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  1. 1. America's Love Affair With Sport Utilities Is Cooling Off, and Big Three Try to Adjust By JOSEPH B. WHITE, STEPHEN POWER and MILO GEYELIN Staff Reporters of THE WALL STREET JOURNAL, 5-31-01 The Ford Explorer is one of the most successful and profitable consumer products ever invented. It's the vehicle that ignited America's sport-utility vehicle craze, making four- wheel drive a must for affluent suburbanites. Now, the Explorer is about to go on trial in the halls of Congress and the courts of law and public opinion. That could mean the end of an era, whether or not safety advocates, plaintiffs' lawyers and furious executives of tire maker Bridgestone/Firestone Inc. succeed in persuading the public that Explorers are dangerously prone to rolling over when their tires fail. Behind the noisy legal and public-relations battle between Ford Motor Co. and Firestone, big changes are underway in the social and economic environment that made the Explorer America's best-selling SUV and an iconic product of America's 1990s boom. Overall sales of "traditional" SUVs, including the $30,000 Explorer, are down 9.8% so far this year and 13.6% in April -- both compared with similar periods last year. Those figures come despite improved sales of larger models, such as General Motors Corp.'s Chevrolet Tahoe. Gas prices have roughly doubled in many parts of the country over the past two years, and there are signs they are starting to hurt SUVs. In the latest J.D. Power & Associates survey of consumer attitudes on auto-industry quality, "excessive fuel consumption" was cited as a problem with 2001 truck models, including SUVs, at more than double the rate for 2000 models. Consumers are also beginning to present symptoms of traditional SUV fatigue, says G. Clotaire Rapaille, a consultant who worked with executives of the former Chrysler Corp. on the PT Cruiser, the smash hit gangster-style wagon that DaimlerChrysler AG classifies as an SUV. "The main reason people were buying [SUVs] was that they were different," says Dr. Rapaille. But now that Explorers are everywhere, "they are losing one of the reasons people were buying these cars." One way the auto makers are responding is by making smaller, lighter SUVs, such as the PT Cruiser. They handle more like passenger cars because under their metal skin, they are passenger cars. But a profusion of such new offerings from a wider array of manufacturers is cutting into the rich SUV profits once enjoyed by Detroit's Big Three. The shifting market poses a long-term challenge to Ford and other U.S. auto makers, whose fat 1990s profits depended disproportionately on cranking out ever-more-lavish SUVs that sold at premium prices. During the 1990s, the sport-utility segment averaged
  2. 2. 17% annual growth, largely because Ford nearly quadrupled sales of its SUVs, riding the success of the Explorer and its big brother, the Expedition. Roots in WWII The first SUV clearly aimed at families was the four-door 1984 Jeep Cherokee, which traced its roots back to the famous World War II military vehicle. It was Ford, however, that saw the enormous potential for a vehicle that offered upper-middle-class families more space and refinement than the Jeep and more macho than a minivan. The SUV's off-road capability, rarely used by most drivers, fit right in with a culture that valued products capable of handling any demand. The SUV made perfect sense for consumers who aspired to commercial-quality ranges for the kitchen, one gigabyte processors for their home computers and expensive GoreTex-lined mountaineering boots for dodging sidewalk puddles. But now, there are signs that this exuberance is surrendering to rationality. In addition to overall SUV sales declining so far this year, resale values have fallen sharply. The resale value of a 1999 six-cylinder, four-wheel-drive Explorer dropped by 20%, to $17,225, from January 2000 to January 2001 -- more than several other top-selling cars and trucks, according to the National Auto Dealers Association Official Used Car Guide. "This softness in all of the SUV prices started long before the Firestone issue came up," says the association's chief economist, Paul Taylor. He attributes the development to a large supply of used SUVs coming off leases, bigger new-vehicle rebates and weakened demand in a generally slow economy. Dealers also are offering rebates earlier in the year to move new models. And Ford's redesigned 2002 Explorer is being sold only about a month into its launch with discounted 3.9% financing -- roughly half the cost of a conventional loan. Already, Detroit executives are sounding wistful about the good old days, before the SUV safety scares, class-action litigation, $2-a-gallon gas and the onslaught of new smaller-SUV competition. "The whole sport-utility creation probably isn't repeatable," Ford Chief Executive Jacques Nasser told analysts during a meeting last week. From now on, the SUV market won't be dominated by one or two major players, he said. Instead, it is becoming more like the passenger-car market, which is fragmenting among dozens of brands and styles. The stakes couldn't be higher. SUVs last year accounted for nearly three million vehicles, or about 17.2% of the U.S. market, and a far greater share of Detroit's profits. The auto makers don't publicly report sport-utility profits, but Wall Street analysts have estimated that as much as one-third of Ford's overall profit now comes from SUVs -- about $3,000 a vehicle.
