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Old 01-28-2003, 03:09 AM
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Auto Makers Start to Back Away
From Hulking, Profitable SUVs

As Outcry Over the Vehicles Grows,
Detroit Pushes Smaller, Carlike Models
By KAREN LUNDEGAARD, JEFFREY BALL and GREGORY L. WHITE
Staff Reporters of THE WALL STREET JOURNAL


Sport-utility vehicles have fattened auto companies' profits and ridden an economic boom into millions of suburban garages. But now, pressures from society, government and the auto industry itself are growing so strong that Detroit is starting to take its first big steps away from reliance on the traditional, huge SUV.

Anti-SUV crusaders now span an unlikely spectrum. The Sierra Club argues that SUVs contribute to global warming. A religious group protests that Jesus wouldn't drive an SUV. Conservative columnist Arianna Huffington recently launched television ads tying SUVs to terrorism.

More threatening for auto makers is the chilling of the easygoing regulatory climate that nurtured the 1990s SUV boom. The nation's top highway safety regulator earlier this month shocked industry leaders by blasting the rollover risks of certain SUVs at an industry conference in Ford Motor Co.'s hometown of Dearborn, Mich. The safety chief also advocated measures to make future SUVs less prone to rollover accidents, including changing the vehicles' basic designs.

Meanwhile, the Bush administration is proposing the first increases in fuel-economy targets for SUVs, pickup trucks and minivans since 1996 -- a move that will encourage manufacturers to make future models lighter and will potentially put a lid on sales of the biggest and most profitable vehicles.

Even SUVs' own success threatens to make the vehicles less attractive to auto makers. A flood of new competition -- including two big SUVs coming from Nissan Motor Co.'s new Mississippi factory and a flock of low-priced Korean entries -- is pushing the SUV market toward saturation. Big rebates, once rare for SUVs, are now commonplace.

Auto-industry leaders say they see no signs that SUV sales will collapse. The Ford Explorer, tarred in a safety scandal two years ago, was one of the best-selling vehicles in America last year. General Motors Corp. sold more than one million SUVs last year, an industry record. GM's hulking Hummer H2 is a sellout.

"We're not seeing any evidence" of a shift against big SUVs, says GM Vice Chairman John Devine. But, he adds, "there's always the issue of fashion in this business, and products come in and out of fashion."

But some auto makers are already acting like the big SUV of the '90s -- essentially a pickup truck with a box on the back -- has peaked. Even as they keep cranking out traditional SUVs, auto makers are ramping up new alternatives dubbed "crossovers." They carry people and cargo the same way SUVs do but are based on the lighter, more fuel-efficient architecture of cars and minivans. The vehicles are now the fastest-growing segment of the U.S. auto market.

Sales of crossovers in the U.S. grew 22.9% in 2002, compared with 0.6% growth for conventional SUVs. Paul Taylor, economist for the National Automobile Dealers Association, predicts crossover sales will jump 50% this year -- and says that the growth in market share for traditional truck-based SUVs is likely over.

GM, while fighting to defend its newly won lead in the SUV market, is considering expanding a crossover program it had scaled back in the late 1990s. Ford is adding capacity for a new midsize crossover and cutting back capacity for truck-based SUVs. Two-thirds of the 21 vehicles Chrysler plans to roll out over the next three years will be built on the underpinning of a car rather than a truck.

"I do not see truck-based growth in the SUV market," says Dieter Zetsche, chief of the DaimlerChrysler AG unit.

Moreover, some major SUV manufacturers have started advertising smaller vehicles by knocking bigger ones. Some of these commercials tar traditional SUVs as gas guzzlers or poke fun at the central SUV marketing myth: that shopping-mall-bound suburbanites need vehicles capable of scaling mountain trails.

In one ad for Chrysler's minivans, a surgeon advises a nurse in the operating room to buy a minivan instead of an SUV because the minivan gets better fuel economy. And when Chrysler over the coming year launches TV ads for its new Pacifica, a cross between a minivan and an SUV that's built on a carlike foundation, "you're going to see us work very, very hard to get people out of large SUVs," says James Schroer, the top marketing executive at Chrysler.

