Detroit used to think that consumers wouldn't worry about gas prices until they hit $3 a gallon. But sales of hulking SUVs are suffering, and hybrids are the new 'it' car
Graphic by Kevin Hand for Newsweek
The guzzlers: How much it costs to fill up (left to right) the Lincoln Navigator, the Toyota Sequoia, the Hummer H2 and the Ford Expedition
By Keith Naughton
Newsweek
June 28, 2004 issue - John Luber reached the breaking point when he took the family SUV for a fill-up recently and the pump didn't stop spinning until it hit $65. When the Cincinnati-area dentist got home, he sat down with his wife and did the math. With their GMC Yukon getting only 13mpg and gas at $2 a gallon, they discovered their monthly fuel bill was more like a car payment: $385. So last month the Lubers doubled down. They traded in one guzzling SUV for two sipping Hondas. The new math: the family gas bill is slashed nearly in half. "We don't miss the big SUV," says Luber. "Not at all."
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Pain at the pump is threatening America's long love affair with SUVs. Sales of large SUVs, which boomed earlier this year, fell 5 percent in April and May as pump prices soared. And that could be just the beginning. Neither two-buck gas nor the stress on SUVs is expected to ease up any time soon. Analysts warn that we shouldn't take comfort in the recent small drop in gas prices. What we're experiencing is not just the usual summer spike, they say. Rather, what's really pumping up prices are factors that won't go away on Labor Day: China's growing appetite for oil, America's limited refinery capacity, the war in Iraq. Motown execs always figured gas had to hit $3 a gallon—and stay there for six months or more—before Americans would reject their guzzlers. As long as gas remains cheaper than bottled water, they're fond of saying, it will never be a roadblock, especially not to the affluent customers who can afford the biggest SUVs. But $2 gas is already driving buyers into smaller SUVs and cars. And a Harris Interactive survey this month found that nearly 50 percent of car buyers are planning to switch to more fuel-efficient models. Now, Detroit is beginning to rethink the old formula. "Everyone is trying to figure out if and how $2 gasoline is going to affect our sales," Ford CEO Bill Ford Jr. said recently. "This issue is here to stay."
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The stakes couldn't be higher for Detroit. The Big Three derive most of their profits from SUVs and pickup trucks. "Because of their utter dependence on these big things," says veteran auto analyst Maryann Keller, "Detroit is massively exposed." Among the crosstown rivals, there are differences of opinion, often heated, about what's causing the sales drop and whether it will last. General Motors accuses Ford of using gas prices to rationalize the double-digit sales drop of its once hot SUVs like the Lincoln Navigator. Ford counters that GM is pumping up its SUV sales with giant $6,000 rebates. Chrysler CEO Dieter Zetsche wishes his competitors would just quit bickering. "I don't think any one of us is served well by trying to talk up the crisis," he told NEWSWEEK. "People might say, 'Now that you mention it, I really shouldn't buy a new car'." While Zetsche is concerned about the new factors pushing up the cost of oil, he still expects pump prices to make their usual summer swoon. "This crisis scenario always pops up in May and June," he says, "and settles down in August and September." GM also sees high gas prices as a temporary annoyance, predicting they will fall to about $1.70 a gallon. "My patience on this issue has worn thin," says GM market analyst Paul Ballew. "All objective evidence doesn't point to some big crisis ... Ford had a very rough month in large SUV sales because we took it to 'em. "
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The referee in this debate, as always, is the consumer. And buyers are now turning away from last year's must-have model, the 11mpg Hummer H2. With sales down 27 percent this year, Hummer is running on fumes. GM says Hummer's woes are not related to gas prices (even though poor mileage is H2 owners' No. 1 complaint in J.D. Power surveys). Rather, GM chairman Rick Wagoner appears to acknowledge that his former star car is simply losing its luster. "They're a fashion statement," he told concerned investors at GM's annual shareholder meeting this month, adding that falling H2 sales were "completely predictable." GM hopes to revive Hummer with the smaller, more fuel-efficient H3 model next year. But consumers are already moving on. The new "it" car is Toyota's 60mpg Prius gas-electric hybrid, which is commanding $5,000 over sticker price and has waiting lists that stretch for two years. Toyota expects the market for hybrids to multiply ninefold, to 600,000 cars by 2006. Detroit artist Alice Frank just ditched her Mercedes SUV for a white Prius. "With the Mercedes, you could watch it guzzle," she says. "When I first got the Prius, I was concerned that the gas gauge wasn't working."
Perhaps the surest sign that SUVs are downshifting: car dealers are hedging their bets. They're ordering fewer big SUVs and thirsty V-8 engines. And for the first time in ages, their ads now tout gas mileage. "High gas prices hit all of us right between the eyes," says Dodge dealer Bruce Campbell, who threw a party at his Redford, Mich., store last week to roll out the new Magnum station wagon. Shoppers nibbling hors d'oeuvres crowded around the black low rider while a big SUV nearby went begging. A salesman pitched the Magnum as having all the benefits of SUVs—power, cargo room, brawny looks—with none of the drawbacks. Even its big Hemi V-8 has new technology that shuts off half the engine at cruising speeds so it gets 24mpg on the highway. As soon as the salesman finished, Sheryl and William Yeakey rushed up for a test drive. "This car has that gangster lean," says Sheryl. Why not an SUV? "Gas mileage," she says. "With all that's going on over there in Iraq, I don't want to put all my eggs into something I'll be sorry for later."
Still, SUVs are far from roadkill. The best thing they have going for them is America's love of all things big (houses, TVs, hamburgers). "With SUVs, it's all about size and power," says psychologist Margaret Krikorian of the L.A. trend-spotting firm Iceology. "It's all about Freud." So now automakers are coming up with a way we can live in harmony with our road hogs and high gas prices: hybrid SUVs. Ford will be first with its 35mpg Escape hybrid in August. Toyota will follow with hybrid versions of its Highlander and Lexus RX330, which promises to go 600 miles on a tank of gas. But GM will trump them all with hybrid versions of its monstrous Chevy Suburban and GMC Yukon in 2006. Enviros decry GM's jumbo hybrids as akin to wearing a nicotine patch while still smoking three packs a day. But Krikorian says that will provide just the rationale SUV buyers need. "It's a completely emotional purchase," she says, "but we all want to appear logical." Still, it's hard to rationalize a $65 fill-up. And unless those go away soon, the emotion many SUV buyers will be feeling is remorse.
