Why Both Ford and GM's Profits Could Be in Danger

It's been an extremely profitable first half of 2013 for both Ford (NYSE: F  ) and General Motors (NYSE: GM  ) . One huge reason for this is that their most profitable vehicle segment, full-size pickups, are selling at a rapid pace. The F-Series and Silverado sales are up 22% and 27% so far this year and don't look to be slowing down with the automotive market continuing its rebound. But there is one scary development for investors that could potentially reduce the profits made from these full-size trucks by thousands of dollars. 

Pricing power
Full-size pickups bring in the majority of the profits for domestic automakers; analysts estimate each truck sold could bring in as much as $10,000 in profits. In addition to that, transaction prices for trucks have increased faster than other vehicle segments.


Graph by author, information from Automotive News DataCenter.

There are a couple reasons for ever-rising truck prices: brand loyalty and a 50-year tariff on light trucks enacted in 1963. While few trucks now are subject to the tariff, mainly because Toyota (NYSE: TM  ) builds most of its trucks on U.S. soil, it still keeps some competition away which indirectly leads to higher prices. Consider that in midsize car segments there are 15-20 brands competing compared to the more profitable truck segment which has a fraction of the competition.

In reality the competition is even less than it seems between domestic automakers because of brand loyalty. The line in the sand has been drawn for decades, so you're either a Ford or GM driver – there is no grey area. Because of this automakers can get away with high prices because they know their customers will likely purchase from them again, regardless. If the tariff were reduced or abolished it could bring in extra competition, which could potentially reverse transaction prices by thousands of dollars. 

Bargaining chip
Detroit automakers are using the tariff as a bargaining chip during the Trans-Pacific Partnership negotiations. Japan is still the world's third-largest auto market and is virtually closed off from U.S. automakers. If Detroit agrees to abolish the tariff then it might be enough to negotiate domestic automakers' entry to Japan – but there's doubt among executives if this would ever truly happen. The worst-case scenario being that the tariff is reduced or abolished but U.S. automakers still get the runaround from Japan and fail to gain market entry.

This development does have some Ford and GM executives worried because a weak yen gives Japanese automakers more incentive to produce vehicles in Japan and export them to the U.S. market – using the exchange rate as a way to increase profitability. It's the main reason for Toyota's huge 94% increase in profits last quarter. If the weak yen is used aggressively, then Toyota could load up features and incentives to try and get its foot in the door of the very profitable U.S. full-size truck segment.

For now the tariff is a road block stopping Toyota and Honda from exploiting their advantage, but if removed could have an effect resulting in more competition and lower prices. That could drastically reduce Ford and GM's profitability.

Bottom line
Ultimately, if the tariff is used as a bargaining chip to gain entry into Japan's market, it could be worth it. Chances are that with such high loyalty rates and decades of industry knowledge, Detroit's trucks would still dominate the market.

Michelle Krebs, senior analyst at Edmunds.com told Detroit News:

The simple fact of the matter is, Detroit reigns supreme when it comes to trucks. When it seemed like Toyota was going to take over with its trucks, they didn't make a dent. And in the current truck boom, Nissan's Titan sales are down.

One thing is for sure, reduced profits from full-size pickups would drastically hurt Ford and GM's share price and this is a development to keep a close eye on as negotiations progress.

A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.


Read/Post Comments (17) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2013, at 3:42 PM, ghstflame wrote:

    Mistitled for clicks, article full of drivel and no substance

  • Report this Comment On August 05, 2013, at 4:33 PM, MustangMuse wrote:

    This might make a good article to write for short-term or long-term investors IF the tariff is eraticated and Japan is granted admission into the Trans Pacific Partnership. Until then, it is the typical 'what-if' speculative hype founded on a hunch that gets too much play in the overly bombarded minds of investors. I generally read and agree with the articles released from this publication because they are grounded in fact. Please refrain from joining the tabloid-like investment articles with bold headlines like 'Why Ford and GM's Profits Could be in Danger' with skinny facts. How about a good article on possible market effects of other cities (like Chicago) who may follow Detroit into bankruptcy. That seems more imminent. Thanks.

  • Report this Comment On August 05, 2013, at 4:49 PM, btc909 wrote:

    If Japaneses automakers start building vehicles in Detroit GM & Ford will be in trouble. Or so this article is leading you on to believe.

  • Report this Comment On August 05, 2013, at 4:51 PM, hunter3203 wrote:

    The article is completely off base. The US is by far the largest light duty truck market in the world. The second largest is Thailand. What other manufacturers exist that make US full size pickups? The Detroit 3 dominate the full size market. Toyota and Nissan don't even register even though they've spent Billions in the US on plants so they can say that they're made in the US.

  • Report this Comment On August 05, 2013, at 5:13 PM, speculawyer wrote:

    Of course their profits are in danger. They continue to profit off gas-guzzler trucks and SUVs that will wane in popularity as the price of oil continues to rise. It is going to be difficult to profit in the auto biz for the next few decades as they transition to more efficient cars that cost more to build due to the batteries and R&D.

