Challenges in Truck Country: trucks have long been a Big Three bastion. Now they're under serious competitive pressure.

A number of factors have conspired to set up a slow year for U.S. light vehicle sales and production in general, but one of the most painful aspects for the Big Three might be the state of the pickup truck market. Big trucks have typically meant bigger profits for the automakers, on the order of $2,000 for a pickup vs. $500 for a mid-level passenger car, for example. The tilting of the U.S. market in favor of light trucks over the past ten years has been beneficial to the Big Three, and their flagship trucks are among their highest-volume platforms: GM produces over 900,000 Sierra/Silverado pickups annually; Ford F-Series pickups are over 800,000 units a year; and Dodge's flagship Ram pickup runs about 400,000 units. The stakes are high for the Big Three, and the challenge is growing.

Macroeconomic Factors

High fuel prices led to concerns about the light truck market in 2005, but our statistical analysis showed virtually no correlation between fuel prices and light truck sales. This lack of relationship is particularly true for pickup trucks because there are few substitutes for their functionality, whereas SUV users might be better able to turn to a more fuel-efficient alternative if they felt inclined to do so. Our assessment was that fuel prices would need to remain above $3.00 per gallon for a sustained period before we would see a significant impact on light truck sales. Fortunately for all of our wallets, unleaded gasoline spiked in 2005 and again to the $3.00 mark in 2006, but has not remained at that level.

More concerning is the softening of housing starts. As the accompanying graph shows, there is a strong similarity in the pattern of pickup truck sales and housing starts, since the construction sector is a heavy consumer of vehicles in this segment. The fact that new home sales are falling and the inventory of single-family homes on the market is rising does not bode well for pickup truck demand. The outlook for housing will be weak through most of 2007, and we will not see a full recovery until sometime in 2008. Over the long term, the pickup segment is stable, but it rides the economic cycle of expansion and contraction to a greater degree than other segments, so in the near term it will continue to decline.

Market Share Factors

Aside from macroeconomic conditions, the Big Three are facing a familiar threat on a new front. The New Domestics collectively have captured almost 60% of the U.S. passenger car market, up from almost 40% 10 years ago. Now they are applying themselves to the light truck market and are bolstering their strong positions in minivans, SUVs, and crossover utility vehicles, with a foray into pickups. As the chart shows, the New Domestics as a group constitute 36% of the U.S. light truck market, up from 17% nine years ago. New pickup truck offerings could help fuel further penetration.

The Japanese-owned automakers have not been competitive in this market segment historically, but they are masters at traveling down the learning curve. Toyota has evolved its pickup offering from the early undersized T-100 to the old Tundra pickup to a new Tundra that should be a success as it ramps up production in 2007. The company employed American engineers in the development of the new model, so its features, including an all-new 5.5-liter V8 engine, are more likely to satisfy the core pickup audience. Toyota also situated the new Tundra assembly plant in San Antonio, TX--the heart of the market, a state that constitutes 25% of the nation's pickup sales.

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The other members of the Japanese Big Three are driving along a similar route. Honda has yet to get all the details right--its Ridgeline pickup is of unibody construction with a V6 engine, so it cannot haul or tow enough to be a serious contender, but it is a good-looking step in the right direction. Nissan's full-size pickup, the Titan, beat Toyota to the market in terms of size and power, but it has not been overly successful. This illustrates an interesting point about the pickup truck segment. The nature of the core pickup truck buyers--farmers, skilled tradespeople, construction workers--is such that these are customers who tend to place a premium on loyalty to long-term American brands. In this market segment more so than others, it takes more than good product to win over American consumers.

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The State of the Segment

It won't be an easy year for those who rely on the pickup truck segment. Demand is contracting due to the economic environment and slow housing market. Major competitors have come in with new offerings. Suppliers that are on pickup platforms should apply a dose of realism to volume expectations through an understanding of the market dynamics and economy. For now, GM and Ford will continue to swap punches, with GM having the better position this year thanks to its all-new GMT 900 Silverado/Sierra trucks. The Dodge Ram, as the oldest of the pickup truck models on the market, will find this a particularly difficult market until its next redesign in 2008-2009. The Japanese will not be able to make significant inroads into the pickup segment immediately or even over a few years, for reasons of consumer mentality but also because they do not have a platform or engine to build three-quarter and one-ton pickups, so they are not able to serve that subsegment at all. But they have exhibited diligence and patience in the past, so 10 years from now, who knows? The Big Three put a lot of resources into their pickup-truck products, and they will not yield the segment easily. It promises to be an interesting and challenging time in Truck Country.

Melissa Anderson and Erich Merkle

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Melissa Anderson, Vice President, IRN, Inc. and Erich Merkle, Director of Forecasting, IRN Inc.