SUVs Meet the New Fuel Crunch
Automakers are downsizing sport-utility vehicles—and facing the oil crunch—with crossover rides that have drivers wondering, "Do I really need a truck?"
Paul A. Eisenstein
From the Print Edition:
Antonio Banderas, Nov/Dec 2005
Shelly and Jim Hopper have had a crude awakening. It was when they saw the numbers on the local gas pump start to spin like the reels on a slot machine every time they went to fill their SUV that reality set in for the young Michigan couple. The Hoppers had traded their sports car for a sport-utility vehicle a few years back when they arrived in Michigan from Florida.
Their new Nissan Xterra seemed better suited to Michiganís rough winters and abundant off-road trails. It also seemed safer with all that snow and ice theyíd be facing. "But the thing I liked best," Shelly recalls with a laugh, "was the way it looked." Things looked different for her when the rising cost of crude oil sent the price at the pump inching toward $3 a gallon. She realized that "the gas money was outrageous and the lease was too expensive, and itís not like we went off-road all the time."
So the suburban Detroit couple recently traded in their big SUV on something a bit smaller and markedly more fuel-efficient. Looking a lot like a station wagon on steroids, their ë05 Chrysler Pacifica still boasts many of the advantages that originally sold the Hoppers on their old ute, including all-wheel drive and the higher "command"
Is this what Yogi Berra once described as "déjà vu all over again"? In the days before the oil crunch of 1979, Americans drove full-size sedans and family station wagons. Then gasoline prices soared to record levels and long lines formed at the gas stations, sending Americans by the millions scurrying to dealers to trade in their big gas-guzzlers on more fuel-efficient econoboxes. But the price of gas eventually dropped against the inflated dollar and motorists gravitated to the largest vehicles they could buy—this time they were pickups, minivans and SUVs—especially SUVs. Oversized rides came to dominate the market, accounting for more than half of all motor vehicle sales.
But with fuel prices soaring into the $3-a-gallon range, many analysts suspect we're about to see Americans abandon their behemoths again. Indeed, but for a brief summer respite, when the Big Three U.S. automakers launched an aggressive price war, SUV sales have been slipping this year. Another trend might be compounding the situation: recent research suggests that consumers may simply be tiring of the rugged vehicles, regardless of fuel prices.
Don't expect to see conventional passenger cars regain dominance in the U.S. market, however. Even as the SUV boom is beginning to bust, buyers are checking out a new generation of ute-like "crossover" vehicles, such as the Pacifica, and other car-based products almost impossible to categorize.
Off-road Warriors and Soccer Moms
It wasn't all that long ago that if someone mentioned "light truck," you'd likely picture a no-nonsense workhorse bought to haul wood, carry tools or traverse tough terrain. But something happened in the late 1980s. Affluent Boomers began trading in their sedans and coupes and driving sport-utility vehicles and pickup trucks as their everyday rides. Today, you're just as likely to see a Jeep as a Jaguar parked in front of a fancy boutique on Beverly Hills' fashionable Rodeo Drive.
Exactly what triggered the switch is a matter of much debate. Some suggest that the sport-utility vehicle is the natural evolution of the classic American station wagon. It's certainly a more fashionable alternative—and more functional, thanks to such features as all-wheel drive. Meanwhile, today's utes are a lot more comfortable and car-like than the rugged Jeeps first made famous in the Bill Mauldin "Willy and Joe" cartoons from the Second World War.
Yet that image of wartime invincibility has also been a strong card for SUVs. "When I'm in this thing, it feels like absolutely nothing in the world can stop me," says Eric Edelstein, as he maneuvers a new Land Rover LR3 down Detroit's busy Woodward Avenue. Ironically, in the late 1990s, sport-utes came under attack for being a bit too invincible, if you will. Critics contended that utes were unacceptably deadly to passengers of smaller vehicles they might collide with. But the advantage that SUVs enjoyed in a car-versus-truck run-in only encouraged more car owners to trade in. Then the introduction of three-row seating made roomy SUVs even more appealing. The so-called "soccer moms" hoping to sidestep the stigma that comes with driving a minivan began showing up to practice with half the team packed in an SUV.
Curiously, the SUV has benefited from forces that might have been intended to work against it. Consider federal rules meant to encourage motorists to downsize their vehicles to improve fuel economy. The Corporate Average Fuel Economy rule sets a standard that every manufacturer must meet. It's a complex formula, but essentially it balances out the average mileage of each vehicle an automaker sells, dividing the vehicle population into two distinct categories: cars and trucks. But the mileage requirement for the latter class—which includes SUVs—has been significantly lower than for traditional sedans, coupes and wagons. Since 1990, products in the passenger car class have had to average 27.5 miles a gallon, but until 2004, trucks needed to average only 20.7 mpg. That jumped to 21.6 on October 1 of this year, and will climb to 22.2 mpg in 2007, but even then, that's a significantly lower hurdle to clear.
