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Why Is General Motors Launching Sedans When SUV Sales Are Booming?

By John Rosevear - Sep 3, 2015 at 8:22AM

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SUV sales are up and sedan sales are down, but GM is spending big to launch two new sedans over the next few months. Here's why that actually makes sense.

The new-for-2016 Chevy Malibu has many great features -- but it's not an SUV. Is it doomed from the start? Source: General Motors.

SUV sales have surged in recent months. But at the same time, sales of sedans have dropped significantly.

It's a well-documented trend: More and more buyers are choosing car-based "crossover" SUVs as replacements for traditional sedans. Sales of longtime industry stalwarts like Honda's (HMC -1.88%) Accord and Civic are down sharply this year.

General Motors (GM 1.82%) hasn't been immune to the trend. Sales of its mainstream sedans -- the Chevrolet Cruze, Malibu, and Impala -- are all down this year through August.

The good news is that unlike some of its Japanese rivals, GM has been able to capture an outsized share of SUV sales, more than enough to make up the difference.

But at a moment when GM's dealers could really use even more SUVs to sell, GM is about to spend a lot of money launching two new -- you guessed it -- mainstream sedans.

Some analysts have suggested that GM might have its priorities mixed up. Does it?

Coming soon, the all-new Malibu and Cruze
Very soon, shipments of the all-new 2016 Chevrolet Malibu will begin arriving at dealerships around the country. I examined a preproduction version of the new Malibu back in April, and it appears to be a big improvement over the current car. Fit and finish, fuel economy, and interior space are all improved -- and it's a better-looking car than the current model, too.

Early next year, GM will follow up its all-new Malibu with another all-new Chevy sedan. The also-all-new-for-2016 Chevrolet Cruze follows the same template as the new Malibu: It's lighter in weight, but roomier inside; it's loaded with new high-tech features, and it has a stylish new body that (like the new Malibu) riffs on the basic shape of the full-size Impala while maintaining its own identity. 

The Malibu will be offered in a brand-new hybrid version that uses technology developed for another all-new 2016 Chevy sedan, the Volt. And the Cruze will feature a new turbocharged 1.4 liter four-cylinder with some high-tech tricks that are expected to result in an EPA highway mileage rating around 40 miles per gallon.

The new-for-2016 Chevrolet Cruze will start arriving at dealers early next year. Source: General Motors.

GM spent a lot of money on these new products. CEO Mary Barra is determined to make every new GM product the best in its individual market segment. The new Malibu and Cruze are aiming not just to match models like the Accord and Civic, but to beat them.

Many of GM's most recent products have been terrific -- almost surprisingly so, given GM's long track record of mediocrity. Whether critics will rate the Cruze and Malibu as tops in their respective classes remains to be seen, but both look very strong from here.

But again, sales of the Accord and Civic -- and most of their compact and midsize rivals -- have been terrible recently, and show no signs of picking up. Why now?

These new cars will boost GM's profits -- even in a sales slump
First, even for the most efficient and streamlined automakers, it takes over two years to develop a new vehicle from scratch -- anywhere from 28 to 36 months is typical. These products were probably first planned three years go, before the big drop in gas prices exacerbated consumers' shift to SUVs.

Second, sedan sales may be down, but GM (and its rivals) still sell a lot of sedans. They're still hugely important products and they still generate substantial profits.

And what's more, those profits are set to jump, even if the total number of sales continues to decline.

U.S. sales of the Malibu were down 6% last year, but GM still sold 188,519 of them. It also sold over 273,000 Cruzes -- and GM expects the new Malibu and Cruze to boost its average profit per car by $1,500 to $2,000.

Do the math on that. 

Actually, I did it for you. Strong new models generally cause sales to jump. But even if the new Malibu and Cruze don't generate any more sales than GM managed with the old models last year, GM's pre-tax profits should get a boost to the tune of at least $690 million.

As a GM shareholder, I'll be happy to take that gain -- sedan slump or not. 

Oh, and one more thing: GM is already working on increasing its production of SUVs.

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