- and marketing budgets for smaller cars are getting boosted.

Chrysler, which is trying to move the Dodge Ram pickup model to clear the decks for a far more fuel-efficient model coming this fall, has cut first-quarter national spending on the Ram from $40 million in 2007 to just $14 million this year, according to TNS Media Intelligence. The other leading players in the segment have followed suit, TNS data show. Ford spent $35 million in measured media on the F-Series in the first quarter vs. $69 million a year ago. Toyota, which spent $75 million launching its redone Tundra in the first quarter of 2007, spent just $28 million in the first three months of 2008. Meanwhile, GM dialed down its spending on its Chevrolet Silverado to $49 million from $77 million a year ago.

Toyota and Honda beefed up national advertising for their midsize cars in the first quarter vs. a year ago: Toyota Camry to $11 million from $7 million, and Honda Accord to $50 million from $34 million, according to TNS. But while Toyota increased spending on the redone Corolla to $49 million from $5 million a year ago, Honda reduced spending on the Civic in the first quarter by $10 million to $15 million.

Fiesta in Mexico
If you needed further evidence there's a seismic shift going on, Ford said May 30 it would convert its plant near Mexico City from making F-Series full-size pickups for the Mexican market to the manufacture of the new Fiesta small car, set to go on sale in North America in early 2010.

What's more, according to PIN, four out of 10 trade-ins on large pickups in the first 26 days of May were what the industry calls "upside down," where the owner of the vehicle still owes more on it than the retailer will offer for it. There are even dealers refusing to accept big SUVs on trade-ins, an occurrence Mr. Toprak said he's never heard of before. "They don't want to take the risk since they don't know how low values will go," he said.

You can bet they'll go pretty low. Incentives are climbing to near-record levels and roughly averaged $2,400 per unit at the end of May, Mr. Toprak said. The deals are more generous on gas-guzzling SUVs, around $4,500, with some big pickups nearing $8,000 per unit.

Meanwhile, consumer data from GfK Automotive shows that Americans are already planning more of those smaller vehicle purchases in the next three months to a year. "The downsizing syndrome is picking up," said Doug Scott, a senior VP at the consultancy. "Nobody is upsizing."
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