By Mark Boada, Executive Editor
It’s time for fleet managers in North America to face facts: we are witnessing the death of the American sedan.
In April, Ford rocked the automotive world when it announced that after this model year it’s no longer going to make any sedans in its U.S. factories. That lightning bolt came just a few months after FCA let on that it’s taking the axe to its two mid-market sedans, the Dodge Dart and Chrysler 200. While at the time FCA said nothing about the luxury Chrysler 300, it appears to be headed for a similar fate: CEO Sergio Marchionne told analysts this month that starting next year the company’s factories here will be exclusively devoted to Jeeps, the Pacifica minivan and pickup trucks.
Which leaves GM as the only traditional car-maker in the U.S., with sedans a-plenty from its Chevrolet, Buick and Cadillac divisions. But are they long for this world? With a possible exception of a few, the answer here is no, for a couple of reasons.
Consumers are shunning sedans. Once upon a time, sedans dominated the American market. But at least since 2009 – the year the recession ended — Americans have been turning their backs on sedans of all sizes in favor of crossovers, SUVs and pickup trucks, with no end in sight for the trend. Here, I’m quoting a May 9 report from the market research firm, JATO:
“In 2009, sedans posted an impressive market share of 39% — 12 points higher than the share held by SUVs. Simultaneously, the popularity of SUVs has boomed, jumping from a 25% market share to 41% in 2017. It simply comes down to the fact that consumers want SUVs and car makers can equip them with better features than regular sedans.”
What’s driving consumers is their preference for the higher seating position, roominess and carrying capacity that utility vehicles offer. At the same time, particularly with CUVs – the acronym for utility vehicles based on a car chassis – OEMs have addressed consumers’ concerns with SUVs’ truck-like handling and fuel efficiency.
Better profitability. Detroit has long found it difficult to make robust profits on small cars. And with the large sedan segment suffering the greatest declines in sales, the CUV and light-truck markets are the place where OEMs — and their investors – want to be.
That was underscored by the fact, anticipating Ford’s announcement, Morgan Stanley Adam Jones changed his outlook on Ford stock from bearish to bullish and raised his earnings estimate. Ford’s stock price has since climbed more than 10%.
Don’t think that GM didn’t notice. And, for what it’s worth, Jones has since said he believes GM will follow the trend and eliminate at least some of its sedans. It recently cut the Cadillac ATS sedan, and has some ageing models, like the Chevy Impala and the Cadillac XTS. Like Ford and Chrysler, GM will almost certainly look to cut some of its older, less-profitable cars in favor of new electric vehicles and more of the kinds of autos consumers are clearly demanding.
Where does this leave fleets?
So, let’s say that GM follows Ford and Chrysler’s example. What are fleets’ alternatives? There are two: they could replace those makers’ sedans with their utility vehicles, or they could buy from the likes of Honda, Toyota, Hyundai, or any other European or Asian OEM that remains in the sedan market.
In fact, fleets themselves have been part of the trend away from sedans. But two fleet management companies say they haven’t seen a dramatic shift toward utility vehicles, because their higher total cost of ownership (TCO) remains an issue. Of the alternatives, crossovers have the closest profile to sedans, but are still more expensive and, as a class, less fuel-efficient, despite the improvements. On the other hand, if consumers abandon sedans in increasing numbers, residual values may drop, tipping the TCO balance back toward crossovers.
“We’ve seen a slight shift, perhaps, particularly as the crossover segment has expanded with offerings throughout the size ranges,” says Matthew Salm, Element’s senior vice president of strategic alliances and sourcing. “SUVs and crossovers speak to driver preference, but don’t always present a compelling TCO when up against a sedan.”
Partha Ghosh, ARI’s director of supply chain management, echoes Salm’s comments. “On the fleet side, we have not observed a large-scale, dramatic shift away from sedans. Our clients’ [vehicle selections] are…determined by their business needs and…whatever financial considerations are in play.”
For his part, Ghosh believes that fleets may try to retain their relationships with OEMs who dropped their sedans instead of turning to others who still make them. He said that, in view of the competitive pricing agreements they have in place, “it is more likely that fleet managers will start having conversations with us and their OEM representatives to determine if any new vehicles in their preferred partner’s lineup can align with the business needs currently served by sedans.”
But at Element, Salm sees it a little differently. “Client reaction appears split. For some, this will just leave the crossover or SUV as the item on a selector. For others, I think we will see an openness to other OEMs and a potential shift in market share. In all cases, I think customers will look hard at their vehicle needs to ensure that they have the right application for their organization and specific business purpose.”
Salm said in view of carmakers’ shifting lineups, standard criteria for vehicle selection will remain in place. “Comprehensive TCO analyses will be important to ensure that decisions are made with all short-, mid- and long-term costs taken into account. Safety, driver and business productivity, efficiency and cost-effectiveness will continue to be critically important.”