As Gas Spikes, Car Buyers Focus on Fuel-Efficiency
Business + Economy

As Gas Spikes, Car Buyers Focus on Fuel-Efficiency

REUTERS/Rebecca Cook

The specter of rising gas prices didn’t scare off car buyers last month. Instead, consumers looking for more fuel-efficient vehicles drove U.S. auto sales to their best month in four years, rewarding Detroit’s Big Three carmakers for their increased emphasis in recent years on smaller, more fuel-efficient cars.

“The U.S automakers now are pretty much as competitive as their Asian counterparts,” says Ken Elias, a partner at industry research firm Maryann Keller & Associates. “Now they’re players in the small and mid-size cars for sure, whereas before they weren’t really competitive.”

General Motors, Ford, and Chrysler all outperformed analysts’ expectations, posting solid – and in some cases even spectacular – year-over-year gains in sales. Chrysler led the pack, reporting a 40 percent year-over-year jump in February sales. Car sales more than doubled, while truck sales climbed 21 percent over the same month last year. In all, Chrysler sold 133,521 vehicles. GM’s results weren’t nearly as strong, but the biggest carmaker in the world still beat analysts’ expectations by notching a 1.1 percent gain compared with February 2011.

RELATED: How Fuel-Efficient Cars Drive Up Gas Prices

Ford, meanwhile, posted a 14 percent year-over-year increase with retail sales, as opposed to fleet sales to car rental companies and the like, jumping 19 percent. “Similar to everyone else in the industry, Ford put up very, very strong results,” says Kelley Blue Book analyst Alec Gutierrez. “Ford has put themselves in a pretty solid position in terms of sales here in the U.S.”

Sales of the 40-mpg Ford Focus, which has undergone a well-received redesign, shot up 115 percent, marking the model’s best February since 2000. “Sales momentum built as February unfolded, with higher fuel prices driving consumer demand for more fuel-efficient vehicles in the second half of the month,” Ken Czubay, Ford’s vice president of U.S. marketing, sales and service, said in a statement announcing the monthly numbers.

Other fuel-efficient cars also sold well as gas prices spiked. “It looks like almost everyone’s fuel-efficient offerings are some of the best performers for the month,” Gutierrez says. “It looks like the sales surge for a lot of these compact vehicles really picked up just in the last two weeks of the months when fuel prices really started to surge.” GM reported an 11 percent year-over-year increase for its more fuel efficient Chevy Cruze, compared to a 1 percent increase for GM overall.

Volkswagen’s TDI, a turbo diesel model that is among the most fuel-efficient in its lineup, saw a 55 percent year-over-year jump in February sales. Sales of Toyota’s hybrid Prius jumped 52 percent last month to their highest levels in nearly four years. “We expect that high gas prices will continue to be a top purchase consideration for consumers, which bodes well for Toyota’s continued growth in 2012,” Bob Carter, general manager of the Japanese automaker’s U.S. division, said in a statement last week.

Car Sales: A Big Leap Ahead?

The results are also the product of what analyst Lacey Plache calls a “perfect storm” of positive factors driving car sales, both in the car industry and the broader economy. First is pent-up demand from consumers who held off buying big-ticket items such as cars during the recession. “You probably still have 4.5 million units of cars that could be made up in pent up demand, and that’s a pretty conservative estimate,” Plache says.

Americans have been holding onto their cars and trucks longer than ever, and the existing fleet of more than 240 million vehicles on the roads has been getting older, with the average age reaching a record 10.8 years as of July 2011, according to market research firm R.L. Polk & Co. Recession-weary consumers considering a new car are also finding a lot to like in new models, from enhanced technology and safety to new styling. And the credit crunch of the recession has eased somewhat, allowing new buyers to get financing or to find better rates.

On top of all that, “then you start seeing this wave of positive economic data, and the stock market is starting to really soar again, which always brings consumer confidence up,” Plache says. “You combine all these things, and it doesn’t hurt to have some milder winter weather, and all of a sudden you’ve got a lot of people out there buying cars.”

Challenges in Europe

While U.S. sales are speeding up, the outlook in Europe is, predictably, much weaker, as the deteriorating European economy results in less demand for new cars. “In terms of overall profitability from a global perspective, Europe’s going to continue to be a pretty significant challenge, not just for Ford but for all automakers,” Gutierrez says.Ford’s chief financial offer, Lewis Booth, told reporters this week that the company expects to lose $500 million to $600 million in Europe this year, according to Bloomberg News. “We’re going to have a tougher time in Europe than perhaps we anticipated at the beginning of the year,” Booth said. “We think Europe’s much more likely now to be at the bottom end of the scale we talked about, in the range of 14 million” cars sold.

Ford reported a pre-tax operating loss of $27 million in Europe last year, even as it posted an overall pretax operating profit of nearly $9 billion. “Certainly, a $500 million loss would be significant for the brand, but it seems as though their strength here in the U.S. and other parts of the world should be enough to offset the challenges they’re facing in Europe,” Gutierrez says.

Gas Prices by County

Spiking gas prices may have turned consumers’ attention to more fuel-efficient models, but it will take a much more severe oil shock stemming from events in the Middle East to get people to stop buying now, analysts say. “Americans have seen spiking gas prices before, and a lot of people believe that they’ll come down eventually,” Elias says. “So higher gas prices being a drag on car-buying doesn’t seem to be the case.”

The gravest risk for carmakers then, may lie in how they respond to an improving economy. “The biggest threat to automakers is potential oversupply—that they get too eager and overproduce,” says Plache of “We’ve got the Japanese automakers trying to restock their inventories and recapture the sales they lost and regain lost share. And we’ve got the Americans and Koreans who’ve been running on tight supply for a lot of models last year, and they’ve been trying to step it up as well. And then you’ve got people like Volkswagen who just want to come in and capture new share and grow in this market.”

Adding up all the growth projections from major carmakers results in a forecast that’s much higher than analysts like Plache believe is realistically possible. In that scenario, winners and losers could emerge later this year, and the increased supply could result in discounts from some carmakers who find themselves looking to clear out the inventories they’ve scrambled to build up – meaning that consumers looking to buy could come out the biggest winners.

CarmakerFebruary 2012 Sales (U.S.)% Increase from Feb. 2012
General Motors209,3061.1
Source: Carmakers' monthly sales reports