Will Jeep carry Fiat Chrysler Automobiles (NYSE:FCAU) to another big sales gain?
If analysts' estimates are on target, it looks like September will shape up to be a decent month for the Italian-American automaker. Analysts at Edmunds expect FCA's U.S. sales to rise 14.4% in September, a bit ahead of the overall U.S. market's gain.
Given that Jeep sales were up 21% this year through August -- and given that low gas prices and steady interest rates appear to have kept truck and SUV sales strong in September -- it's likely that the iconic SUV brand is set to post another strong month.
But it may not be long before FCA finds that additional gains for Jeep are hard to come by -- and not because buyers are turning away from SUVs.
At some point, FCA can't make any more Jeeps
Here's the problem: Sales of several Jeep models have been growing so well for so long that some of FCA's factories are probably close to maxed out.
Consider this: Sales of the Jeep Grand Cherokee are up just 2% this year, and sales of the related Dodge Durango are actually down 5% through August. Is that because the two SUVs have suddenly been outclassed by a rival?
I don't think so. I think it's because the Detroit factory that makes the two popular SUVs is maxed out. In fact, I would guess that Durango sales are down because FCA has prioritized production of the Grand Cherokee, which is probably a little more profitable -- not because Dodge dealers are having trouble selling Durangos.
Other Jeeps may be bumping up against production limits. Sales of the Wrangler are up 16% this year, but they were up just 1% last month. Likewise, sales of the wildly popular Cherokee are up 24% through August, but were up just 3% last month.
The Wrangler and Cherokee are made in the same factory, in Toledo -- another factory that may have hit its limit.
Expanding production capacity is a risky and expensive move
A maxed-out auto factory is both good and bad news for an automaker.
Between all of the specialized tooling required to make a car, the high energy costs, and ongoing labor contracts, auto factories have extremely high fixed costs. A general rule of thumb in the auto business is that a factory breaks even at about 80% of "capacity," which is usually defined as two shifts working five days a week. As production rises above that level, so do profits.
FCA, like other automakers who learned hard lessons during last decade's economic crisis, wants to run its factories as close to full speed as possible -- ideally, around the clock. That's the way to maximize its investment.
In that sense, having super-busy Jeep factories is great news -- they should be generating big profits for FCA. But here's the bad news: Once a factory is maxed out, boosting production is expensive.
Essentially, another assembly line has to be built, with another set of expensive, specialized tooling. That tooling can cost $200 million or more. If the automaker doesn't have room in an existing factory to set up another assembly line, it'll have to expand an existing plant or build a new one. That sends the costs up further -- and also means that the expansion will take more time to complete.
And it's a gamble: Will that new assembly line be busy enough when it's done to justify the investment?
Some additional production capacity for Jeep is a good bet
FCA is expected to make a bunch of changes to boost production of some Jeeps, including the Cherokee and Wrangler. Reportedly, the next-generation Cherokee will be made in a different factory with more capacity, while the Toledo plant will be reconfigured to make more Wranglers -- along with a new Wrangler-based pickup truck.
More than most automakers, FCA needs to show that it can turn big SUV sales into strong profit margins. It made some progress last quarter -- but it needs to do better. Will it? We'll find out next month.
John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.