The ads, he says, will tout the Pacifica as easier to step into than a tall SUV, "even if you're wearing a cocktail dress." Chrysler also is instructing its dealers to try to reel in potential buyers by noting to them that the Pacifica gets better fuel economy than traditional full-size SUVs. The intended message, Mr. Schroer says: "You're not going to take it off-road, but you don't in your SUV anyway." But this is tricky, because Chrysler must keep selling a chunky SUV, the Dodge Durango, as well as its Jeep line.

Bayerische Motoren Werke AG, in a billboard ad for its super-compact Mini, proclaims, "The SUV backlash officially begins now." And a regional radio ad for the luxury auto maker's X5, a crossover vehicle, compares most SUVs to "huge lumbering shopping carts." Meanwhile, Nissan built the entire marketing campaign for its new SUV, the Murano, around the concept of "on-roading." Television spots show drivers driving from store to store looking for a rare book and antiques, not climbing rocky mountains.

Hybrid Models

Some auto makers are further trying to silence environmental critics by creating hybrid models of their SUVs that run on a blend of gas and electrical power. GM says it will start building in 2005 a hybrid version of its Saturn VUE SUV that will get combined city-and-highway fuel economy of up to 40 miles per gallon, nearly 50% better than the gasoline version. And, starting in 2007, GM will offer versions of its full-size SUVs, including its Chevy Tahoe and GMC Yukon, which combine hybrid systems with a feature called "displacement on demand" that shuts off some of the engine's cylinders during driving conditions where the engine's full power isn't needed. The combination will boost the trucks' fuel economy by 15% to 20%, GM says.

Toyota Motor Corp., which sells a wide range of truck- and car-based SUVs in the U.S., also is working on gas-electric SUVs to complement its Sequoia, which averages 17 miles to the gallon on the highway.

Meanwhile, there are increasing signs that the traditional SUV market is nearing saturation. For instance, some manufacturers are now offering steep discounts on the vehicles -- once a relatively rare practice.

Ford's Expedition, redesigned last year, is selling so far this year with an average cash rebate of $1,605, up from $371 in the third quarter of 2002, around its relaunch, according to the Power Information Network, an affiliate of auto-information company J.D. Power & Associates. GM dealers are giving discounted financing to more than 80% -- sometimes 90% -- of SUV buyers, according to the network, which gets data from 5,900 franchises in 26 major metropolitan areas.

At the same time, projected resale values for traditional SUVs have continued to shrink over the past several years, while crossover resale values are stronger than those of any SUVs.

Auto mechanic Ken Spratford sees the latest auto trends up close from his Westside Mercedes shop in Santa Monica, Calif., which caters to about 450 clients, many of them in the entertainment business. Over the past couple of years, he says, "you had to be seen in your SUV."

But Mr. Spratford says the SUV fad seems to be fading. "People are coming to their senses. They're realizing what they're really using it for, which is dropping little Johnny off at day care." Mr. Spratford says he talked one client, Joe Reece, out of buying another large SUV when his Range Rover lease ended.

Mr. Reece says he ended up purchasing a Mercedes wagon, primarily for safety reasons. "It's not going to tip over," says Mr. Reece, a Santa Monica investment banker. An added benefit: A recent trip required just half a tank of gas, whereas the SUV used to require more than a full tank, he says.

The SUV was born out of Americans' ambivalent attitude toward fuel economy. When the federal government imposed automotive fuel-economy standards in the early 1970s, in response to the Arab oil embargo, it gave trucks a lower average fuel-economy target than passenger cars. The rationale was that trucks were work tools.

But as Detroit product planners saw they couldn't keep selling big station wagons without violating the car-mileage rule, they began looking for an alternative family vehicle. They came up with one that fell under the more-lenient truck mileage rules: the SUV.