  • Report this Comment On August 05, 2013, at 5:18 PM, TMFTwoCoins wrote:

    More than half of GM and Ford's profit come from full size trucks where transaction prices have increased faster than the industry. With a weak yen, it's possible Toyota could make an aggressive push in the segment -- it might not be successful in terms of sales but could put downward pressure on transaction prices and thus profits for GM and Ford.

    That seems like a pretty legitimate threat towards profitability if and when the tariff is removed, but maybe I'm off base since you all hate the write up.

  • Report this Comment On August 05, 2013, at 5:22 PM, hunter3203 wrote:

    Speculawyer - The automakers are already moving in that direction. The new F-150 that will be introduced next year is 700 lbs lighter than the current generation. Ford has already introduced Ecoboost engines in the F-150 and they've been a hit. Lowering the weight will allow even smaller engines. We'll soon see full size pickups that get the mileage that compact cars got a few years ago - mid 30s on the hwy for sure.

  • Report this Comment On August 05, 2013, at 5:26 PM, milehighassassin wrote:

    Do your research. Toyota accounts for less than 5% of all truck sales. Nissan accounts for 1%. GM, Ford and even Dodge are not in any danger when it comes to truck sales. That is a tough market and Toyota and Nissan do not even come close to making as good of a truck when it comes to real trucks with people that use trucks as they were designed. Nissan and Toyota lack in fuel economy, payload, ride, longevity, etc, etc. Who else is going to get into this market? VW? Doubtful, they have never made a full sized truck. There is really no one else even capable. Honda is putting an end to their "truck" which is a honda Pilot essentially in the Ridgeline.

  • Report this Comment On August 05, 2013, at 5:51 PM, TMFTwoCoins wrote:

    @milehighassassin

    I did my research. Did you read the part where I said "Chances are that with such high loyalty rates and decades of industry knowledge, Detroit's trucks would still dominate the market."

    Then I said it's a development to keep an eye on. I didn't say that Toyota and Honda have success today because they don't...

    It's a development to keep an eye on with a yen that continues to weaken, and the possibility of the lowered tariff.

  • Report this Comment On August 05, 2013, at 7:10 PM, AnelaRose wrote:

    I'm amazed they make $10,000 on a truck! Now that's over-priced!

  • Report this Comment On August 05, 2013, at 7:21 PM, cityperson wrote:

    Just wait till the non-inflation takes a real foot hold in America and the prices keep increasing, the auto makers will all suffer and mnay other busniesses.

  • Report this Comment On August 05, 2013, at 7:39 PM, Greencrackman wrote:

    @milehighassasin

    I've been to many parts of the world and see many toyota trucks old and new vs American trucks. Apparently u dont know what your talking about except your just a big3 loyalist

  • Report this Comment On August 05, 2013, at 7:59 PM, lowmaple wrote:

    As mentioned, Ford and GM have loyal customers and buy American are the hardest hurdles Toyota etc have in penetrating the U S market.

  • Report this Comment On August 05, 2013, at 8:20 PM, billphx wrote:

    This just a another proof and his john boehner republican friends have figured out how two ruin the American auto industry and help there Asian friends that pay better this part of the republicans plan to kill the middle class and make there rich friend richer And our president can not stop them or the oil companies from charges us $4.00 per gallon the republican and the rich run this country.

  • Report this Comment On August 06, 2013, at 12:28 AM, dwduke wrote:

    The consumer would like lower prices for sure. Less profits though will mean profits will have to come from somewhere. For instance lower wages, cut pensions, and perks. That will not happen though. Or will it.

  • Report this Comment On August 06, 2013, at 10:23 AM, Crazylegs52 wrote:

    I think prior to posting the possible "open door" Japan has to take away American market share in the full size truck arena, an area America has dominated since its infancy, one should look at Toyotas' newest entry. The 2014 Toyota Tundra.

    See below link:

    http://www.autoblog.com/2013/07/30/2014-toyota-tundra-review...

    I quote "Toyota appears to have ceded to the competition".

    Now this of course is only 1 website. And you could say that maybe they are American biased (I have not found that to be true in the past). But in order for Japan to make in roads into this market, they will need to make a MUCH BETTER product AND take advantage of the exchange rate profitability. It looks like they are disinterested.

    I think the better place to look for profitability is actually the AMERICAN car makers and their moves to make a more profitable, efficient, and attractive economy car, Examples as the Chevy Cruze (selling like hotcakes), the Ford Fiesta/Fusion (hotcakes). Even the Volt is starting to pick up sales even though it is not profitable. Toyota is doing well right now from a profit standpoint due to exchange rates. But I think they are in trouble. China doesn't like them anymore and selling cars there will become more difficult. We are making domestic cars that are more and more competitive. And, they have not really innovated anything to help them standout.

    I would stick with American and I think truck buyers will as well.

  • Report this Comment On August 06, 2013, at 10:38 AM, Crazylegs52 wrote:

    Just saw this on same website.

    http://www.autoblog.com/2013/08/06/ford-adds-third-shift-at-...

    I dont think Ford feels threatened by Toyota. They haven't even released the new F 150 yet and are selling the old one like crazy. The new one will be a game changer for the segment I think. 700lb weight loss and Ecoboost. I am betting >30mpg HWY.

    BTW, I hate pickups.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2579499, ~/Articles/ArticleHandler.aspx, 8/22/2014 11:43:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement