SUVs Will Continue To Dominate In Europe

Nick Gibbs

Automotive News Europe

August 11, 2017 06:01 CET

Surging demand for SUVs and crossovers in Europe and around the world is the industry's growth trend. High-riding models of all shapes and sizes are reliably delivering strong sales and solid profits that more attention-grabbing trends such as car-sharing, electric propulsion and autonomous driving aren't and won't for a long while.

"It's a global phenomenon that started in the U.S, spread to Europe and China and is now shaping emerging markets such as Brazil, India and Southeast Asia," said Felipe Munoz, a global analyst for JATO Dynamics.

The rise shows no signs of slowing. In Europe, SUVs accounted for 26 percent of all passenger car sales last year, up from 8 percent in 2007, according to JATO. This year automakers are forecast to sell more than 4 million SUVs in Europe, which would push the market share up to 28 percent, analysts at LMC Automotive predict. By 2020, Europe’s SUV volume is expected to reach nearly 5.7 million, resulting in a market share of 34 percent, LMC believes.

In the first six months, U.S. sales of what the Automotive News Data Center classifies as crossover utility vehicles, or CUVs, (such as the market-leading Nissan Rogue) reached a new record of 33.8 percent of the country's total vehicle sales, up from 16.8 percent in 2007 and just 6.1 percent in 2000. In 2016, 5.6 million CUVs were sold in the U.S. The segment for larger SUVs reached 7.5 percent of the U.S. market in 2016, accounting for 1.3 million units. U.S. sales in the light truck segment, which includes CUVs, SUVs and pickups, hit 10.6 million last year in a total market of 17.5 million units, resulting in a 60.7 percent share.

In China, it's a similar story. In the first half of this year, SUVs accounted for 40 percent of the market's 4.5 million total sales, according to figures from Chinese industry association CAAM. Based on China's half-year figures, SUV sales are on track to be four times higher than in 2011.

Willing to spend more

SUVs are succeeding because they are practical enough to lure buyers from almost all existing segments, but also desirable in a way that car equivalents rarely are, especially outside the premium segment. Therefore, the decision to purchase an SUV is more emotional than rational, as the industry terms it, which means customers will spend more money.

"Prices are led by what consumers will pay, and clearly they're valuing SUV robustness, the driving position, the big wheels, or they wouldn't be buying them in the way they are," Citroen CEO Linda Jackson told Automotive News Europe. Citroen is a late-comer to the segment but is launching two new models this year. Jackson has high hopes that the C5 Aircross and C3 Aircross will boost margins for the automaker. "Clearly, SUVs are very profitable for any manufacturer," she said.

Automakers are increasingly dependent on SUVs. The list of brands whose best-seller is an SUV in Europe based on the first five months of sales this year includes Nissan, Hyundai, Kia, Mazda, Mitsubishi, Jaguar, Lexus, Porsche, Maserati and Volvo. SUVs represent half of Volvo's current global sales but account for "more than 50 percent of our profits," Hakan Samuelsson, CEO of Volvo, told Automotive News Europe.

The arrival of the new XC40 compact SUV at the end of the year will push Volvo's SUV share "considerably higher" than half, Samuelsson said. Volvo's 11 percent increase in operating profit to 3.5 billion crowns [$419 million] in the first quarter this year was "mainly driven by strong demand" for the company's XC60 and XC90 SUVs, it said in a statement.

Even ultraluxury brands such as Bentley have jumped into the SUV segment. The Bentayga, Bentley’s top-seller, will soon have competition from Aston Martin, Lamborghini and Rolls-Royce.

Balance-sheet saviors

 Volvo is not the only premium brand that has turned around shaky finances with help from SUVs. The arrival of the F-Pace means Jaguar is no longer considered weaker than sibling SUV-only brand Land Rover. The F-Pace SUV is Jaguar's No. 1 seller in Europe and around the world. Last month, the company unveiled the smaller E-Pace, which Jaguar expects will soon outsell the F-Pace. If true, that would push Jaguar's SUV sales to well over half of the brand's total.

 Meanwhile, Maserati's profit margin in first-quarter rose to 11.3 percent from 3.1 percent largely because the Levante SUV helped to push the company's sales to 11,700 in the first three months from 6,700 during the same period last year. At Bentley, the Bentayga SUV was the brand's biggest seller in 2016 with a volume of 5,586. That was nearly double that of its previous best-seller, the Continental GT Coupe. The Bentayga has pushed the Volkswagen Group-owned brand to record sales. Those following Bentley into the ultraluxury SUV space include Lamborghini, which will debut the Urus in December and start sales next year, Rolls-Royce, with an unnamed SUV that is due next year, and Aston Martin's DBX that will arrive in 2019.

Full pipelines

While the ultraluxury brands are preparing to enter the segment, volume and premium brands are stuffing their development pipelines with SUVs. In June, VW brand CEO Herbert Diess announced that by 2020 the automaker would sell 19 SUVs globally and those models would represent 40 percent of the brand’s overall sales. "This will help us defend our No 1 position in Europe and China, build up our brand in North American and lead to a rebound of the brand in South America," Diess said.

Ford will expand the number of SUV models it sells in the U.S to 13 by 2020 from seven now, Automotive News reported in February. Audi, meanwhile, will increase its SUV count to seven by 2019 from four. SUVs currently account for a third of Audi's total global sales, representing 40 percent of the brand’s volume in China and 47 percent in the U.S., the automaker's head of sales and marketing, Dietmar Voggenreiter said in March. "I believe the share of SUVs will further grow," he said. Asked whether SUV sales could reach half of Audi's total in the future, he said that was "maybe achievable."

