Although opposition to SUVs intensified in Europe in 2004, with a variety of local and national governments proposing measures to limit their use, this had little impact on their popularity. Here, Global Insight outlines what it believes the future holds for the contentious vehicles in Western Europe and what shape their future growth curve will take.

A Steep Upward Growth Trend

In the 10 years between 1995 and 2004, sales of sports-utility vehicles (SUVs) in Western Europe soared by a massive 170%, from 330,000 units to around 880,000 in 2004. This compares with overall passenger car market growth of 20% in that time, meaning that SUVs now account for 6.1% of the market, up from 2.7% a decade ago. The steepest points in this growth curve occurred between 1997 and 1999 and between 2002 and 2004, largely corresponding with the explosion of two sub-segments of the market between those years - compact SUVs and luxury SUVs. In 1997, two of Europe's best-selling compact SUVs were launched - the Honda CR-V and the Land Rover Freelander, whilst it was the end-2002 arrival of the Porsche Cayenne, Volvo XC90 and Volkswagen (VW) Touareg in the luxury SUV market which triggered the expansion of that segment. (See chart at end - SUV Demand compared with Total Market Growth)

Despite Criticism, Demand Refuses to be Dampened

This explosion in popularity has proved unpopular in certain quarters. In addition to the multitude of environmental groups that campaign against the vehicles, more significant are the proposals from various local and regional governments across the region that attempt to limit their use.

Despite widespread criticism, and despite rising costs that look sure to hit the vehicles in some countries in the future, the bottom line is that, at the moment, drivers do not care. Of Western Europe's 16 countries, Global Insight expects SUV growth to outperform the market in 15 in the three years between 2003 and 2007.

Growth in the segment will also be helped by a large number of new SUV launches, including a considerable number of entirely new entrants in addition to replacement models.

Growth Forecast Based on Number of Assumptions

Our forecast that SUVs will carry on enjoying spectacular growth in the medium term at least (until 2014) is based on a number of assumptions regarding the European regulatory environment:

  • No Specific Bans on SUVs: Because there is no definitive characterisation of what exactly constitutes an SUV, a blanket ban on the vehicles is theoretically impossible to enforce.
  • No Specific Tax Singling Out SUVs: For the same reason as above, it would also be impossible in theory to single out SUVs for special taxes.
  • Pan-European Harmonisation of General CO2-Based Taxation on New Vehicle Purchases: It is more likely that, under increasing pressure to meet global environmental targets - such as CO2 emission-reduction goals set by the Kyoto Protocol as well as the voluntary agreement between ACEA and carmakers to reduce CO2 emission levels - European Union (EU) member states could start to implement tax systems on passenger cars that would be graded according to CO2 emissions. By introducing revenue-neutral schemes, such as the bonus-malus scheme that was proposed in France last year, governments could avoid a lot of the criticism they would otherwise attract, due to the fact that drivers of small, environmentally friendly cars would actually be rewarded for their decisions. For forecasting purposes, the numbers in this report assume that such a tax system will be introduced throughout Europe on 1 January 2008.
  • High-to-Moderate Progression in CO2 Bands: Were this scheme introduced, we would expect there to be quite large steps between the penalties for the different C02 bands, meaning that fines would rise steeply for larger-engined cars.
  • Diesels Able to Meet Euro V Limits: We assume that with their future-generation diesels, manufacturers will be able to meet the EU's Euro V requirements, which are expected to come into force in 2009 or thereabouts.
  • Social Stigma Does Not Become Too Great: The possibility that the backlash against SUVs will become so intense that it will start seriously damaging their brand image and turning buyers off in notable numbers seems highly unlikely in the foreseeable future.

The Effects of Bonus-Malus

Under the preliminary bands suggested by the French government for a CO2-graded bonus-malus scheme, cars emitting less than 140g/km of CO2 would qualify for a 250 euro rebate, whilst those emitting between 140g/km and 180g/km would neither be penalised nor rewarded. Drivers of cars emitting more than 180g/km would have to pay anything between 400 euro in tax - applied on first purchase, in addition to value-added tax (VAT) - and 9,200 euro, with a progression of bands between those two levels, each one attracting a substantially higher tax rate than the one before.

A study by Global Insight has found that of the SUVs currently on offer around the world, only one-sixth fall into the 140-180g/km range (meaning that they would be neither penalised nor rewarded in tax terms) and none of them emit less carbon dioxide per kilometre than that. Therefore, no current SUVs would receive tax breaks from such a scheme, whilst 85% would be subject to some form of punitive tax upon acquisition.

We also found that current SUVs emit, on average, 240g/km, which would make the average fine applied on the vehicles equal to 800 euro. As a rough guide, since the average cost of an SUV is 30,000 euro, the tax would add another 3.6% to its retail price.

Click to enlarge

As the graph above shows, we believe that, following the introduction of such a scheme, SUVs would suffer an immediate and sharp drop in demand as a result of consumers' knee-jerk reaction, before returning to an upward growth trend. That growth trend would follow the same shape were no tax introduced, but at lesser volumes (because of the immediate drop in sales following the introduction of the tax). Either way, we foresee the growth curve of SUVs becoming less steep after 2007 as the segment matures.