  3. 3. Washington is starting to cool to the SUV, even though many powerful government figures -- including some Republican and Democratic leaders of Congress -- are chauffeured around the capital in Chevrolet Suburbans and Lincoln Navigators. House Commerce Committee Chairman W.J. "Billy" Tauzin owns an Explorer, while Democratic National Committee Chairman Terry McAuliffe drives a Cadillac Escalade. But with gas prices soaring, Congress is considering legislation to require that SUVs, pickup trucks and minivans consume less fuel. The Bush administration so far hasn't backed a specific plan to require better SUV fuel efficiency. But the White House has directed the Department of Transportation to consider whether the current standards should be toughened, based on the findings of a National Academy of Sciences study due in July. Mid-sized SUVs, such as the Explorer, typically get 15 to 19 miles per gallon. A mid- sized sedan, like the Ford Taurus, gets 19 to 28 mpg. Thanks to the rise of SUVs, the nation's overall fuel efficiency has sunk from 26.2 mpg to 24.5 since 1987. Responding to the building political pressure, Ford, GM and DaimlerChrysler have vowed to voluntarily improve their SUV fuel economy over the next five years, using new technology, such as hybrid gas-and-electric power systems. Meanwhile, Rep. Tauzin has served notice he intends to stage a sequel to Commerce Committee hearings he led last fall, in the wake of the Firestone tire recall. With accusations flying between Ford and Firestone, and the auto maker replacing millions of additional tires, Mr. Tauzin's committee has asked manufacturers of tires, sport-utility vehicles, light trucks and minivans for reams of data. The panel is trying to determine whether there are problems only with certain batches of Firestone tires or with the design of the Explorer and other vehicles, as well. As if that weren't enough to make Detroit marketers cringe, federal regulators also are calling more attention to the rollover issue. The National Highway Traffic Safety Administration is devising a new test that will measure the propensity of vehicles to roll over in real-life conditions. Until last year, auto makers, with help from their allies on Capitol Hill, had blocked the agency from issuing so-called "rollover ratings." But after the Firestone recall and a spate of deadly rollover accidents involving Explorers, the industry relented, and the safety agency is moving ahead with its test. As daunting as new government ratings may seem to the industry, the dangers of plaintiffs' lawyers and juries could turn out to be far worse. SUVs have been targeted in lawsuits over rollover-related injuries and deaths since the vehicles first appeared in the mid-1980s. Plaintiffs' lawyers say lately they are seeing a shift in public attitudes that could favor their clients -- and themselves. Mikal Watts of Corpus Christi, Texas, began suing Ford in the mid-1990s, alleging that flaws in the Bronco II, the Explorer's predecessor, led to rollovers. It has become easier
  4. 4. to settle SUV cases, as both sides have become aware that fewer potential jurors assume that rollovers are the fault of drivers, Mr. Watts says. Today, his jury research shows that many people believe "it may well be the vehicle's fault," he adds. The lawyer is scheduled to begin trial of a rollover suit against Ford and Firestone next week in state court in Hidalgo County, Texas. Each company says its products are safe. And both deny any responsibility for the injuries to Mr. Watts's client, a mother of three who was left brain damaged after the Explorer in which she was a passenger rolled over. Ford spokesman Jason Vines dismisses Mr. Watts's jury research as self-serving and biased. Most of the injury and death suits against Ford and Firestone involving the Explorer have been settled out of court, some for large sums. But even before Firestone's recall last summer, Englewood, Colo., plaintiffs' lawyer W. Randall Barnhart says he began to sense a shift. Mr. Barnhart won a $26 million compensatory-damage award in state court in Hayward, Calif., last year on behalf of a 55-year-old reinsurance executive who