Sales of SUVs took off in the early 1990s, fueled in part by the arrival of breakthrough vehicles, such as the Ford Explorer and Jeep Grand Cherokee, that married the utility of four-wheel drive to more luxuriously appointed cabins and up-high seating that made many drivers feel secure. Marketers played up SUVs' off-road abilities with images of the trucks bounding over stream beds and Western deserts.

But as SUVs became ubiquitous on American roads, trouble began to brew. Designed with higher centers of gravity than conventional cars, some truck-based SUVs exhibited a higher tendency to roll over than conventional cars. This issue exploded in August 2000 with the revelation that federal safety regulators were investigating a rash of deadly rollover accidents involving Ford Explorers equipped with certain Firestone tires.

Regulators ultimately tied more than 200 deaths and 700 injuries to Explorers that experienced sudden tire failures. But the scandal focused attention on the bigger rollover issue, of which Jeffrey W. Runge, administrator of the National Highway Traffic Safety Administration, wanted to remind consumers earlier this month after a speech in Dearborn. "All vehicles are not created equal," Dr. Runge said. "I wish [consumers] would educate themselves. I think vehicle fleet mix would change just as a result of that."

At the same time, SUVs have come under increasing fire for their consumption of fuel. Traditionally, concern about fuel economy has been limited to environmental activists. But since 9/11, public figures not usually identified with the green movement -- including former Central Intelligence Agency Director R. James Woolsey and Arizona Republican Sen. John McCain -- have called for federal policies to prod SUVs to go significantly farther on a gallon of gas. Thus, the critics believe, the U.S. can ease its dependence on Middle Eastern oil, and cut off a potential source of funding for terrorists.

In response to that pressure, the Bush administration recently proposed toughening the federal truck-mileage standard, now 20.7 mpg, to 22.2 mpg by 2007. That doesn't worry the auto industry, which has long been expecting some tightening of the rules. But auto makers are concerned about suggestions that the administration is mulling further increases in the truck-mileage standard starting in 2008.

Choosing a Gear

Making more crossovers might help. But figuring out how to balance product lines is a tricky question for auto makers -- and one that has burned several big names in the past.

Ford and GM, as well as the major Japanese auto makers, missed the rise of minivans in the 1980s, allowing Chrysler to ride its popular people-haulers to huge profits. Later, in the mid-1990s, GM officials were slow to read the signs that huge numbers of consumers were shifting into SUVs and pickup trucks. GM spent heavily developing more cars, leaving it hamstrung as trucks grew to be half the market. Ford and Chrysler, which had read the shift earlier, enjoyed record profits from their truck lineups in the late 1990s. GM has caught up, but only in the past few years, as Japanese and European auto makers were also piling into the SUV market.

As executives at GM confront the challenge of how to continue their profitable SUV franchise, a critical question is how many plants GM should commit to making traditional SUVs and how many to crossover models.

"The folks that are going to win are those who are going to be able to move from where they are today to where they need to be without major investment," says Jim Queen, GM's North American engineering chief. "This a huge discussion inside the company."

Moving too fast -- as some insiders say GM did with its wholesale shift in the 1970s to front-wheel drive -- would cost the company billions in extra investment and lost profits from riding the traditional SUVs as long as possible.

"You want to be a very fast follower here," says Mr. Queen. "We don't want to lead the migration."

A key question is whether demand from crossovers will come from minivan and car drivers, or from truck-based SUV drivers. If truck drivers want crossovers, GM would have to retool its truck factories to make the smaller vehicles. If it's car drivers, existing factories would need to be refitted for larger models. The decision is an expensive one, and one that must be made soon, given the industry's long lead times.

Unsure of the answer, GM is investigating whether it could make some of its truck plants flexible enough to also make car-based vehicles. Citing competitive concerns, Mr. Queen won't talk in detail about whether GM has found solutions. "Those are the family jewels," he says.