One of the main reasons why SUV sales would so quickly return to growth following the introduction of a tax is that all similar-sized cars would be hit by the same taxes, and therefore alternatives to SUVs would be equally unattractive - unless buyers were to downsize massively and buy a supermini or the like. In addition, the tax would raise SUVs' residual prices. This is because the CO2 tax would be on the first purchase and not on ownership of the vehicles, meaning that their lease values would decrease, making them more attractive to the buyer - and likely raise their sales.

We can also assume that, faced with the loss of a large chunk of their SUV sales, manufacturers would come up with plenty of responses to try and counter the effects of increased prices.

Possible Industry Responses

  • Downsize SUV or Crossovers: Compact SUVs are already highly popular, already accounting for more than 40% of new SUVs purchased in Western Europe. In the future we expect them to make up an even greater proportion of SUV sales, peaking at almost 50% of the entire segment in 2008, as manufacturers place a greater focus on them, at the expense of their larger counterparts, due to their lower emissions. In addition, we will see the emergence of more 'crossover'-type vehicles, such as the already-launched Nissan Murano SUV crossover.
  • Weight Reduction/Materials Technology: Vehicle manufacturers are constantly looking at ways to reduce the weight of their vehicles, which would immediately cut their emission levels. Viable ways of doing this include reducing the steel content from their bodies and the iron content of their engines, and replacing both with, for example, aluminium.
  • Further Dieselisation: In the UK, the diesel penetration rate amongst new SUV purchases currently stands at 57%, in Germany it is 67%, and in France it is 85%. Therefore, there is plenty of room for manufacturers to substantially increase the dieselisation of their SUV fleets, which would serve to reduce CO2 emission rates.
  • Move to On-Demand 4WD or 2WD: According to Global Insight's Nigel Griffiths, by moving an SUV from permanent 4WD to 2WD, typical CO2 output would be reduced by 10g/km. Under the aforementioned CO2 tax bands, that could be an attractive goal for automakers to work towards. Already, around 45% of SUVs sold in Western Europe are permanent 4WDs, meaning that the remaining 65% are either 4WD on demand or 2WDs. Global Insight's powertrain division believes that, for that reason, by 2009 as few as 20% of new SUVs sold will be 4WDs.
  • Hybrids: The first hybrid SUVs have already been launched in the US to great acclaim; a trend that Western Europe may follow, depending on tax conditions.
  • Cut Margins and Lower Prices: SUVs are currently a huge generator of profits (per unit) for automakers. Should punitive taxes be imposed on them, and should these higher prices start to displease consumers to the point that their sales start dropping significantly, then manufacturers face the decision of whether to lower their prices, thereby cutting their own profit margins on the vehicles.

Outlook and Implications

SUVs are not going to lose their popularity in the medium term, with the vehicles remaining on a steep upward trend until the end of our forecast period, 2014, no matter how vociferous the environmental faction becomes. By that time, there will be over 1.2m units of the vehicle on our roads. On the other hand, pressure will force automakers to clean up their acts with regards to the emission levels of their SUV offerings and they will, at some stage, be forced to cut the margins on them and thus lower their prices.

We are also likely to see further fragmentation of the segment, which will be another driver behind the medium-term growth of SUVs. So just as compact and luxury SUVs both boosted segment volumes with their respective arrivals, as more and more types of SUV crossovers emerge this will have the same positive effect that earlier fragmentation had. By doing this, automakers are essentially pandering to both consumer and environmental pressures. By marketing the vehicles as SUVs, they are indulging the lifestyle aspirations of their customers, but with the introduction of the SUV crossover they are also responding to legislative pressure by making the vehicles more pedestrian-friendly, lighter and more fuel-efficient.

Paradoxically, however, these industry responses ultimately mean that SUV demand is likely to increase. A further dieselisation of SUV fleets (with the most room for this apparent for the the Asian manufacturers) would almost certainly boost their sales, as would the lowering of their retail prices. What would happen then is that emissions per SUV would decrease, but the number of SUVs on the road would increase, so the net gain in terms of CO2 reductions would be negligible. At this point, it would be the governments' turn to respond again - by tightening the CO2 tax bands and substantially increasing the financial penalties for each grade so that the system once again becomes a deterrent. However, with the assumption that the first-generation punitive tax system will not come into effect until 2008 at the earliest, it would be several years after this that its grades would be reviewed. Again, that takes us to the end of our forecast period, with the conclusion, once more, that drivers will remain willing to pay a premium price for premium vehicles - just as they are now - and that despite the best efforts of various politicians and other detractors of the vehicles, the number of SUVs on our roads is going to carry on rising for many years yet.

SUV Demand compared with Total Market Growth
Click to enlarge

This is an edited version of a report based on a presentation entitled 'New Trends and Issues Impacting the West European Market' given by Global Insight Director of European Automotive Research Nigel Griffiths in Stuttgart, Germany, in October 2004. The full report is available on Global Insight's website. For more details, please contact