Global automakers, amid a rising consumer preference for crossovers and SUVs over sedans, are facing tricky decisions about how to configure their factories and in which new models to invest.
Most CEOs would choose to build and sell more crossovers and fewer sedans right away -- if that were possible. But vehicle manufacturing entails multi-year lead times to create new designs and tools. Vehicle demand, meanwhile, shows signs of weakening in the U.S., the world's most profitable market.
Hyundai (HYMLF) , the South Korean group that is the No. 5 automaker in the world, is investing $100 million to add an additional assembly line at its plant in Montgomery, Ala., to build the Santa Fe Sport SUV. Meantime, Hyundai also is introducing a new generation of its Elantra compact sedan, available with advanced safety technology, which will be built in the same factory.
Earlier in the week, Fiat Chrysler Automobiles (FCAU) - Get Report CEO Sergio Marchionne said the automaker will discontinue new investment in its slow-selling Chrysler 200 and Dodge Dart sedans. FCA, whose financial resources aren't as strong as those of its competitors, told analysts it's doubling down on spending for its Jeep and Ram pickup truck brands. Jeep offers several crossovers and SUVs.
"There has been, in our view, a permanent shift toward UVs [utility vehicles] and pickups," Marchionne said.
Others aren't so sure. Nissan (NSANY) is spending "three times as much as usual," said one executive, on refreshing the design and features of its 2016 Sentra compact sedan, now being shipped to U.S. dealers. Yet the Japanese automaker also is developing at least one new small crossover, executives said. Nissan is heading into the fifth year of a five-year business plan, with goals of achieving 8% global market share and 8% operating margin, predicated in part on growing sales of Sentra, Altima, Maxima and other Nissan sedans.
Mike Jackson, CEO of AutoNation (AN) - Get Report , the biggest vehicle retailer in the U.S., said on Thursday that it plans to cut vehicle orders from automakers in the first quarter to reduce inventories. He said inventories had grown 13% from a year earlier and discounts were higher, contributing to weaker-than-expected profit in the fourth quarter.
"In a growing market you can be aggressive," Jackson told Reuters. "Once you hit a plateau you have to bring those inventories into line. We have changed our forward orders" for new vehicles. Jackson said U.S. vehicle sales had "plateaued" at 17 million or more vehicles annually, with the second half of 2016 expected to be weaker than the first.
Although the U.S. economy slowed to 0.7% in the fourth quarter, the report contained an encouraging sign for automakers: Consumer spending remained strong and job growth robust. Those working on crossover and SUV development teams can rest easy, at least for the time being.
Doron Levin is the host of "In the Driver Seat," broadcast on SiriusXM Insight 121, Saturday at noon, encore Sunday at 9 a.m.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.