The facts are as clear as they are painful for the U.S. automotive industry:
The average U.S. gasoline price is $2.92 per gallon as of this writing (May 19) - here - and it has been going up. A year prior, it was $2.34. That's an increase of 25%.
Americans love pickup trucks, especially large ones. 653,911 pickup trucks were sold in the U.S. in the first quarter of 2018, up 3% from 2017.
The strong performance of the U.S. pickup truck market has been one of the two saving graces for the Detroit "Big Three" over the last half decade. The other one is of course the rapidly growing crossover-SUV market. Sedans and smaller cars sure have not paid the bills, let alone provided for profits or growth.
As a result, the 25% increase in gasoline prices over the last year is a major risk in perhaps turning this market around, for the worse. General Motors (NYSE:GM), Ford (NYSE:F) and FCA (NYSE:FCAU) can ill afford for this pickup truck market to go into reverse. It would become a catastrophe for shareholders.
With fuel prices working against this segment, GM has decided to do something about it - and it's a most exciting development indeed. But before I get into those details, let's review where we stand in the U.S. pickup market at the end of the first quarter of 2018:
US pickup sales | 2018 1-3 | 2017 1-3 | change y/y | 2018 share | 2017 share |
Chevrolet Colorado | 28859 | 22358 | 29% | 4% | 4% |
Chevrolet Silverado | 135545 | 128467 | 6% | 21% | 20% |
GMC Canyon | 7213 | 7527 | -4% | 1% | 1% |
GMC Sierra | 41468 | 49810 | -17% | 6% | 8% |
Ford F-Series | 214191 | 205281 | 4% | 33% | 32% |
RAM Pickup | 103964 | 119199 | -13% | 16% | 19% |
Toyota Tacoma | 53799 | 43493 | 24% | 8% | 7% |
Toyota Tundra | 26318 | 23220 | 13% | 4% | 4% |
Nissan Titan | 12724 | 11295 | 13% | 2% | 2% |
Nissan Frontier | 22825 | 15566 | 47% | 3% | 2% |
Honda Ridgeline | 7005 | 9724 | -28% | 1% | 2% |
TOTAL | 653911 | 635940 | 3% | 100% | 100% |
As you can see in the table above, pickup trucks sold in the U.S. were up 3%. That's 50% better than the U.S. light vehicle industry as a whole, which was up 2% during the same period. It's clear that Americans continue to shift their buying preferences away from cars and in favor of pickup trucks.
However, the table above is a bit messy. Several automakers have multiple nameplates. Let's bring it all down to the stock level:
US by parent co | 2018 1-3 | 2017 1-3 | change y/y | 2017 share | 2016 share |
GM | 213085 | 208162 | 2% | 33% | 33% |
Ford | 214191 | 205281 | 4% | 33% | 32% |
FCA | 103964 | 119199 | -13% | 16% | 19% |
Toyota | 80117 | 66713 | 20% | 12% | 10% |
Nissan | 35549 | 26861 | 32% | 5% | 4% |
Honda | 7005 | 9724 | -28% | 1% | 2% |
TOTAL | 653911 | 635940 | 3% | 100% | 100% |
As you can see in the table above, the two losers were FCA and Honda. In the case of FCA, 1Q 2018 represented the switch over to the all-new 2019 RAM 1500, so that explains its decline. In the case of Honda, it's by far the smallest player to begin with, in the extreme "lightweight" corner of the U.S. pickup truck market.
At the other end of the spectrum, Nissan and Toyota were the two big winners, with Ford also eking out a smaller market share gain for the F-series. GM was up, but lost the tiniest amount of market share. That's what happens when you grow 2% in a market that grew 3%.
Seeing as we are looking at an environment in which fuel prices are going up, what about isolating the numbers for the full-size pickup trucks? How did they do in 1Q 2018?