Write to Karen Lundegaard at karen.lundegaard@wsj.com, Jeffrey Ball at jeffery.ball@wsj.com and Gregory L. White at greg.white@wsj.com

Updated January 27, 2003 1:51 p.m. EST
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  #2  
Old 01-28-2003, 03:09 AM
Klaus's Avatar
Klaus Klaus is offline
Hummer Guru
 
Join Date: Nov 2002
Location: CSA
Posts: 2,511
Klaus is an unknown quantity at this point
Default

Auto Makers Start to Back Away
From Hulking, Profitable SUVs

As Outcry Over the Vehicles Grows,
Detroit Pushes Smaller, Carlike Models
By KAREN LUNDEGAARD, JEFFREY BALL and GREGORY L. WHITE
Staff Reporters of THE WALL STREET JOURNAL


Sport-utility vehicles have fattened auto companies' profits and ridden an economic boom into millions of suburban garages. But now, pressures from society, government and the auto industry itself are growing so strong that Detroit is starting to take its first big steps away from reliance on the traditional, huge SUV.

Anti-SUV crusaders now span an unlikely spectrum. The Sierra Club argues that SUVs contribute to global warming. A religious group protests that Jesus wouldn't drive an SUV. Conservative columnist Arianna Huffington recently launched television ads tying SUVs to terrorism.

More threatening for auto makers is the chilling of the easygoing regulatory climate that nurtured the 1990s SUV boom. The nation's top highway safety regulator earlier this month shocked industry leaders by blasting the rollover risks of certain SUVs at an industry conference in Ford Motor Co.'s hometown of Dearborn, Mich. The safety chief also advocated measures to make future SUVs less prone to rollover accidents, including changing the vehicles' basic designs.

Meanwhile, the Bush administration is proposing the first increases in fuel-economy targets for SUVs, pickup trucks and minivans since 1996 -- a move that will encourage manufacturers to make future models lighter and will potentially put a lid on sales of the biggest and most profitable vehicles.

Even SUVs' own success threatens to make the vehicles less attractive to auto makers. A flood of new competition -- including two big SUVs coming from Nissan Motor Co.'s new Mississippi factory and a flock of low-priced Korean entries -- is pushing the SUV market toward saturation. Big rebates, once rare for SUVs, are now commonplace.

Auto-industry leaders say they see no signs that SUV sales will collapse. The Ford Explorer, tarred in a safety scandal two years ago, was one of the best-selling vehicles in America last year. General Motors Corp. sold more than one million SUVs last year, an industry record. GM's hulking Hummer H2 is a sellout.

"We're not seeing any evidence" of a shift against big SUVs, says GM Vice Chairman John Devine. But, he adds, "there's always the issue of fashion in this business, and products come in and out of fashion."

But some auto makers are already acting like the big SUV of the '90s -- essentially a pickup truck with a box on the back -- has peaked. Even as they keep cranking out traditional SUVs, auto makers are ramping up new alternatives dubbed "crossovers." They carry people and cargo the same way SUVs do but are based on the lighter, more fuel-efficient architecture of cars and minivans. The vehicles are now the fastest-growing segment of the U.S. auto market.

Sales of crossovers in the U.S. grew 22.9% in 2002, compared with 0.6% growth for conventional SUVs. Paul Taylor, economist for the National Automobile Dealers Association, predicts crossover sales will jump 50% this year -- and says that the growth in market share for traditional truck-based SUVs is likely over.

GM, while fighting to defend its newly won lead in the SUV market, is considering expanding a crossover program it had scaled back in the late 1990s. Ford is adding capacity for a new midsize crossover and cutting back capacity for truck-based SUVs. Two-thirds of the 21 vehicles Chrysler plans to roll out over the next three years will be built on the underpinning of a car rather than a truck.

"I do not see truck-based growth in the SUV market," says Dieter Zetsche, chief of the DaimlerChrysler AG unit.

Moreover, some major SUV manufacturers have started advertising smaller vehicles by knocking bigger ones. Some of these commercials tar traditional SUVs as gas guzzlers or poke fun at the central SUV marketing myth: that shopping-mall-bound suburbanites need vehicles capable of scaling mountain trails.

In one ad for Chrysler's minivans, a surgeon advises a nurse in the operating room to buy a minivan instead of an SUV because the minivan gets better fuel economy. And when Chrysler over the coming year launches TV ads for its new Pacifica, a cross between a minivan and an SUV that's built on a carlike foundation, "you're going to see us work very, very hard to get people out of large SUVs," says James Schroer, the top marketing executive at Chrysler.

