Good news for Detroit: Full-size truck sales are up 23% in the first quarter and are approaching levels not seen since the recession tanked U.S. vehicle sales. Detroit's Big Three automakers -- Ford (NYSE:F), General Motors (NYSE:GM) and Chrysler -- completely dominate this market and have accounted for 93% of full-size truck sales this year through March. And Detroit wants to keep it this way, since the majority of its profits come from this segment.
They'll have to keep an eye on Toyota (NYSE:TM), which is trying to make a push with its 2014 Tundra to increase its 5.4% market share. In the past, Toyota has had very little success taking share away from Detroit, but this year could be different, as the new Tundra rolls out in the fall. Here's what investors need to know.
During the recent Trans-Pacific Partnership trade negotiations, the U.S. government agreed to gradually abolish all tariffs currently in place on Japanese vehicles entering the U.S. market, including the 2.5% tariff on each vehicle brought in and 25% on every truck. In an industry that has margins in the single digits, those tariffs can mean a huge difference in profitability and vehicle pricing.
There's another recent advantage for Japanese vehicles that adds to Detroit's worries. Over the past few months, the yen has fallen pretty significantly against the U.S. dollar. That means Toyota and Honda have a financial advantage on every vehicle sold in the U.S. market. Toyota exports more than 2 million vehicles a year, and each one becomes more profitable by the day as the yen falls. Morgan Stanley believes the advantage to be equivalent to about $1,500 per car, while Detroit thinks the figure is closer to $5,700 per vehicle.
Ball in Toyota's court
It's up to Toyota to decide how it wants to use these advantages. It's had such little success breaking into the Detroit-dominated full-size pickup segment that it might opt to use the abolished tariff and devalued yen to drop prices significantly on its new Tundra, giving price-conscious consumers a reason to try it out. The timing couldn't be better for Toyota to make a push for more market share, either: Not only does it have a year before the next-generation Ford F-150 -- the No. 1 selling truck for 36 years -- hits the market, but also the average age of trucks on the road is 13 years, and gas prices are sliding downward. That could be all consumers need to finally bring them into the dealerships.
Detroit is obviously not happy about this development, and it's using all the leverage it can to have the government reconsider its decision to slowly abolish tariffs. So far, the pleas are falling on deaf ears, and that could be the reason GM's 2014 redesigned Chevy Silverado won't see a price increase when it replaces the previous-generation truck -- an unusually aggressive decision.
This is the most important vehicle segment to Detroit's companies, and Toyota has been desperate to claim more of the immense profits. Investors will need to keep an eye on how Toyota plays its cards and how the new Tundra sells this fall when it's released. If Toyota gets aggressive, it could do some damage to Detroit's bottom lines.