Fullsize trucks | 2018 1-3 | 2017 1-3 | change y/y | 2017 share | 2016 share |
Chevrolet Silverado | 135545 | 128467 | 6% | 25% | 24% |
GMC Sierra | 41468 | 49810 | -17% | 8% | 9% |
Ford F-Series | 214191 | 205281 | 4% | 40% | 38% |
RAM Pickup | 103964 | 119199 | -13% | 19% | 22% |
Toyota Tundra | 26318 | 23220 | 13% | 5% | 4% |
Nissan Titan | 12724 | 11295 | 13% | 2% | 2% |
TOTAL | 534210 | 537272 | -1% | 100% | 100% |
As you can see in the table above, we are onto something here. Fullsize trucks were down 1%. Let's just bring it down to the stock level again:
Fullsize by co | 2018 1-3 | 2017 1-3 | change y/y | 2017 share | 2016 share |
GM | 177013 | 178277 | -1% | 33% | 33% |
Ford | 214191 | 205281 | 4% | 40% | 38% |
FCA | 103964 | 119199 | -13% | 19% | 22% |
Toyota | 26318 | 23220 | 13% | 5% | 4% |
Nissan | 12724 | 11295 | 13% | 2% | 2% |
TOTAL | 534210 | 537272 | -1% | 100% | 100% |
As you can see in the table above, in many ways the fullsize market mimicked the overall pickup truck market, except GM, Toyota and Nissan didn't do as well, the reason for which shall become evident below. For example, GM's full-sizers were down 1%.
Now that's the essence of what I will be talking about below. The pickup truck market was up 3% overall, and GM was up 2% - but GM's full-size trucks were actually down 1%. That needs to be explained - but more than that, it needs to be fixed, especially in the context of rising fuel prices.
But before we explain that phenomenon, let's take a look at the U.S. midsize pickup truck market. With the full-size market being down 1%, how did the smaller pickup trucks do in 1Q 2018?
Midsize trucks | 2018 1-3 | 2017 1-3 | change y/y | 2017 share | 2016 share |
Chevrolet Colorado | 28859 | 22358 | 29% | 24% | 23% |
GMC Canyon | 7213 | 7527 | -4% | 6% | 8% |
Toyota Tacoma | 53799 | 43493 | 24% | 45% | 44% |
Nissan Frontier | 22825 | 15566 | 47% | 19% | 16% |
Honda Ridgeline | 7005 | 9724 | -28% | 6% | 10% |
TOTAL | 119701 | 98668 | 21% | 100% | 100% |
As you can see in the table above, whereas full-size trucks were down 1%, the smaller ones were up 21%. What do they all have in common? All but the smallest brand - Honda - comes with four-cylinder engines as standard. Speaking of brands, let's isolate them by their underlying stocks:
Midsize by co | 2018 1-3 | 2017 1-3 | change y/y | 2017 share | 2016 share |
GM | 36072 | 29885 | 21% | 30% | 30% |
Toyota | 53799 | 43493 | 24% | 45% | 44% |
Nissan | 22825 | 15566 | 47% | 19% | 16% |
Honda | 7005 | 9724 | -28% | 6% | 10% |
TOTAL | 119701 | 98668 | 21% | 100% | 100% |
As you can see in the table above, GM did a lot better in the midsize truck category than it did in the full-size segment. Just like in the full-size truck market, GM tracked the segment average here right to a tee: 21%. That's a huge jump forward, just as fuel prices have been going up. Coincidence? I think not.
What does all of this mean in terms of market share for the midsize truck segment as a whole? Here it is, compared to the full-size share:
Segment v Segment | 2018 1-3 | 2017 1-3 | change y/y | 2017 share | 2016 share |
Fullsize | 534210 | 537272 | -1% | 82% | 84% |
Midsize | 119701 | 98668 | 21% | 18% | 16% |
TOTAL | 653911 | 635940 | 3% | 100% | 100% |
As you can see in the table above, the fullsize market share fell from 84% to 82% in 1Q 2018. That doesn't seem a like a lot, but in this mature and competitive market, a 2% share shift is significant.
So let's put together some of these facts, and see what happens next:
Fuel prices are up 25% in a year.
Midsize trucks increased 2% in market share during that period.
The midsize growth rate was 21%, compared to the fullsize growth being negative 1%.
The midsize trucks have four-cylinder engines (except for Honda, which was the underperformer and smallest in absolute market share).
Looking at these facts, it seems clear that perhaps the time has come for automakers to start putting a fuel-efficient. four-cylinder engine in large pickup trucks. Let me tell you why I think that is a great idea at this time.
