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Monday, November 28, 2005

Why the Large SUV Strategy is Flawed

A company that shall remain nameless (cough GM cough) has put a lot of hope on renewed versions of their upcoming large and full size SUVs and pickups. This strategy is flawed. Why?

Large SUVs sell only in an economic climate where fuel is cheap and abundant. The economy being strong helps as well. Unfortunately this type of environment will never occur for the foreseeable future.

If the economy does well, the price of fuel will jump. Because there is no possibility of additional fuel coming on the market to drive down the price of crude if the economy is to do well, that means more people driving and using fuel, and that means more expensive fuel prices. This will drive people away from SUVs.

If the economy does poorly, and demand decreases for fuel, the price of fuel will go down. But SUV sales will not increase, because if the economy is doing poorly, people will not be able to afford new SUVs because no one is making money to enable the population to splurge.

An SUV is a luxury item. The large pickup for the vast majority of buyers is as well. When times are tough, luxury items are the first to go. The buying habits of Americans are far far different than the buying habits of everyone else in the world. America has an enormous amount of wealthy people (and poor people), and so business decisions are made that see American buying habits as "normal" when that is the farthest from the truth. Most of the world faces high fuel costs, crowded spaces and small cars.

But like all exceptions to the general rule, things quickly change, and exceptions are small in number. Expect the age of the SUV to die, in a hurry.

Comments:
You said: "If the economy does poorly, and demand decreases for fuel, the price of fuel will go down."

In a normal supply-and-demand situation, that is true. It's a little different with gas prices, though.

The economy as a whole is tied pretty closely with the price of fuel. Cheap gas means a good economy, and vice versa.

I agree with you that GM shouldn't be betting the future on SUV's though. I wrote of it here:
http://dorri732.blogspot.com/2005/10/those-who-do-not-learn-from-history.html
 
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