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GM gambles on quick car redesigns in shifting market

General Motors wants to raise its game in the car space so badly that it’s thrown the kitchen sink into the next-generation Chevrolet Malibu sedan, from automatic braking to a hybrid version that will return the segment’s best fuel economy.

GM executives are confident that they’ll reap more than $1,000 in extra per-vehicle profit from the 2016 Malibu when it goes on sale this fall, simply by offering head-turning features and options rather than fire-sale prices. They expect the same from the redesigned Cruze, scheduled for an unveiling here this week.

But those cars will arrive in a market that is squeezing car margins, not expanding them. Industry incentives on both midsize and compact cars last month hit their highest levels in more than five years, as automakers try to keep customers interested amid a shift toward crossovers. And more cars have been making the profit-sapping journey to rental-car lots in recent months.

The deteriorating outlook for car sales will make it tougher for GM and other automakers to achieve the returns they once envisioned for their car lines. And they may need to get used to it.

Analysts increasingly see the malaise in car demand not as a cyclical blip caused by lower fuel prices but as a long-term consumer migration toward the utility that crossovers offer. The trend has implications for everything from financial forecasting to brand positioning and the cadence of future vehicles, analysts say.

“I think we’re headed for a world where the relative importance of a brand’s reputation and image will be more tied to crossovers than sedans,” says Karl Brauer, senior analyst for Kelley Blue Book.

Changing the equation

For years, the midsize sedan segment has been the largest in the U.S. and the de facto place where mainstream brands showcase new powertrains, safety features and design direction. The intense competition forces a compressed product cadence, typically five years or fewer between redesigns. The arrival of credible Detroit 3 entries, including the current Ford Fusion and Chrysler 200, has raised the stakes.

Midsize sedans are “the heart of what people think of a brand,” GM product chief Mark Reuss said this spring after unwrapping the sleek ’16 Malibu.

But the surging popularity of crossovers is changing the equation. Compact crossovers — led by the Honda CR-V, Chevy Equinox and Ford Escape — were neck-and-neck with midsize sedans through May, threatening to become the industry’s top-selling segment.

Much of that growth has come from new, more affordable entries at the small end of the segment. The Honda HR-V, Jeep Renegade, Chevy Trax, Fiat 500X and Audi Q3 still offer versatile storage, all-wheel drive and up-high seating.

And consumers no longer suffer a fuel economy hit in exchange for functionality. The HR-V, which debuted last month, gets 35 mpg on the highway, comparable to the 38 mpg for its platform sibling, the Fit hatchback with a six-speed automatic transmission. The HR-V rang up more than 6,300 sales in just two weeks in May with virtually no advertising.

John Mendel, executive vice president of Honda’s U.S. sales unit, told Bloomberg last week that he doesn’t think higher gasoline prices would dampen demand.

“This is a small crossover that people will look at as the ultimate hedge against everything,” he said.

Automakers are seizing the crossover opportunity to generate bigger profits from their smaller vehicles. Incremental profit on crossovers vs. their car counterparts tops $3,000 on average, industry insiders estimate.

By rule of thumb, the extra cost of building a crossover body vs. a car on the same platform is roughly $1,500 per vehicle, says John Krafcik, president of TrueCar and former CEO of Hyundai Motor America. The average transaction price of a small crossover in 2014 was nearly $5,000 more than that of its small-car platform mates, he says.

That could lead automakers to shorten the life cycles of crossovers, which typically have been left in the market for longer intervals than cars.

For example, the Ford Escape that was launched in 2012 replaced a predecessor that had been around for 12 years — double the time Ford took to redesign the current Focus, which came out in 2011.

“We’re very likely to see a complete shift, so that it’s the crossover that hits first, not the sedan,” Brauer says.

Meanwhile, already cutthroat competition in car segments has intensified. U.S. car sales slipped 1.3 percent through May after managing a 1.5 percent gain last year. Sales are dropping even as automakers ratchet up discounts.

The average incentive on midsize sedans in May hit $3,271, the highest monthly level since at least January 2010, TrueCar data provided to Automotive News show. The average incentive for compacts was $2,403 in May, also at least a five-year high.

And more cars are being sold as rentals. The Wall Street Journal reported last week that 21 percent of compact cars and 20 percent of midsize cars went to rental fleets in the first quarter, up from 17 percent for both segments a year ago. The paper cited IHS Automotive data provided by sources.

Battle for share

GM’s aging car lineup has been particularly hard hit. Its retail car sales fell 19 percent through May. Pending redesigns of several key nameplates should help — the next generations of the Malibu, Cruze, Volt, Camaro and Spark are due out in coming months. But it’s a tough time to count on higher car margins, Krafcik says.

GM “has put a heck of a lot of investment into segments in which pricing pressures are going to be very strong,” Krafcik says. “If they’re able to gain share, it will be in shrinking segments.”

GM’s lineup offers an example of the trickiness in getting product cadence right.

Having shaken off its post-bankruptcy hangover, GM has accelerated its car redesigns by matching the roughly five-year rhythm of its Asian competitors. But its core crossovers — the Chevy Equinox and related GMC Terrain, and the Chevy Traverse, GMC Acadia and Buick Encore — will be at least seven years old by the time they are redesigned over the next few years.

GM North America President Alan Batey says the breadth of GM’s portfolio buffers the company from market swings. He points to GM’s booming light-truck sales — up 18 percent this year — fueled by impeccably timed redesigns of its full-size pickups and SUVs and the relaunch of its midsize pickups, the Chevy Colorado and GMC Canyon.

“We’re benefiting from having this full range of vehicles,” Batey told Automotive News this month. “If I were only in [cars], it would be a different answer.”

IHS analyst Tom Libby agrees. He says Chevy, Ford, Toyota and other large brands with broad lineups are best positioned to handle the vagaries of consumer demand.

“Who knows what the market is going to look like two years from now, let alone five?” Libby says.

“The brands that consistently redesign their products even in segments that fly under the radar will be in the best shape when the market turns back.”

Even so, Krafcik adds another factor that could pinch car sales even beyond 2020: mobility services such as Uber. Should those eventually replace large numbers of personally owned vehicles, as some observers expect, Krafcik predicts that “three-box sedans” are the most likely to go, rather than crossovers, pickups and other, more versatile vehicles.

“The crossover is the winning architecture for the modern car buyer,” he says. “The industry needs to retool to produce more of them.”