10 trends mark changes in industry - Mercer University



10 trends mark changes in industry

Joseph B. White - Wall Street Journal

Friday, December 3, 2004 AJC

For nearly a decade, the most reliable way for an automaker to prosper was to build and sell sport utility vehicles. Now America's SUV fever is cooling, and automakers are navigating a rougher road.

Rising gas prices are driving consumers toward crossover models that are built more like cars than trucks. And Detroit is scrambling to keep up with demand in other areas, such as gas-electric hybrids and trendy cars for the youth market.

But times are good for consumers. The rapid pace of new-model introductions and technological innovation means dealers will replace old models more quickly --- and discount yesterday's hot offerings. And Web sites filled with information about prices and features give consumers a much stronger hand in negotiating.

Here are some trends to watch in the industry over the next several years:

1. SUVs turn into CUVs

Automakers love acronyms, and they love categories. Now the new breed of all-wheel-drive wagons --- typified by Toyota Motor Corp.'s Highlander, Ford Motor Co.'s Freestyle, DaimlerChrysler AG's Chrysler Pacifica and Honda Motor Co.'s Acura MDX --- is making a mess of the neat market segmentation that drove the industry during the 1990s.

Back then, an SUV was a vehicle built on a solid, heavy ladder frame, like a pickup truck, but with room for five or sometimes seven people and cargo. With gas prices rising, sales of these truck-based SUVs are flattening out or declining despite heavy discounts. Rising to take a larger share of the market are the crossovers, most of which look like cars or minivans from underneath, and handle like the smaller vehicles as well. More important, these ''crossover utility vehicles'' tend to get better gas mileage.

For now, Japanese and European automakers, which morphed their cars into crossovers to quickly crash Detroit's SUV party, are benefiting the most from the shift to CUVs. U.S. and Korean automakers are racing to catch up. Meanwhile, all the players are trying to figure out the best design for the vehicles. Some crossovers look a lot like big SUVs, but others resemble European station wagons, riding almost as close to the ground as sedans.

2. Got a hybrid?

Rising gas prices have made Toyota's gas-electric hybrid car, the Prius, a smash hit. Now, rivals are rushing to bring out more hybrids and ushering in the most vigorous era of underhood experimentation since the auto industry's earliest days.

Some of the technology isn't that novel, such as diesel motors and engines that shut off some cylinders during highway cruising. But thanks to technical advances, automakers can repackage those technologies as new and improved.

3. Racing in the streets

Still, rising gas prices haven't taken away consumers' love of big, powerful engines. Graying baby boomers eager to relive their youth are driving demand for a new generation of muscle cars.

Ford is launching a new Mustang with styling that takes the car back to the days of Steve McQueen. Ford is even using images of the late Mr. McQueen in ads for the car. Chrysler's Dodge brand is about to roll out a 21st-century edition of its brawny Dodge Charger. General Motors Corp. hit a foul ball with its reincarnated Pontiac GTO. But Pontiac plans to revamp the car's look, adding retro hood scoops and even more goats under the hood.

Meanwhile, Japanese and European brands are embarking on a horsepower race of their own, led by cars such as Nissan Motor Co.'s 287-horsepower 350Z and the newly launched, 300-horsepower Acura RL from Honda.

4. Luxury for everyone

Luxury brands' share of total U.S. auto sales is rising, and the aging of baby boomers means vehicles should keep getting plusher and better equipped.

During the late 1990s, once snooty European luxury brands took advantage of the relatively strong dollar to offer U.S. consumers comparatively affordable models --- with prices starting at less than $30,000 --- that put a BMW or a Mercedes within the reach of upper-middle-income consumers who might otherwise have settled for a Buick or a Chrysler. The dollar's recent weakness has made it tougher for the European luxury brands, but they're showing no signs of backing away. BMW AG, DaimlerChyrsler's Mercedes division and Volkswagen AG's Audi unit all plan to expand their U.S. lineups with smaller, more affordable models.

5. Safety sells well

As carmakers seek profit by pushing more luxury features into high-volume cars, premium brands increasingly are using advanced safety technology to distance their models from the hoi polloi.

With European luxury nameplates taking the lead, once exotic technologies such as electronic stability control --- which automatically uses the brakes to prevent a sideways skid --- are poised to become more widely available. Automakers and federal safety regulators are increasingly looking to the new electronic stability and anti-rollover technologies to decrease the rollover risk for sport utility vehicles.

Coming next: technology that warns a driver when the vehicle drifts out of the lane, a feature recently offered by Nissan's Infiniti brand; radar-enabled cruise control that automatically keeps a safe distance between your car and the one ahead; and side-scanning radars that warn of cars in your blind spot.

6. It's hip to be small

After years of neglect, small cars are enjoying a renaissance, thanks in part to teens and 20somethings, who represent a cadre of buyers to rival the size of the baby-boom generation. Many younger buyers spent their childhoods in the back seats of minivans and SUVs and see a smaller car as one more way to set themselves apart from the older generation.

The enthusiastic receptions for Volkswagen's New Beetle and BMW's Mini brand have emboldened Audi and Mercedes to make plans to offer some of their European subcompact and mini-car models in the United States. Audi plans to bring its European A3 here in about a year.

7. Urban style strong

GM was caught by surprise when its Cadillac Escalade SUV suddenly became a hot ride with rappers, athletes and other trend setters, in part because of its supersize chrome wheels. Sales of Chrysler's 300C sedan took off when rapper 50 Cent put the vehicle in a video and praised it for looking like a Bentley. Marketers for Toyota's Scion youth brand had to revise their strategy when consumers embraced the xB as a kind of urban party wagon.

Suddenly, automakers realize what music-industry executives have known for years --- urban, minority consumers are important trendsetters and fashion leaders, not just for their own communities but for a significant number of suburban, white consumers.

Urban car fashion is increasingly influencing the styling and features of mainstream cars. Wheels and tires are getting bigger.

8. Service, not sales

Back in the 1990s, a few Internet entrepreneurs predicted that the Web would make traditional car dealers obsolete. They were wrong. But the Web --- by giving consumers more information --- is cutting into dealers' profits. So dealers are trying to entice consumers to where the real profit potential lies: the service shop.

AutoNation Inc., the biggest U.S. auto retailer, is trying out new approaches to selling service, including talking to customers who bring in their cars for warranty work about additional preventive maintenance. AutoNation is also trying to make service prices more competitive with independent shops.

9. A new standard

During the 1980s and 1990s, automakers invested heavily in efforts to ensure that cars arrived in showrooms without obvious defects and didn't fall apart during the first few months of ownership. That definition of quality was driven, in part, by the J.D. Power Initial Quality Study, which surveyed consumers' complaints about cars during the first 90 days of ownership.

Now, J.D. Power executives say they have found that performance on the IQS is less important than another measure: Power's survey of durability and reliability after three years. Power's researchers say that when it comes time for consumers to buy a new car, a brand with a strong record for long-term durability will get more repeat business.

10. The China card

Some industry executives believe China could become as large an auto market as the United States within 20 years. Already, China is having a huge impact on auto industry investment as Western carmakers move manufacturing operations there.

But the world's most populous country could eventually begin to influence what Americans and Europeans drive. Some automotive designers already are talking about creating a distinct Asian style that would be aimed at Chinese consumers.

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