That's understandable when the trucks that the rule is referring to are primarily designed for the work site. You need a big, heavy vehicle, with plenty of pulling power, to haul a load of bricks or pull a heavy trailer. But critics contend that manufacturers perverted the loophole in the mileage rules—there's no question the industry took advantage of it—to encourage buyers to get out of tinny underpowered subcompacts and into big, often V-8-powered utes, pickups and vans.
Whatever the reason, light truck sales skyrocketed. In the mid-1980s, they accounted for barely a quarter of the overall U.S. market, according to government statistics. Last year, that share nipped 54 percent. SUV sales, in particular, shot from about 600,000 in 1984 to 4.5 million two decades later.
The Rise and Fall?
Neither the most anguished cries of critics nor the rise of fuel prices have had much of an impact on SUV sales—at least not until now. But analyst Daniel Gorrell, chief consultant with the California-based market research firm, Strategic Vision, believes that what has gone up—and up and up—is finally starting to come down.
Since the last oil shock ended, motorists have tended to grit their teeth and hang tight, waiting for fuel prices to settle back. And they've been willing to accept modest, long-term increases with a few grumbles and gripes, but with little impact on their buying habits. In fact, until recently, American buyers seemed to be whistling past the petroleum graveyard; as big oil gained momentum, record numbers of large trucks and big Hemis were rolling off assembly lines. Hurricane Katrina hammered home the recognition that things will never go back to where they were. Even before the disaster sent prices into the stratosphere, research suggested that few drivers ever expect to see $2-a-gallon gasoline again, never mind $1.50.
It's easy to overestimate the impact of fuel prices, insists General Motors' car czar, Bob Lutz. SUV owners, "on the whole," tend to be more affluent, the GM vice chairman points out, and less likely to be hurt by a dime's increase in the price of gasoline. For a vehicle like the big Chevrolet Suburban, that dime a gallon adds up to about $100 a year. But as this story was being put to press, fuel prices across the country had already eclipsed the $3-a-gallon barrier, or roughly twice what motorists were paying in the summer of 2002. With their large tanks, a fill-up for a Suburban, Ford Expedition or Toyota Land Cruiser can now cost around $100. For an SUV getting 15 miles a gallon and driven 15,000 miles a year—fairly typical—that means an extra $30 a week. And even the affluent recognize that that's the price of a lobster at a nice restaurant.
Other factors are at work here, stresses analyst Gorrell. "Ten years ago, when we studied SUVs, the emotional metrics measured off the chart," he notes, "but new data show sport-utes generating little more than yawns this year." Where the mass media once heralded the ute, the cool factor is definitely wearing off. Television shows, such as HBO's dark drama "Six Feet Under," often make sport-utility vehicles the object of derision. The big Hummer H2 has become a lightning rod for the growing number of critics who contend that the Iraqi war was about oil, rather than democracy. Whichever side of the political aisle you sit on, the ute's once shining image is clearly showing some tarnish these days. And sales are starting to show it.
Consider some of the powerhouse models that had long driven the truck boom. Sales of the Chevrolet TrailBlazer were off about 15 percent during the first five months of 2005. Other GM models were faring even worse, and so, with overall light-truck inventories nearly double the normal 60-day supply—and many dealers running out of space to store them—the company launched a massive price blow-out in June. GM wasn't alone. Ford's midsize Explorer was off 35 percent in May from year-ago sales, and down 25 percent for the first five months of 2005. The downturn was "greater than what we'd have expected," says Ford analyst George Pipas. The numbers for the nation's best-selling ute recovered a bit over the summer, thanks to Ford's own employee-pricing incentive campaign, but even company officials admit that's likely a temporary reprieve, at best.
Ford launches an updated version of the Explorer for 2006, but admits Pipas, "we don't have any illusions that we'll be returning to the days when we were selling 400,000 Explorers." Indeed, such major redesigns don't seem to be connecting with consumers. The latest generation of the Grand Cherokee is a good example. Jeep sold 18,040 of the utes in May, up a grand total of 39 from May 2004. For the first five months of the year, Grand Cherokee sales rose a meager 2 percent. As with virtually everything else, the numbers briefly recovered over the summer, though that clearly reflected the Big Three's near-giveaway employee-pricing deals, which drove overall industry figures to record levels. From the front lines of the retail wars, dealers are making it very clear that consumers are becoming increasingly anxious and beginning to shift their buying patterns, which will become all the more apparent as the industry's heavily subsidized sales programs fade away.
Sales of the biggest—and least fuel-efficient models—have been hit especially hard. Even employee pricing couldn't salvage plunging demand for Ford's Expedition, Chevy's Suburban or the Dodge Durango. Toyota's massive Land Cruiser, or as wags prefer, the "Land Crusher," is down nearly 20 percent from the January—May 2004 period. SUVs are among the few weak products in the vast Toyota arsenal. The 4Runner was off 11.2 percent in May, just before the Big Three incentives completely distorted the market, and 5.6 percent for the first five months of the year. Nissan dealers had nearly as large an inventory backlog as GM at midyear.
