Adrienne Roberts and
John D. Stoll
Domestic auto makers are stumbling toward the finish line in 2017, on pace to finish the year with the lowest market share since 2009, when two U.S. auto giants declared bankruptcy.
But even as Detroit approaches another nadir, it is proving it pays to be smaller.
General Motors Co., Fiat Chrysler Automobiles NV and Ford Motor Co. lost ground to Japanese competitors in November, as the domestic brands returned mixed results. GM said November sales slid 2.9% compared with the same month in 2016, primarily due to a planned reduction of sales to rental companies such as Enterprise Rent-A-Car or Avis Budget Group. Fiat Chrysler reported a 4% decrease last month, continuing a string of sales declines it is weathering after discontinuing the Chrysler 200 and Dodge Dart, two cars that were money losers and largely sold to rental lots.
Detroit’s once-dominant market share has dwindled below 44%, according to WardsAuto.com, mostly due to a critical decision to cut back sales to rental fleets, which has lessened their need to produce low-margin compact cars and sedans that are out of favor amid low gasoline prices.
The strategy is workable only because the domestic auto makers addressed financial problems that had been a thorn for decades leading to the industry’s collapse in the financial crisis. Even in 2007, when Detroit built more than half the vehicles sold in a sizzling U.S. car market, domestic players were losing approximately $326 per car produced.
Fast forward a decade, and GM, Ford and Fiat Chrysler earned $20 billion in North American profits through nine months of 2017, equivalent to $2,500 for every car made in the region during the period. A broad shift to bulky pickups and SUVs has padded margins, with Ford’s best-selling F-Series selling for $47,100 in November, $3,800 higher than a year earlier and far more than it costs to build a truck designed to haul boats or carry lumber.
Detroit’s car companies have worked for several years to break the boom-and-bust business cycle that returned big profits during good years but led to deep losses when demand dried up. Wall Street appears to believe domestic brands have turned a corner, even if their grip on a softening market is loosening.
Shares of GM, Ford and Fiat Chrysler have collectively gained 29% of their value in 2017, a year when overall auto sales are slumping modestly and spending on sales incentives has skyrocketed.
Investors have been impressed by future technology bets, including driverless cars, but the companies’ ability to keep profits afloat as the market weakens is underpinning optimism.
“Domestic auto makers have greater flexibility now,” said Mark Wakefield, the leader of AlixPartners LLP’s automotive practice in Southfield, Mich. “They’re accepting market-share losses if they’re still profitable.”
Rental cars had been a lifeline for Detroit, providing a ready dumping ground for vehicles that Americans had limited or no appetite for. Domestic brands needed to keep plants going to meet high labor costs and avoid slowing assembly lines, but the practice cheapened once-strong brands like Chevy and Dodge, requiring higher discounts on vehicles that already offered minimal margins.
Ford reported a surprise 7% sales increase, mostly due to an abnormally high level of fleet sales, even though overall it has dialed back on rental cars in 2017.
Toyota Motor Corp. reported a 3% sales decline, but other Japanese brands offset that weakness. Honda Motor Co. gained 8%, thriving amid redesigns of its Civic small car and CR-V, and Nissan Motor Co. grew an estimated 14% (it reports official numbers Monday).
Domestic auto makers, excluding Tesla Inc., have posted a collective 3% decline in sales through November, opening the door for a growing number of small but aggressive players to stake out considerable positions.
Subaru, for instance, had 2.2% market share when GM sought bankruptcy in 2009 and annual auto sales collapsed to 10.4 million vehicles. In 2017, its share of the more than 17-million-vehicle market is nearly 4%—larger than GM’s rugged GMC brand or Fiat Chrysler’s Dodge unit.
Volkswagen AG, including its Audi and Porsche brands, as well as Mazda Motor Corp. and Volvo Car, are gaining ground by adding bigger SUVs to their lineups along with subsidized leases. Nissan, once a bit player in the U.S., is nearing 10% market share as it ramps up sales to rental car companies.
Many analysts say that if many of Detroit’s well-known nameplates want to regain ground, executives will need to rely more heavily either on sales incentives or fleet buyers. Cadillac and Lincoln, once luxury car powerhouses, are on track to sell fewer combined vehicles this year than BMW AG or Lexus on their own. A further erosion of those domestic brands could force executives to trim domestic production capacity.
Domestic market-share declines come as analysts are souring on near-term prospects for the U.S. vehicle market, with the National Automobile Dealers Association saying Friday that 2018 sales will recede by 2.5% compared with 2017.
The association projects 16.7 million deliveries for next year, well below the record 17.5 million sold in 2016, representing several factories’ worth of production.
Steeper discounts will be needed to keep sales volumes within shouting distance of the record pace set in recent years.
Autodata Corp. said overall market sales are estimated to be up 1% in November compared with the prior year. Incentive spending reached a record at $4,124 per unit, far exceeding 10% of the average initial asking price.
—Mike Colias contributed to this article.
Write to Adrienne Roberts at Adrienne.Roberts@wsj.com and John D. Stoll at email@example.com