July 30, 2008
Were SUVs such profitable products after all?
You only find out who is swimming naked when the tide goes out, as they say, and the Detroit auto makers are providing an example.
They are now halting cheap leases that have enabled Americans who could not afford to buy an expensive pick-up truck or Sports Utility Vehicle to lease one instead. Banks no longer want to underwrite that business.
The financial incentives are not entirely going, as the Wall Street Journal points out, since they now want customers to buy them instead. That needs some encouragement, in fact a lot of it given the high oil price.
But it does make me wonder about their business model yet again. The Detroit three always used to say that Americans wanted big vehicles and it was a good market business because margins were higher on trucks than on cars.
Now it turns out that a lot of those higher-margin sales were in effect being subsidised by the auto makers with cheap debt. Take away the debt and the natural level of demand is lower.
But if the auto makers had not relied on leases to boost sales of trucks, their product mix might not have been so skewed and they would not have been so badly caught by expensive fuel.
Cheap debt does feel good at the time but it has a lot of pernicious effects, and some that you only realise with hindsight.
