Who Will Gain Most From The Large SUV/Crossover Demand In The U.S.?

by Trefis Team
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Sports utility vehicles and Crossovers have seen a surge in demand in recent times. Customers are opting for SUVs, which combine the looks of a car and the functionality and power of a utility vehicle, over sedans. Continually low oil prices have also fueled sales of SUVs and Crossovers, which are typically not big on fuel economy. However, these gas guzzlers are expected to remain in vogue even if crude prices return to more normalized levels.

Much before oil prices started declining last year, sales of SUVs/Crossovers were rising in the world’s second largest automotive market–the U.S., as customers preferred these more spacious and powerful vehicles. U.S. oil futures have recovered to over $60 a barrel, but despite an uptick in crude prices, SUV and Crossover sales are expected to continue outpacing sales of large and midsize sedans, and compacts. With more customers willing to pay slightly extra for these larger vehicles, automakers have looked to strengthen their SUV/Crossover lineups, specifically in the U.S. However, some companies have fared better than others, and are expected to continue gaining from the large demand for SUVs and Crossovers.

We have a $52 price estimate for Volkswagen AG, which is above the current market price.

See Our Complete Analysis For Volkswagen AG

Americans Love Their Larger Vehicles

SUVs and Crossovers have more capacity, a higher vantage point for drivers, and also carry most of the features that make a passenger car attractive, such as connected car features, comfortable seating, and attractive styling. These vehicles are also considered safer due to their larger size and more power, and also preferred for their off-roading capabilities. SUV and Crossover sales have risen by double-digit percentages in the last year or two, and low oil prices have made a stronger case for purchasing these vehicles. Some of the compact SUVs and Crossovers also offer a decent mileage now, which weakens the low-fuel-economy-argument for these vehicles. For example, the Honda CR-V gets around 27/34 (city/highway) mpg, which is comparable with the Honda Civic, which gets up to 28/36 mpg. [1] [2] In fact, the CR-V has outsold the Civic this year, growing sales by 6.7% year-over-year in the first four months, compared to a drop of 3.7% in the sales of the Civic, over 2014 levels.

…SUV/Crossover Sales Rise While Car Sales Fall

*Source: http://www.motorintelligence.com/

 

The U.S. vehicle sales data through April shows how while sales of passenger cars, including small, midsize, and large sedans, have decreased, SUV and Crossover sales have grown by double-digit percentages. SUVs/Crossovers form around 34% of the country’s light-duty vehicle market, and with improved customer purchasing power owing to low oil prices, and historically-low unemployment rates, demand for these large and powerful vehicles could remain strong in the next few years.

Which Automaker Gets A Bigger Bite Of The Cherry?

Toyota, Volkswagen, and GM have been fighting for the global lead in terms of volume sales for the last few years. With the U.S. automotive market returning to solid growth in recent years, both Toyota and GM have recorded strong sales growth in the country, while the German automaker Volkswagen has struggled. The Volkswagen group includes strong luxury brands, such as Audi and Porsche, but these premium brands account for only a small percentage of the net volume sales, whereas a bulk of the net volumes is contributed by the company’s namesake passenger brand. The Volkswagen Passenger Cars division (including cars, light commercial vehicles, and SEAT) forms around 16% of the company’s valuation, according to our estimates, and was a massive 46% contributor to the net revenues last year. However, the percentage contribution from this division has decreased over the years, partly due to the strong performance by sister brands Audi, Porsche, Bentley, and Skoda, but mostly because of the poor sales performance for this division.

Part of the problem for the Volkswagen-branded vehicles in the U.S. has been a weak SUV/crossover lineup. Volkswagen Passenger Vehicles presently sells only two SUVs in the U.S., the compact Tiguan and the upscale Touareg, and despite a 13.3% rise in overall SUV/crossover volume sales through the first four months, the total light truck sales for the brand fell 2.2% in the country. On the other hand, both GM and Toyota have fared well, with their light-truck sales (which mainly comprise SUVs and Crossovers) up 20% and 14.4% year-over-year, respectively, through April. In fact, passenger car sales for GM have declined 15.8%, highlighting how cars are losing out to SUVs and Crossovers in the U.S. While GM, Toyota, Honda, Ford, Jeep, and Nissan- all have a strong SUV/Crossover lineup, or at least a high-selling model in this category, Volkswagen has only a minuscule 0.5% market share in the U.S. SUV and Crossover segment.

Can Volkswagen Bounce Back?

Volkswagen is now working on a lineup of five new SUVs, aimed directly at the U.S. market, in a bid to turn its fortunes around in the country. The company has missed out on the large growth in the U.S. automotive market in recent times–most of which has come from the SUV/Crossover segment, and considering this segment forms more than one-third of the country’s overall passenger vehicle market, Volkswagen’s small 0.5% share has been one of the obstacles to the brand’s growth in the country, and in the race for the global volume sales crown. Volkswagen is expanding production capacity at its plant in Chattanooga, where a new midsize SUV is expected to start production by 2017.

There may be another two to three years before Volkswagen starts gaining from the SUV demand in the U.S. Till then, automakers such as GM, Toyota, and Ford are better placed to sell more vehicles in the country, due to their solid SUV/Crossover lineups. The shift in attitude of U.S. customers is reflected in improving sales of the SUVs/Crossovers, at the expense of compacts, midsize, and large sedans. For example, while Chevrolet’s best-selling car, Cruze, sold 6.2% fewer units this year, compared to a year ago period, the 23.7% rise in volume sales for the brand’s best-selling SUV Equinox more than made up for this decline.

Honda has strong models such as the CR-V and Pilot, GM has the Chevrolet Equinox and Traverse, Toyota has RAV4 and Highlander, and Ford has Escape, Explorer, and Edge, to rake in the dough in the U.S. However, Volkswagen has missed out on this large growth in SUV and Crossover sales in the country, and it could be a good couple of years before the group becomes a strong contender in this segment. What is another downer for the German automaker is that the company is losing out on the positive impact of currency translation, as the U.S. dollar continues to strengthen against most foreign currencies, due to lower, and further declining, vehicle sales in the U.S.

The high demand for SUVs and Crossovers is here to stay in the U.S., and while automakers such as GM, Toyota, Ford, and Honda are expected to continue to gain from this trend, growth for these companies might come at the expense of Volkswagen.

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Notes:
  1. CR-V mileage []
  2. Civic mileage []
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