The employee-pricing campaign shows how the new-vehicle market can be manipulated by a manufacturer willing to hand out cash, but to some observers, the more telling—and disturbing—indicator is the used car market. The online classified service, AutoTrader.com, is listing 40 to 50 percent more SUVs and trucks than a year ago. At the same time, the Internet buying service, Edmunds.com, reports that trade-in values for three-year-old SUVs have dropped about 9 percent over the last year.
The end of the SUV boom would prove particularly bad news for Detroit's Big Three automakers. They've dominated the light truck segment since the late 1980s, and light trucks have dominated their production plans. Take the Chrysler side of DaimlerChrysler AG, where vehicles such as the Durango SUV, Ram pickup and Caravan minivan account for nearly two-thirds of all sales. This tectonic shift from Escorts to Explorers has generated the vast majority of Detroit's earnings for the past two decades, shoring up a balance sheet otherwise decimated by the increasing import domination of the passenger car market.
That's not to say European and Asian automakers have ignored the growing and profitable sport-utility vehicle market. Mercedes-Benz created an entirely new market segment when it launched its luxury sport-ute, the M-Class. Because consumers couldn't get enough, the German maker repeatedly expanded its "transplant" assembly plant near Tuscaloosa, Alabama.
Japanese makers have had some tough times cracking the code of the light-truck market, but they're beginning to have success with products like the compact Toyota Tacoma pickup, the Nissan Xterra and the Honda Odyssey minivan. While Toyota may be painting a green picture of itself by emphasizing the high mileage and low emissions of its little Prius sedan, the hybrid-electric vehicle barely registers on the sales charts. Truck products like the Land Cruiser and Highlander SUVs, however, now make up nearly half of the automaker's U.S. volume. Give credit to two SUV models, the RX330 and LX450/LX470, for making Toyota's Lexus division the number-one luxury brand in America. The Japanese automaker is rapidly expanding its North American production capacity to meet this demand, as are other importers. So the Asians could be as much at risk as Detroit should the golden SUV goose stop delivering.
"We still believe [in] the truck side," asserts GM's director of market analysis, Paul Ballew. Perhaps, but the giant automaker is lifting a page out of the import playbook by putting increasing emphasis on a new generation of products neither fish nor fowl. Or, if you prefer, neither car nor truck.
How much SUV sales have slumped so far this year depends on how you tally up the numbers. Do you include products like the Highlander, or Honda's CR-V? They might appear to be conventional, truck-like SUVs, but under the skin, those rugged-looking bodies are based on lighter, more nimble—and usually far more fuel-efficient—passenger car platforms.
Sure, there is a trade-off. Crossovers tend to be less rugged and agile off-road—but then less than 10 percent of SUV owners ever experience anything rougher than a gravel road. Most crossovers still offer all-wheel drive—at least as an option. They're usually a lot more nimble and pleasant to drive on-road than truck-based utes. Perhaps best of all, considering the new reality at the gas pump, they generally yield far better mileage than what some industry analysts like to call "truck-trucks," such as the Explorer.
Japanese makers were quick off the line with crossover vehicles such as the Lexus RX330. Early examples tended to look a lot like conventional utes, though newer models are finding their own shape and form, defining a variety of new segments. American manufacturers are racing to catch up. Ford's Five Hundred sedan shares a platform with the car-based Freestyle ute. Chevrolet's Equinox will spawn Pontiac's Torrent later this year, and one of the most successful products in the Saturn stable is the quirky Vue crossover. Even Jeep, a brand that prides itself on its benchmark off-road capabilities, is getting ready to deliver a "soft-roader."
As for imports, BMW's original wagon/ute melding, the X5, has been one of the stars of the automaker's lineup. It was joined last year by the X3, and other crossovers are coming. Mercedes recently launched its new R-Class, a vehicle that aims to blend the best of a minivan and SUV, with a dash of station wagon thrown in. In one of the more novel moves in today's fast-changing market, the automaker's second-generation M-Class has evolved from a truck-based SUV to a car-based crossover, and industry sources expect other products could take the same path in the coming years.
Will the classic truck-based SUV die off? Not likely, says J.D. Power and Associates chief economist Bob Schnorbus. "The SUV market is not going to disappear as a result of high gasoline prices." But the days when the ute could climb every obstacle on the sales charts have likely come to an end, observers generally agree. Sales of the largest utes seem unlikely to recover much, especially if fuel prices remain high. And smaller models seem destined to hold their own, at best, and more likely start to slide in favor of new alternatives. Consumers are leading the push to car-based crossovers, and manufacturers are ready to follow. Some vehicles will look like the utes we've known and loved, while others will blaze entirely new trails.
Paul A. Eisenstein publishes an automobile magazine on the Internet at www.TheCarConnection.com.
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