'Complete idiots'

Few could have predicted that SUVs would become so prevalent on Europe's roads, especially in the mid-2000s when environmental activists and politicians would take turns vilifying them. For instance, in 2004 the mayor of London, Ken Livingstone, branded SUV drivers "complete idiots" for choosing vehicles that emitted far more carbon dioxide than car equivalents. He also threatened to charge SUV drivers 25 pounds to enter the city. (He was voted out before that happened.)

The fortunes of the SUV were revived when automakers made them more like regular cars by building them on the same platforms. The change started in Europe with the Nissan Qashqai compact SUV that debuted in 2006. Now in its second generation, it remains the region's biggest-selling SUV. "It draws from all other segments," Nissan Europe Chairman Paul Willcox said. "You have all the practicality, carbon dioxide performance, economy and driver dynamics, but it's much more attractive to consumers than a conventional hatchback."

Since the Qashqai's arrival, automakers have also learned that off-road ability is not a must for the average SUV buyer. Nissan says four-wheel-drive versions of the Qashqai account for just 5.3 percent of the model's sales in Europe. For the smaller Juke, just 1.9 percent of the subcompact SUV's European sales have four-wheel drive. Removing the hardware needed to drive the rear wheels as well as the front wheels cuts weight and reduces CO2 emissions.

The big problem that SUVs have today in Europe is the backlash against diesel. European customers have widely accepted the fuel over the last 10 years, especially for larger cars, as automakers refined what had been a coarse, noisy technology. The 15 percent to 20 percent improvement in fuel consumption over gasoline models allowed the market for SUVs to flourish by masking the penalty for their increased weight and air resistance compared with sedans, station wagons and hatchbacks.

Automakers that sell the most SUVs in Europe also have a high reliance on diesels. Last year, 96 percent of all Land Rovers sold in Europe were diesels, while the share was 83 percent at both Jaguar and Volvo, according to figures from market analysts AID. The trouble is that diesel sales are falling. In Germany, for example, they accounted for 39 percent of overall sales in June compared with nearly half in 2015, figures from the German motor transport authority (KBA) show. "Without a rapid campaign to preserve diesel, market share is going to decline much further," Max Warburton, an analyst at financial research firm Bernstein, wrote in a July report. "SUVs do not work in a European context with gasoline engines – the fuel economy is simply not acceptable to consumers."

The challenge for automakers will intensify starting in 2020, which is when tougher European fleet emissions rules for CO2 start to take effect. Warburton said if the anti-diesel sentiment continues to worsen automakers are going to find it almost impossible to hit CO2 targets without "substantial and expensive incremental electrification efforts."

Volvo has taken a first step in that direction by promising to electrify the powertrains in every all-new vehicle it launches starting in 2019. Most of its future models will pair a 48-volt mild hybrid with a gasoline or diesel engine. Jaguar, meanwhile, will unveil its I-Pace full-electric SUV later this year, and Audi will follow in 2018 with the e-tron battery-powered SUV.

Loyal customers

That is unlikely to be enough to reach Europe's next CO2 target, which could force automakers to try to coax customers to choose more fuel-efficient models instead. That won't be easy. Customers are incredibly loyal to SUVs, research by IHS Markit into U.S. buying habits showed. Of those SUV owners who returned to the car market in the first four months of this year, more than two-thirds purchased another SUV. Customer loyalty for SUVs and crossovers grew to 66 percent in April 2017 from 53 percent in 2012, IHS discovered, the highest for any segment. Loyalty among sedan customers meanwhile declined to 49 percent from 56 percent in 2012. IHS has not run a similar survey in Europe.

The popularity of SUVs is strangling more traditional segments ranging from station wagons to minivans and even to subcompacts. As SUVs grew to 26 percent of the European market in 2016, minivans shrunk to 9 percent last year from 16 percent in 2007, figures from JATO Dynamics show. Compact cars have dropped to 21 percent from 26 percent and midsize cars have fallen to 9 percent from 13 percent.

The SUV boom has also shaken up the subcompact segment. IHS figures show the market for small SUVs has grown to 1.16 million last year from below 200,000 in 2012. JATO predicts the segment will double by 2021 to almost 2.2 million. That has decimated the subcompact minivan segment, which IHS predicts will collapse to just 82,000 in 2021. "Part of the reason for this fall is that automakers cannot create a business case for such vehicles," IHS' Fletcher said.

SUVs succeed nearly everywhere in the world, unlike pretty much any other segments. At the launch of the Giulia sedan, Alfa Romeo said it wouldn't develop a wagon, even though the body style is popular in Europe. Alfa will concentrate on producing SUVs from the Giulia's platform instead.

"If you talk to global customers and open your ears the only thing you hear is 'SUV'," said Harald Wester, who is chief technology officer at Alfa's parent, Fiat Chrysler Automobiles.

One danger for SUVs is that they could become too popular. "We need to be careful the SUV market doesn't become saturated," Citroen CEO Jackson said. Her view is shared by Maxine Picat, who is head of the Europe region at Citroen parent PSA Group. "In one or two years, customers at a traffic light will see SUVs all around them. They will look for something else because differentiation will always be the quest for the customer," Picat told the UK's Auto Express magazine last December.

However, Trevor Mann, who is chief operating officer at SUV-heavy Mitsubishi, draws a parallel with the decline of sedans in Europe. "A lot people in the 1970s and '80s asked how far hatchbacks could grow when they first came, and they took over the European market," he said. "So, until someone comes up with something new, I think SUVs are here to stay."

Douglas A. Bolduc, Luca Ciferri and Christiaan Hetzner contributed to this report

AUTOMOTIVE NEWS EUROPE MONTHLY MAGAZINE This story is from Automotive News Europe's latest monthly magazine, which is also available to read on our iPhone and iPad apps.> You can download the new issue as well as past issues by clicking here.

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