January 6, 2006
Changing SUVs pose challenges for Detroit
By Nick Carey
CHICAGO (Reuters) - Oil prices may have dipped below record
highs, but they are still steep and that, combined with
changing consumer fashions, means that gas guzzling sports
utility vehicles may never regain the popularity they have
enjoyed for the past few years.
"The debate on gas prices has accelerated the end of the
life cycle for many old-style SUVs," said Jesse Toprak, senior
analyst at Edmunds.com, an automotive information Web site.
"But the SUV segment was already undergoing changes well before
gas prices became an issue."
Analysts predict that further changes are in the pipeline,
with production of the heavier and more powerful truck-based
SUVs -- made by General Motors Corp., Ford Motor Co. and
DaimlerChrysler AG -- poised for a slowdown.
"Crossover" foreign-brand SUVs -- lighter and more
fuel-efficient car-based SUVs that cannot pull heavy loads like
their truck-based counterparts but handle better -- are seen
The challenge for Detroit's car makers will be to try to
capture more of that car-based market, which will be more
costly than simply making SUVs using truck parts.
A slew of new models due out this year -- many will be on
display at next week's auto show in Detroit -- could boost
sales in the short-term, but few analysts expect sustained
growth in the segment.
According to Edmunds.com research, SUV sales as a
proportion of total auto sales reached 24 percent at the end of
November this year, compared with more than 27 percent in
Sales have also fallen in real terms, with J.D. Power &
Associates projecting that 4.3 million SUVs will have been sold
in 2005, down 4 percent from their high of 4.5 million in 2004.
NOT JUST GAS
Even before last year's spike in gas prices, a number of
factors were already in play leading to falling sales --
including consumers' ever-changing fashion sense.
"For a long time, SUVs were hip," said Wes Brown, a partner
at consumer trend firm Iceology. "But fashions change and they
have been losing their hipness for some time now."
Secondly, but no less important, is demographics. Much of
the driving force that saw total U.S. SUV sales rise to their
2004 peak of 4.5 million, from 1.8 million in 1995, came from
baby boomers, said Susan Jacobs, president of automotive
consulting company Jacobs & Associates.
"A lot of baby boomers bought SUVs for their functionality,
especially for families," she said. "The impending baby bust
means many SUV owners are now looking for something less
functional, such as a small car or sports car."
And for those middle-class earners who bought SUVs on
credit and already found making payments hard, having to pay
more than $50 to fill a tank "has forced a major rethink,"
Edmunds.com's Toprak said.
This lower end of the segment has been selling out, further
forcing down the resale of SUVs. Resale prices were already low
due to rising gas prices. Detroit car makers in particular have
made the situation worse having "flooded the market with
discounted SUVs to the saturation point," Jacobs said.
"Now if you want an SUV you don't have to buy a new one
because you can pick up a used one at low cost," she added.
This doesn't spell the end for the SUV segment. But it is
going to change significantly.
Increasingly, fuel efficient SUVs "will become more common
and we'll see more hybrids being produced," Iceology's Brown
said. As an estimated 95 percent of SUV owners never take their
vehicles off road, the demand for larger, more powerful SUVs is
expected to diminish.
JD Power sales forecasts for full-year 2005 put smaller,
car-based SUVs as the only part of the segment growing versus
2004. All other SUV types were expected to decrease.
"Moving forward, most growth in the SUV segment will come
from car-based vehicles," said Jeff Schuster, executive
director of global forecasting at JD Power.
That will pose more of a challenge for the U.S. car makers
in Detroit, which have relied more on truck-based SUVs than
Japanese or European car makers.
With fewer trucks to produce, the Japanese and Europeans
forged ahead with car-based, crossover vehicles. These handle
better, are more fuel efficient and have proven ever more
popular, Iceology's Brown said.
Ford, GM and Chrysler have their own car-based SUVs and can
develop more, but this will cost more than making truck-based
vehicles, he added.
"Truck-based models cost less for U.S. car markers to
produce because they already have all the parts developed for
their truck business," said David Healy, an automotive industry
analyst at Burnham Securities. "These truck-based SUVs have
been the most profitable segment for Detroit in recent years,
so developing new car-based models will eat into margins."
Sales may get a boost from new models coming out this year,
but that is likely to be short lived.
"The new models should provide a slight increase in sales
for 18 to 24 months, but after that they should level out
again," JD Power's Schuster said.