How SUVs will overcome slowing sales, CO2 backlash to keep growing

SUVs and crossovers have been touted for their ability to handle rough roads, urban potholes and bad weather. But they are facing far more difficult challenges: Slowing sales and tightening emissions regulations.

In the past decade, SUVs and crossovers have gone from niche vehicles with less than 10 percent of the European market to nearly 40 percent of all new-car sales today. Buyers love them for their image, the sense of security they give and their high seating position.

Automakers have profited handsomely from healthy profit margins compared with equivalent non-SUV models.

While the party may not be over, sales in the midsize segment have declined this year by 8.2 percent, and growth has slowed to 1.8 percent among compact SUVs, according to data from JATO Dynamics. Only small SUVs and crossovers are continuing to take market share, with the segment up 13 percent through the first half.

In the premium SUV segments, sales of large models are down 2.5 percent and medium models have lost 2 percent. The compact segment, however, grew at a healthy 18 percent.

Analysts see that as a sign of a maturing market. "Basically, the growth in SUVs is coming in the smaller segments," said Felipe Munoz, global automotive analyst at JATO Dynamics. "Many consumers have already shifted to SUVs from regular cars. The next step will be electrification, which will be quite a challenge considering design and weight issues."

Midsize SUVs are sensitive to increased regulations that penalize high-polluting vehicles, analysts said, and small and compact SUVs are gaining in sophistication and even size.

Automakers are "bringing all the utility of big vehicles into smaller ones," said Tim Urquhart, an analyst at IHS Markit. "That's definitely been one of the trends in the last few years." Urquhart cited the new Mercedes-Benz GLB, a compact SUV available with seven seats, a feature typically reserved for large or midsize models.

The larger and most costly SUV segments, which include models such as the Audi Q7 (sales down 42 percent in the first half) and the Mercedes GLE (down 52 percent) are not likely to see much future growth because of a lack of full-electric models, Munoz said.

CO2 challenge

With their added weight, larger frontal mass and less-aerodynamic profiles, SUVs and crossovers generate higher CO2 emissions than non-SUVs -- an average of 14 percent per automaker, according to a report from advocacy group Transport & Environment (T&E).

As SUVs and crossovers have gained market share at the expense of smaller and lighter cars, it has contributed to an overall rise in CO2 emissions in recent years, the group says. And SUV-heavy model lineups are making it harder for automakers to reach their European emissions targets for 2020-21.

The prevalence of SUVs and crossovers has also sparked something of a backlash, with climate change campaigners at the Frankfurt auto show calling for them to be banned.

"As long as SUVs rather than small electric vehicles dominate automotive transport, cars will remain the problem child for us climate activists," a consortium of environmental groups including Greenpeace said.

None of this means, however, that automakers will stop selling SUVs or developing new models -- or that consumer preferences will shift overnight. Instead, future models will gain electrification options, ranging from 48-volt mild hybrid systems to conventional and plug-in hybrids, and even full-electric drivetrains. That will come at a cost, both to car buyers and automakers.

Consumers will probably be willing to absorb the higher prices associated with low-emissions technology, even for small and compact SUVs and crossovers, said Sammy Chan, an analyst at LMC Automotive.

Chan said he and colleagues had been discussing whether small cars could continue to be profitable once the costs of electrification were added. His conclusion? "Our forecasts for SUVs are a lot more optimistic because of the demand for them," he said.

Consumer demand

The number of SUVs on the market in Europe started ramping up in 2014, Chan said. The first victims of the surge were minivans, with the number of those models dropping from 50 in 2015 to fewer than 30 this year, and a number of automakers have abandoned the segment or re-purposed minivans models as crossovers, including the Peugeot 3008 and 5008.

One of the defining features of the first SUVs on the market was four-wheel or all-wheel drive, but that has become much less of a consideration. According to figures from JATO, only 29 percent of SUVs and crossovers sold in Europe have awd, while 71 percent are front-wheel drive. That partly reflects improvements in traction-control technology, and also that image plays a large role in how SUVs are marketed.

"The European consumer needs room, basic comfort and trunk space," Munoz said. You can find that in both a traditional car and an SUV, but brands are telling drivers that SUVs can both meet their needs and be fun to drive at the same time."

Station wagons have suffered, with brands such as Renault pushing its small Captur SUV while eliminating the Clio wagon variant on the same platform. Even sports cars have felt a pinch, Munoz said, from the introduction of coupe SUVs such as the BMW X6.

In the premium segments, there are now more SUV models than conventional styles, and the gap is closing in the nonpremium market, Chan said. Brands such as Jeep and Land Rover, once niche players that sold burly body-on-frame trucks, have become mainstream by leveraging that cachet into a full range of unibody SUVs and crossovers.

Nissan's popular Juke, Qashqai and X-Trail SUVs led the brand to largely abandon sedans in Europe. At Jaguar, known for its sleek sports cars and sedans, 70 percent of first-half sales this year were SUVs.

