We learned a lot during the management conference call that followed Fiat Chrysler Automobiles' (NYSE:FCAU) earnings report last Wednesday. That's no surprise: FCA CEO Sergio Marchionne has never been one to stick to a bland script when talking to analysts and reporters.
As he sees it, the biggest factor is that FCA needs some new products. In particular: a big new SUV. But is that plausible?
FCA has a long way to go to match margins at Ford and GM
The profit-margin gap is significant. The third-quarter operating margins for the North America units at Ford (11.3%) and General Motors (11.8%) are both far higher than the 6.7% result for FCA.
The difference is a bit puzzling, given that FCA seems to have strong entries in the segments that Ford and GM credit for their success: crossover SUVs and pickups.
"Undoubtedly, they're impressive numbers coming out of both Ford and General Motors [for profit margins in North America] and obviously we're envious of those numbers," Marchionne said on Wednesday. "So we've been trying to understand the structural differences between our reported earnings and theirs."
Marchionne: Two "buckets" explain the gap
As Marchionne sees it, the difference breaks down into "two buckets." One is simply volume: Ford and GM sell more vehicles in the U.S. than FCA. That means better economies of scale and better returns on their investments in new vehicles. Given that FCA has posted year-over-year sales increases in the U.S. for 66 consecutive months (and counting), it's possible that time will help narrow that gap.
The second "bucket" is about product. Marchionne said that gaps in FCA's product portfolio are costing the company big. "We have simulated our earnings on the assumption that we match the portfolio distribution of our competitors," he said. "We get to roughly double digit margins just by simulating a similar portfolio to theirs using our own products."
In other words, Marchionne is saying that FCA is getting beaten by products it doesn't directly compete with.
"The portfolio [of FCA's products] is skewed in a way which does not reflect our competitors, he said. "As a result of that, I think we're going to be spending some significant amount of time here over the next quarter to try to understand how we can improve our offering into the market, especially in view of what I consider to be a generally believed fact that gasoline prices will continue to stay at the low end of the spectrum at least for the foreseeable future."
He gave a hint to at least one of the portfolio gaps he had in mind.
"I think that we're underrepresented in some significant areas in the large SUV market, which given the work that we're doing now on the renewal of the Ram brand may offer interesting opportunities going forward."
Is a big new SUV really the answer?
FCA has lots of SUVs. But it doesn't have a big full-size truck-based SUV, and Marchionne seems to think that's part of his problem.
The market for full-size truck-based SUVs is much smaller than it used to be. Many SUV buyers have migrated to "crossovers," vehicles that offer similar capabilities but that are based on architectures shared with cars, not pickups.
But to the extent that there's a market for the old heavyweights, GM mostly has it wrapped up with its Chevy Tahoe and Suburban, GMC Yukon, and Cadillac Escalade. Through September, it has sold 176,523 of them across the three brands. It might have been able to sell even more if it had them: GM is investing $1.4 billion in a big expansion of the Arlington, Texas, factory that makes the full-size SUVs.
Ford also has big truck-based SUVs, the Ford Expedition and Lincoln Navigator. But sales are relatively tiny: just 39,243 sold through September. Any new FCA entry would have to be spectacular to take significant market share away from GM.
That makes me wonder what Marchionne is thinking.
Doesn't FCA have enough SUVs already?
Ford's F-Series pickups are probably its biggest contributor to profit, but the company has also pointed to big sales of the Explorer and Edge in explaining its strong North America profits.
Both the Explorer and the Edge are crossovers. They compete more or less directly with FCA's Dodge Durango and Jeep Cherokee, respectively. And Jeeps aren't exactly slow-selling: The all-SUV brand has seen its U.S. sales grow 23% this year through September.
Long story short: I'm far from convinced that a new big truck-based SUV will be the key to a big jump in FCA's profitability in North America. I think there's more to the story of why FCA lags its rivals in profitability, and I hope that Marchionne will share it with investors next quarter.