Big 3 SUV blitz could backfire

Automakers forge ahead despite high gas prices, changing consumer tastes.

By Eric Mayne / The Detroit News

High gasoline prices and changing consumer tastes have stalled sales of big sport utility vehicles, a critical source of profits for Detroit automakers since the early 1990s.

Despite the dropoff, General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group are forging ahead with a parade of all-new and redesigned SUVs.

Over the next 18 months and beyond, showrooms will get more crowded with Jeep's first seven-passenger SUV, new versions of the full-size Ford Expedition and Lincoln Navigator, and more than a dozen redesigned midsize and full-size SUVs from GM. Bleeding cash in North America, GM said it's pulling ahead the introduction of its redesigned Chevrolet Suburbans, GMC Yukons and Cadillac Escalades to early next year to help reverse its fortunes.

Can SUVs pull the U.S. auto industry out of the ditch one more time?

It's the billion-dollar question in Detroit and on Wall Street.

In the first quarter, demand for full-size SUVs dropped 21.5 percent from a year ago, according to Autodata.

The sharp decline caught Ford and other automakers by surprise. With more competition from Toyota Motor Corp. and Nissan Motor Co., Detroit automakers have been reluctantly forced to dramatically raise discounts on big SUVs.

"From a profitability side, it's going to be tough" with the new models, said analyst Art Spinella of CNW Market Research. "They're not going to make the $15,000 (per unit) they're used to making."

No turning back

Despite the cloudy outlook for SUV sales, there's no turning back now because the new models represent billions of dollars in product development costs.

"There's still a lot of money being made in SUVs," said Jim Hossack of AutoPacific, a California-based consulting firm.

Still, SUV demand is expected to drop to 2.2 million units this year, marking the third straight year of decline and the lowest total since 1996, according to WardsAuto.com. SUV sales peaked at 2.98 million units in 2000.

Analysts blame fuel prices and the emergence of crossover utility vehicles . While they seat as many people as big SUVs, they consume less fuel.

Sales of crossovers, such as the Ford Freestyle, Honda Pilot and Chrysler Pacifica, rose 15.5 percent in the first quarter, according to WardsAuto.com.

Hoping to break even

"What (automakers) are hoping is that they can at least break even on the (SUVs and crossovers)," Spinella said. "They won't come out ahead."

Large SUVs, once the industry's fastest-growing segment, comprise about 37 percent of the total SUV market.

But their contribution to the bottom line is falling. In March, discounts from list price on large SUVs averaged $8,608 -- about $2,700 above 2002 levels, according to Edmunds.com. And they remain parked on dealer lots for an average of 91 days before a sale, 41 days longer than they did three years ago.

Detroit automakers say they aren't panicking. For GM, some falloff was inevitable given the age of its SUV fleet and increased competition.

"As we get to the end of our product life cycle, and with more alternatives in the utility space, it's not a surprise that we've seen some sales fall off," said Paul Ballew, sales analyst at GM, which owns more than 60 percent of the large SUV market.

"We're not anticipating we'll see big growth in that category. But we see it as a pretty stable, pretty profitable category."

This fall, Chrysler's Jeep division is scheduled to introduce its first seven-passenger SUV, the Commander.

Foreign automakers also continue to make big bets on large SUVs.

Mercedes-Benz plans a new G-wagon. The midsize M-Class SUV has been revamped for the 2006 model year, and Mercedes plans to build an additional full-size sport utility at its assembly plant in Tuscaloosa, Ala.

Ford, which rolled out a $50 million ad campaign touting SUVs last week, is investing $300 million to prepare its Michigan Truck factory in Wayne -- once the most profitable assembly plant in the world -- to produce the next-generation Expedition and the Navigator.

Challenge to Suburban

And in a challenge to the dominance of GM's Chevrolet Suburban, GMC Yukon XL and Cadillac ESV models, Ford plans to market longer versions of the Expedition and Navigator.