rolled a Bronco II and was left a quadriplegic. The jury declined to award punitive damages, but Mr. Barnhart says three jurors who voted in favor of imposing such damages drove SUVs themselves. Ford and Firestone have held talks to try to settle about 300 individual and class-action suits against them, which have been consolidated for pretrial proceedings before the federal court in Indianapolis. But the acrimony between the companies is playing into the hands of their courtroom adversaries. The damning documents Ford and Firestone are spewing will probably end up as plaintiffs' exhibits, and the companies' chief executives could well find themselves facing off in court. Mr. Nasser and his Firestone counterpart, John Lampe, are scheduled to be deposed next month by a dozen lawyers involved in the Indianapolis cases. Another Ford spokesman, Ken Zino, says the company isn't in more peril because of its feuding with Firestone. "We always try to reach a settlement if a customer has been injured in the use of our product. Nothing has changed." A Firestone spokeswoman says the information and documents it released last week speak for themselves and raise questions about the Explorer's stability. Despite the scrutiny in Washington, attacks on the legal front and rising gas prices, plenty of consumers still love SUVs -- for now. "I've been a happy camper for the last three years we've owned the car," says David Stark, President of Inland Investments in Dallas and owner of a 1998 Explorer. Mr. Stark says he's concerned about the Firestones on his vehicle, and adds that he's aware "SUVs are more likely to tip over if you get into an emergency situation." But he says he's never had "any reservations about driving the Explorer." His wife, on the other hand, "was tired" of it, he says. She used to be the Explorer's main driver, but now she has an Acura sedan.
  5. 5. Dr. Rapaille, the marketing consultant, predicts that the next big craze will have nothing to do with off-road capability. His bet: stylishly retro cars. Shifting tastes are just one reason the easy money the Big Three reaped from creating SUVs out of relatively inexpensive pickup trucks will be harder to come by in the next decade. As more and more models slice and dice the SUV market, industry forecasters expect that high-volume hits such as the Explorer will be fewer and farther between. In 1997, auto makers sold 33 vehicles categorized as sport-utility vehicles. By 2006, Los Angeles-based automotive consultancy AutoPacific Inc. predicts, there will be 79 vehicles marketed as SUVs in America, including many by Japanese, Korean and European auto makers. Most of the 79 SUVs won't be trucks like the Explorer, says AutoPacific consultant James Hall in the firm's Southfield, Mich., office. Instead, they will ride and handle more like passenger cars. Sales of these smaller "crossover" vehicles, which combine some SUV features with more-efficient car or minivan designs, are up more than 176% so far this year, compared with the same period last year. Ford, the largest SUV marketer in the world, is a big part of the change. At Prestige Ford near Dallas, Texas, dealer Jerry Reynolds says customers are clamoring for more of Ford's newest SUV, the Escape. The Escape is no Explorer. It's smaller and gets 18-to-24 mpg with the optional V-6 engine, compared with the larger four-wheel-drive Explorer's 15-to-19 mpg. Cosmetics aside, the Escape is essentially a front-wheel-drive compact car. The Explorer's mechanical DNA comes from Ford trucks. The Escape isn't expected to be as profitable as the Explorer was at its peak. Given Ford's decision to devote two factories to building Explorers and only one to Escapes, there's no chance Escape will outsell Explorer soon. But, despite several recalls, it has turned out to be a success. "I'm selling Escapes as fast as I can get them," says Mr. Reynolds, who heads Ford's national dealer council. "The largest threat to increased volumes of Explorers, even the new Explorer, has nothing to do with tires," says Mr. Hall of AutoPacific. "It's the Escape. If the most you carry around is four people and some stuff, it's tough to beat the Escape."