SUVs: A profit center in flux

The late 1990s and the first few years of the 21st century were the glory days for large SUVs. Trucks and sticker prices grew bigger with each redesign as an endless supply of oil and a flourishing economy drove demand.

The Big Three took full advantage. Their decades of experience making pickup trucks gave them an edge in designing truck-based SUVs U.S. buyers demanded. High SUV and pickup truck margins helped Detroit make billions despite declining market share in passenger car segments.

In and Then Out

Fast-forward to 2006. Oil hovers around $60 per barrel, and SUVs aren't that cool anymore. Many view them as dinosaurs, remnants of '90s excess that have no place in a thriftier, more environmentally conscious century.

More important, the Big Three no longer have the market to themselves. Because of the potential for high profit margins, Toyota and Nissan now offer SUVs. Both the Toyota Sequoia® and Nissan Armada®, based on full-size pickup trucks with body-on-frame construction and V-8 engines, are built in the U.S.

For now the Big Three have a solid grip on the truck and SUV market, though their domination is not what it was. Detroit has realized that it can no longer ignore passenger car sales because of the dominance and profits they enjoy from trucks. All three have strengthened their passenger car offerings and have made major investments in crossover vehicles (CUVs) that are replacing SUVs. Last, the Big Three also are modernizing their SUV offerings.

Foreign competition and frequent vehicle updates have forced the Big Three to fortify their SUV products quickly. Redesigning a product traditionally is the best way to invigorate its sales. This tested strategy, however, is not proving to be universally successful for SUVs.

Redesigning the Beast

The Ford Explorer® was the best-selling SUV for a decade. Recently, however, the Explorer has faced intense competition and a safety scandal following reports of rollover crashes caused by faulty tires. As sales slipped, Ford updated the Explorer for the 2006-model year. The results have been a disappointment. Explorer sales are off 22 percent from this time last year. The situation is similar for the Ford Expedition®, which also was redesigned last year for 2006. Expedition sales are off more than 25 percent compared with this time last year.

The Ford Excursion® provides another interesting example. As the largest of all high-volume SUVs, the Excursion has been a lightning rod for criticism from environmental groups. Along with the Hummer®, it has become a poster child for SUV excess. As a result, Ford has announced it will kill this beast. Sales are off 64 percent compared with this time last year and are well on their way to zero. Ford quietly introduced an extended version of the Expedition that will replace the Excursion.

Ford is moving aggressively to offer crossover vehicles that are luring buyers away from SUVs. Its Escape® has been a remarkable sales success. An all-new Ford Edge® crossover, as well as a version for Lincoln, is due next year.

All is not bad news in the realm of SUVs, however. The Chevy Tahoe® is proof that there still may be life in the SUV segment. The Tahoe was redesigned for 2006, and sales are up almost 50 percent over last year's levels. Notably, sales of the Toyota Sequoia and Nissan Armada are down 27 percent and 21 percent, respectively, for the period.

With the Tahoe redesign complete, GM is moving its large SUVs to the GMT900® platform on which the Tahoe is based. The Cadillac Escalade®, Chevy Suburban®, and GMC Yukon® all have been redesigned on this platform or are in the process of being introduced. It's reasonable to believe that GM is correct in believing that its large-SUV sales will be up in 2006.

Early in 2005 GM made a controversial decision to speed the introduction of the GMT900 platform at the cost of delaying the ZETA® passenger car platform. Many industry observers questioned the decision in light of declining SUV popularity and rising oil prices. Early indications are that GM made the right decision. As it did with previous platforms, GM will redesign its full-size pickup trucks on the GMT900 platform as soon as the SUV launches are complete. This will provide the carmaker with fresh product to help generate badly needed higher margins.

SUVs Are Here to Stay

Despite shifting consumer sympathies; rising gas prices; and the evolution of sexier, more fuel-efficient crossovers, the SUV segment remains a pillar of the U.S. automotive market. While the Big Three can't claim the same domination they once had, foreign competition has been a valuable wake-up call.

In the 1970s and 1980s international automakers challenged Detroit's domination in car sales, and the Big Three were slow to respond and paid the price in declining market share and profits. U.S. automakers' response to challenges in the SUV segment has been quick. Interestingly, the vulnerability SUV competition exposed may be what finally prompted Detroit to respond to the international challenge in passenger cars as well.