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High fuel costs end US affair with SUVs
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09:13, July 01, 2008

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Record fuel price have ended America's love affair with the SUV.

But the break-up is proving to be more painful than anyone anticipated. Some US dealers have stopped buying used trucks. Lenders are bracing for losses. Automakers have slashed output, and Americans have seen the value of their big rides drop by thousands of dollars in recent weeks.

The decline in sales of the heavy sports utility vehicles and trucks favored by Americans for more than a decade has gathered momentum in the last month, leading to a glut on dealer lots and sharply lower trade-in values.

A man looks at a new GMC Yukon SUV at a dealership in Santa Clara, California.

But unlike the last recession in 2001, discounting from Detroit is not showing signs of reviving demand.

"The auto downturn appears to be entering a problematic second phase," Lehman Brothers analyst Brian Johnson said in a recent note for clients. "In this phase, with gas prices remaining stubbornly high, demand for both new and used large pickups and large SUVs is falling precipitously."

For years, North America's truck market has been an outsized anomaly. Cars outsell trucks by a 5-to-1 margin in Europe and by 2-to-1 in Asia Pacific. But in North America, the popularity of SUVs and trucks made that ratio almost 1-to-1 last year, according to Automotive News.

Yet record gasoline prices have driven resale values for big trucks such as the Ford F-150, Chevy Silverado and Toyota Tundra down by 20 percent or more this year.

That decline, in turn, is expected to force lenders, including finance companies like GMAC and Ford Motor Credit, to write down the value of vehicle leases.

General Motors Corp and Ford Motor Co could see write-downs of more than $3 billion on a combined basis for the depressed value of trucks and SUVs coming off leases that are then sold at auctions, analysts have said.

The crunch comes at a time of rising concern about liquidity for Detroit automakers. GM shares on Thursday tumbled to their lowest level since 1955, while privately held rival Chrysler LLC had to deny rumors it was facing a cash crunch.

GM's decision this week to slash truck production by 170,000 units and offer interest-free loans for six years underscored the severe pressure on the automaker.

Ford is already offering its market-leading F-Series pickup trucks with employee pricing, a discount worth up to $5,000 on some models. In an unusual and costly move, Ford has also opted to delay launching a redesigned F-150 to clear out inventory.

Analysts expect the discounting pressure to remain strong for the rest of the year as US auto sales near decade lows.

'Math doesn't work'

Mike Jackson, chief executive of the No 1 dealership group AutoNation Inc, said even stepped-up incentives did not begin to address the shift in the market away from trucks.

"It's very difficult because we have consumers who want a new truck, but they have a truck to trade," Jackson said.

Jackson said automakers would have to sweeten incentives or extend rebates to clear 2008 model-year vehicle inventories.

The plunge in the value of large SUVs and trucks has prompted some dealers to stop taking them at trade-in.

"It has been unlike anything I've seen in my career," Tom Folliard, chief executive of CarMax Inc, the largest US used car retailer, said last week, noting the large vehicle depreciation had been especially dramatic since April.

"People just can't afford to write a multi-thousand-dollar check to get out of their sport utility to get into a car that gets better gas mileage," he added. "The math doesn't work."

Used-car prices are a closely watched barometer for new vehicle sales as a majority of purchases involve a trade-in model and better prices tend to spur more trade-ins.

The average wholesale price of used, large SUVs fell 24 percent in May. Prices for used pickup trucks were down 21 percent in May, according to Manheim, a firm that provides auction pricing benchmarks for dealers.

The collapse in demand for large vehicles has automakers and analysts cutting forecasts for US auto sales this year.

Sales in the world's single largest market for new cars and trucks are expected to drop to about 15 million units in 2008, down from 16.1 million for 2007. Few see a recovery in 2009.

Billionaire investor Kirk Kerkorian's chief auto adviser, Jerry York, expects only a limited sales rebound next year. Kerkorian has invested about $1 billion and taken a 6.5 percent stake in Ford, and offered more capital for its turnaround.

Sales dip expected

US auto sales probably dropped again this month as consumers spurned pickup trucks and sport-utility vehicles because of soaring gasoline prices and couldn't find enough fuel-efficient cars.

The decline to the lowest sales rate in 15 years was led by Ford Motor Co, Chrysler LLC and General Motors Corp, according to a Bloomberg survey of analysts.

Japan's Honda Motor Co, less dependent than the US companies on trucks, may be the only major automaker to report an increase when sales are released today.

Source:China Daily/Agencies

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