Looking ahead, LMC predicts that SUVs will make up 44 percent of the European market in 2024, with the rate of growth slowing from 5 percent in 2018 to just 1 percent starting in 2022.

"We are still expecting aggressive expansion in the SUV segment," Chan said, with the number of models expected to grow to 150 by 2021 from about 100 today.

All this explains why automakers are desperate to keep selling SUVs -- even if it will come with added costs to meet the EU's fleet emissions target of 95 grams per kilometer starting next year, and even lower levels due in 2025 and 2030.
"The consumer thirst for crossovers and SUVs should not be underestimated, giving automakers a tremendous incentive to keep on rolling them out," Chan said.

Electrical switch

The only way to meet future CO2 targets is with electrification, analysts said, and SUVs have both drawbacks and advantages. On the plus side, relatively boxy and spacious body types make it easier to fit batteries under the floor and electric drivelines around transmissions and rear axles.

"If you wanted to hybridize an existing car it's far easier to do it in an SUV," said Oliver Petschenyk, a powertrain analyst at LMC Automotive. "There is greater package space, but perhaps more significantly the body in white crash structure is designed to handle more weight."

This means that SUVs require fewer modifications than sedans to prevent injuries to occupants in a crash from a battery that can weigh several hundred kilograms, he said.

Another less-obvious advantage for SUVs is that they have a built-in pricing buffer against some of the costs of electrification, analysts said.

"Especially at the higher price points, you can absorb the prices for a plug-in hybrid or electrification," IHS's Urquhart said.

In other words, SUVs might be a better canvas to pursue electrification developments while preserving profits than low-margin small or compact cars.

For the majority of SUVs "electrification" will not mean full-electric versions, but rather a spectrum of solutions from 48-volt mild hybrids to conventional hybrids and plug-in hybrids, analysts said.

"The plug-in hybrid SUV offerings, especially for premium brands, will really intensify," said Al Bedwell, director of global powertrain at LMC, as automakers seek to take advantage of emissions "supercredits" for vehicles that emit less than 50g/km of CO2, a figure many plug-in hybrid SUVs can reach.

For example, Peugeot lists emissions for its plug-in compact 3008 as 29g/km. "We are also seeing a mass rollout of 48-volt mild hybrids, which can deliver up to 10 percent CO2 savings," Bedwell said. Another benefit of electrification comes from so-called "e-axles," which can be used to provide a four-wheel-drive system without the need for heavy and intrusive driveshafts running through the passenger compartment.

Weight problem

On the other hand, there is no getting around the fact that SUVs and crossovers are heavier and less aerodynamic than equivalent sedans, reducing the range of full electric and plug-in models, as well as limiting efficiency gains for mild and conventional hybrids.

"The biggest negative with SUVs becomes rolling resistance and aerodynamic drag due to larger wheels and frontal mass, which can't really be improved without a downsize," LMC's Petschenyk said.

It is this inescapable fact that is putting automakers under pressure from environmental advocates. They say that automakers' complaints about difficulties meeting emissions targets ring hollow when, at the same time, they are pushing sales of inefficient SUVs and crossovers.

"It's just a question of physics," said Florent Grelier, an engineer at T&E. "Crossovers and SUVs are heavier and less aerodynamic." Grelier's group says that increasing SUV sales are largely responsible for the recent rise in overall vehicle CO2 emissions across Europe following years of decline. This is increasing the gap automakers must close by 2021.

A decline in sales of diesel engines, which emit less CO2 than equivalent-sized gasoline models, is only part of the reason for the increase, Grelier said. "Our report showed that the impact of increasing sales of SUVs on CO2 levels is 10 times more impactful on average CO2 levels than the drop in diesel," he said.

Nonetheless, Grelier said he expected European automakers to hit their CO2 targets, using a variety of regulatory and technological tools at their disposal.

Even with 100 SUV and crossover models already on the European market, automakers are still creating new niches within the niche. "We are just arriving at saturation," said Munoz of JATO. "Most brands are present in the small and compact segments."

The next trend may be coupe-style SUVs, a body type pioneered by BMW with the X6. Toyota has found success with the C-HR, and Porsche has introduced a coupe version of the Cayenne. Renault has debuted the Arkana, a coupe version of the Kadjar, on the Korean and Russian markets.

Some brands are also doubling up in the SUV segments. Ford has both the Puma and the EcoSport small SUVs in its lineup, with the Puma being the sportier and higher-priced model. Similarly, the Volkswagen T-Roc sits above the T-Cross in the small segment (or below the larger Tiguan in the compact segment). Jeep offers both the Compass and Renegade compact models; Land Rover's Velar and the Range Rover are similarly sized but with different characters. "What we are seeing now is that reference models have been established," Munoz said, "but automakers are adding derivatives to attract new customers."

But there could be a point of diminishing returns, analysts said. Munoz pointed to the new Mazda CX-30 as an example of a model that could "confuse" buyers. "Is there really a need to have another SUV between the CX-3 and CX-5?" he said. "It could take sales from both models. On the other hand, it might bring in new ones."