Last month, I drove two Chevrolet Traverse 3-row SUVs back-to-back. This is the one SUV that GM offers, that has a choice of four-cylinder and six-cylinder engines. What was my impression? In my opinion, most people would have failed a blind test, and especially so in isolation. If you told 100 people who got to drive the four-cylinder Traverse version that they all were in the six-cylinder version, I doubt anyone would suspect otherwise.
Yes, the four-cylinder was that good, feeling just like a capable six-cylinder for general driving-around purposes. There will always be one segment of the market which really needs a six or eight-cylinder engine, or would buy one "just because" - but the time has clearly come to put a four-cylinder engine into the full-size trucks.
How successful has this strategy been for the Chevrolet Traverse? In the first quarter of 2018, the Traverse sold 38,198 units in the U.S., up a whopping 30.1% over 2017. Would this outstanding 30.1% performance have happened without the four-cylinder version? I doubt it.
This is why the all-new 2019 Chevrolet Silverado - and presumably also the GMC Sierra, soon enough - will be getting a four-cylinder engine for the first time: here.
This all-new four-cylinder engine will become the standard powerplant in the best-selling LT and RST Silverado trim levels when it starts to sell this fall. GM seems to imply that most people will upgrade to the 5.3 liter V8 or the 3.0 liter straight-six diesel, but I am not so sure. I think GM may end up being surprised at the high take rate of the four cylinder.
GM did not yet disclose the fuel economy of the four-cylinder engine in the full-size Silverado pickup truck. This will happen closer to the on-sale date this fall. I imagine we will know something around the end of August.
The pickup truck benchmarks for fuel economy are currently set by various diesel models from GM itself (for the smaller Chevrolet Colorado and GMC Canyon), Ford (new diesel) and FCA (RAM 1500 diesel). They are all at or almost flirting with 30 MPG on the highway.
I have no idea how close this four-cylinder gasoline engine will yield in terms of fuel economy in the full-size Chevrolet Silverado pickup truck. How close to 30 MPG on the highway will it perform?
One thing is clear: GM would not be bringing this new engine to market if it weren't meaningfully better than its other six and eight-cylinder gasoline options. There's also another major advancement with this engine: Weight savings. Together with all the other changes, it will save 380 lbs over the outgoing 2018 Silverado's 4.3 liter gasoline V6 engine: here.
As you might imagine, combining this much more efficient four-cylinder turbo with all the other lightweight materials, plus the 8% improved aerodynamics, should result in a very significant fuel economy improvement. I can't imagine an improvement of much less than 20%.
Truck buyers are seen as very conservative, and there's certainly some truth to that. However, consider that when Ford introduced its 2.7 liter and 3.5 liter turbo offerings a few short years ago, people thought they would flop. The result was anything but. Ford's F-series sales continued to outperform the industry, and these new engines have proven to be the most popular ones.
Furthermore, a few years ago people were suspicious that diesel engines would sell well in the half-ton ("150" and "1500") weight class. FCA proved them wrong with the RAM 1500 diesel a few years ago, and Ford starts to sell the F-150 diesel this quarter. GM will follow with the diesel version of the Chevrolet Silverado and GMC Sierra in the fourth quarter of this year.
FCA has been reporting up to 20% diesel take-rates for the RAM 1500 in recent years, but even if they have averaged closer to half that number for most months, somewhere around 10% is still a good number for an engine option that many thought was going to fade into oblivion. Also consider the private imports of the RAM 1500 into countries such as Sweden. They're pretty much 100% diesels there.
Surely, questions about durability will abound. GM says that this new engine has been tested to the highest standards for durability, running between minus 13 degrees and positive 239 degrees at full blast for months without interruption: here.
Conclusion: GM solves the fuel economy problem for the full-size pickup truck.
We should have the fuel economy number within the next 100 or so days, but expect this four-cylinder variant of the full-size Chevrolet Silverado to set a new standard for a gasoline engine in this application. It may even rival some of the best diesels.
With gasoline prices approaching $3 per gallon, and with the potential for the nationwide average to rise even higher, getting these trucks to deliver 25-30 MPG instead of 15-20 MPG will be key to keeping sales numbers from going down. GM's shareholders should watch this metric as the top factor determining the stock price over the next year.
Disclosure: I am/we are long GM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article for publication, the author was short long GM. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
BidaskClub upgraded shares of Littelfuse (NASDAQ:LFUS) from a sell rating to a hold rating in a research note published on Friday morning.