The ads, he says, will tout the Pacifica as easier to step into than a tall SUV, "even if you're wearing a cocktail dress." Chrysler also is instructing its dealers to try to reel in potential buyers by noting to them that the Pacifica gets better fuel economy than traditional full-size SUVs. The intended message, Mr. Schroer says: "You're not going to take it off-road, but you don't in your SUV anyway." But this is tricky, because Chrysler must keep selling a chunky SUV, the Dodge Durango, as well as its Jeep line.

Bayerische Motoren Werke AG, in a billboard ad for its super-compact Mini, proclaims, "The SUV backlash officially begins now." And a regional radio ad for the luxury auto maker's X5, a crossover vehicle, compares most SUVs to "huge lumbering shopping carts." Meanwhile, Nissan built the entire marketing campaign for its new SUV, the Murano, around the concept of "on-roading." Television spots show drivers driving from store to store looking for a rare book and antiques, not climbing rocky mountains.

Hybrid Models

Some auto makers are further trying to silence environmental critics by creating hybrid models of their SUVs that run on a blend of gas and electrical power. GM says it will start building in 2005 a hybrid version of its Saturn VUE SUV that will get combined city-and-highway fuel economy of up to 40 miles per gallon, nearly 50% better than the gasoline version. And, starting in 2007, GM will offer versions of its full-size SUVs, including its Chevy Tahoe and GMC Yukon, which combine hybrid systems with a feature called "displacement on demand" that shuts off some of the engine's cylinders during driving conditions where the engine's full power isn't needed. The combination will boost the trucks' fuel economy by 15% to 20%, GM says.

Toyota Motor Corp., which sells a wide range of truck- and car-based SUVs in the U.S., also is working on gas-electric SUVs to complement its Sequoia, which averages 17 miles to the gallon on the highway.

Meanwhile, there are increasing signs that the traditional SUV market is nearing saturation. For instance, some manufacturers are now offering steep discounts on the vehicles -- once a relatively rare practice.

Ford's Expedition, redesigned last year, is selling so far this year with an average cash rebate of $1,605, up from $371 in the third quarter of 2002, around its relaunch, according to the Power Information Network, an affiliate of auto-information company J.D. Power & Associates. GM dealers are giving discounted financing to more than 80% -- sometimes 90% -- of SUV buyers, according to the network, which gets data from 5,900 franchises in 26 major metropolitan areas.

At the same time, projected resale values for traditional SUVs have continued to shrink over the past several years, while crossover resale values are stronger than those of any SUVs.

Auto mechanic Ken Spratford sees the latest auto trends up close from his Westside Mercedes shop in Santa Monica, Calif., which caters to about 450 clients, many of them in the entertainment business. Over the past couple of years, he says, "you had to be seen in your SUV."

But Mr. Spratford says the SUV fad seems to be fading. "People are coming to their senses. They're realizing what they're really using it for, which is dropping little Johnny off at day care." Mr. Spratford says he talked one client, Joe Reece, out of buying another large SUV when his Range Rover lease ended.

Mr. Reece says he ended up purchasing a Mercedes wagon, primarily for safety reasons. "It's not going to tip over," says Mr. Reece, a Santa Monica investment banker. An added benefit: A recent trip required just half a tank of gas, whereas the SUV used to require more than a full tank, he says.

The SUV was born out of Americans' ambivalent attitude toward fuel economy. When the federal government imposed automotive fuel-economy standards in the early 1970s, in response to the Arab oil embargo, it gave trucks a lower average fuel-economy target than passenger cars. The rationale was that trucks were work tools.

But as Detroit product planners saw they couldn't keep selling big station wagons without violating the car-mileage rule, they began looking for an alternative family vehicle. They came up with one that fell under the more-lenient truck mileage rules: the SUV.