"Those vehicles are coming," said Chris Fuell, Ford's SUV group marketing manager.

With SUV sales down, dealers such as George Fowler said the time is right to reload with redesigned trucks.

"In this economy, you've got to have new faces all the time," said Fowler, general manager of Superior Buick Pontiac and GMC Truck in Dearborn. "Anytime you get a product that's into the third year of its cycle and you don't do something to refresh the face, people will go buy other things."

Mark Douglas, president of Avis Ford in Southfield, is counting on the new models to invigorate sales and give consumers more choices.

"There still may be the same number of SUV buyers in the market," Douglas said. "We just need to make sure we keep our percentage."

Gas-guzzlers still popular?

But there remain serious questions about whether the buying public wants gas-guzzling SUVs.

Consumer surveys regularly identify rising gas prices as a major factor in vehicle purchase decisions. Kelley Blue Book found 49 percent of all April shoppers were influenced by high pump prices -- the highest total since it launched a monthly study of buyer behavior last year.

Peter Dailey traded his midsize SUV, a 1996 Land Rover Discovery, for a Volkswagen Passat, a midsize sedan.

"I absolutely loved the Discovery," said Dailey, a 35-year-old advertising executive in Santa Monica, Calif. "But the fuel was killing me -- $60 bucks to fill the tank. I found myself not driving as much. What's the point of having something you love if you can't drive it?"

But Detroit automakers are counting on loyal SUV buyers such as Troy resident Mike Tilley.

"I don't care about the price of gas," said Tilley, 36, whose printing company owns a pair of Chevrolet Suburbans. "I've always had big vehicles. I've got two boys and I do lots of stuff. I just like 'em."

While Chrysler's Dodge brand scrapped plans for a big SUV in large part because of the crowded field, its Jeep division is ready to forge new ground.

The Commander, its first seven-passenger SUV, features three rows of seating. However infrequent, many consumers have a need to carry more than the five passengers accommodated by two-row SUVs such as the midsize Jeep Grand Cherokee.

"That need is real," Jeff Bell, vice president of the Jeep division of DaimlerChrysler AG's Chrysler Group. "It matters. The question is, how much does it matter?"

Improving fuel economy

To minimize the risks, the Big Three are taking additional steps to improve the fuel economy of their SUVs.

Ford has pulled ahead the introduction of its second gasoline-electric SUV. A hybrid version of the Mercury Mariner will join the Ford Escape Hybrid, which debuted last year.

Bell says Jeep is contemplating how it could increase production of its diesel-powered Liberty, a small SUV that debuted this year. Jeep has rolled out V-8 engines that conserve fuel by shutting down half their cylinders at cruising speed. GM has used the same technology to help increase its SUV fleet fuel economy by one mile per gallon over its 2004 lineup.

And GM promises more fuel economy gains with its new products.

"People come back at the large utes and ask, 'Is the day of the big utility now past?'" Ballew said. "Very few people will talk about other parts of the business."

The crossover segment is one. For nearly two years it's been the fastest-growing vehicle niche in the United States.

But the migration won't turn Detroit into a ghost town, said Spinella, adding that vehicle buyers usually fit in one of two categories: the fashion-conscious or the "core" fanatics.

The former are finding their way into crossovers. The core group is staying with SUVs, Spinella said. "The core is bigger. Fortunately."

You can reach Eric Mayne at (313) 222-2443 or emayne@detnews.com.

Letter to Detroit: Attention - stop making these humungous pieces of shit. If you didn't make them and stopped marketing them as trailblazing pioneer adventure vehicles, people wouldn't feel the need to own them. It doesn't help that they seem to be the only vehicles depicted on TV and in movies any more. Who the frick needs all of that room anyways? It's just another sign of our runaway consumerism. Stupid Detroit. I hope this plan to go ahead with more SUV models is your final undoing. You'd completely deserve it.