January 6, 2006

Changing SUVs Pose Challenges for Auto Industry

By Nick Carey

CHICAGO -- 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 growing.

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 November 2004.

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.


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.