Sales of SUVs took off in the early 1990s, fueled in part by the arrival of breakthrough vehicles, such as the Ford Explorer and Jeep Grand Cherokee, that married the utility of four-wheel drive to more luxuriously appointed cabins and up-high seating that made many drivers feel secure. Marketers played up SUVs' off-road abilities with images of the trucks bounding over stream beds and Western deserts.

But as SUVs became ubiquitous on American roads, trouble began to brew. Designed with higher centers of gravity than conventional cars, some truck-based SUVs exhibited a higher tendency to roll over than conventional cars. This issue exploded in August 2000 with the revelation that federal safety regulators were investigating a rash of deadly rollover accidents involving Ford Explorers equipped with certain Firestone tires.

Regulators ultimately tied more than 200 deaths and 700 injuries to Explorers that experienced sudden tire failures. But the scandal focused attention on the bigger rollover issue, of which Jeffrey W. Runge, administrator of the National Highway Traffic Safety Administration, wanted to remind consumers earlier this month after a speech in Dearborn. "All vehicles are not created equal," Dr. Runge said. "I wish [consumers] would educate themselves. I think vehicle fleet mix would change just as a result of that."

At the same time, SUVs have come under increasing fire for their consumption of fuel. Traditionally, concern about fuel economy has been limited to environmental activists. But since 9/11, public figures not usually identified with the green movement -- including former Central Intelligence Agency Director R. James Woolsey and Arizona Republican Sen. John McCain -- have called for federal policies to prod SUVs to go significantly farther on a gallon of gas. Thus, the critics believe, the U.S. can ease its dependence on Middle Eastern oil, and cut off a potential source of funding for terrorists.

In response to that pressure, the Bush administration recently proposed toughening the federal truck-mileage standard, now 20.7 mpg, to 22.2 mpg by 2007. That doesn't worry the auto industry, which has long been expecting some tightening of the rules. But auto makers are concerned about suggestions that the administration is mulling further increases in the truck-mileage standard starting in 2008.

Choosing a Gear

Making more crossovers might help. But figuring out how to balance product lines is a tricky question for auto makers -- and one that has burned several big names in the past.

Ford and GM, as well as the major Japanese auto makers, missed the rise of minivans in the 1980s, allowing Chrysler to ride its popular people-haulers to huge profits. Later, in the mid-1990s, GM officials were slow to read the signs that huge numbers of consumers were shifting into SUVs and pickup trucks. GM spent heavily developing more cars, leaving it hamstrung as trucks grew to be half the market. Ford and Chrysler, which had read the shift earlier, enjoyed record profits from their truck lineups in the late 1990s. GM has caught up, but only in the past few years, as Japanese and European auto makers were also piling into the SUV market.

As executives at GM confront the challenge of how to continue their profitable SUV franchise, a critical question is how many plants GM should commit to making traditional SUVs and how many to crossover models.

"The folks that are going to win are those who are going to be able to move from where they are today to where they need to be without major investment," says Jim Queen, GM's North American engineering chief. "This a huge discussion inside the company."

Moving too fast -- as some insiders say GM did with its wholesale shift in the 1970s to front-wheel drive -- would cost the company billions in extra investment and lost profits from riding the traditional SUVs as long as possible.

"You want to be a very fast follower here," says Mr. Queen. "We don't want to lead the migration."

A key question is whether demand from crossovers will come from minivan and car drivers, or from truck-based SUV drivers. If truck drivers want crossovers, GM would have to retool its truck factories to make the smaller vehicles. If it's car drivers, existing factories would need to be refitted for larger models. The decision is an expensive one, and one that must be made soon, given the industry's long lead times.

Unsure of the answer, GM is investigating whether it could make some of its truck plants flexible enough to also make car-based vehicles. Citing competitive concerns, Mr. Queen won't talk in detail about whether GM has found solutions. "Those are the family jewels," he says.

Write to Karen Lundegaard at karen.lundegaard@wsj.com, Jeffrey Ball at jeffery.ball@wsj.com and Gregory L. White at greg.white@wsj.com

Updated January 27, 2003 1:51 p.m. EST
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