High Gas Prices Changing Auto Market

DETROIT – High U.S. gasoline prices have not yet dealt a death blow to demand for large sport-utility vehicles, but they are compelling some buyers to switch to smaller, more fuel-efficient cars and SUVs, industry executives and analysts said.

Many executives have long said buying habits would not change until gas hit $3 a gallon. However, with prices hovering near that point and expected to spike again after Hurricane Rita (search), SUV sales are down 7.3 percent this year.

"I don't view it as doomsday," Ford Motor Co. (F) President and Chief Operating Officer Jim Padilla said at the Reuters Autos Summit this week. "Big SUVs are alive and well. All you have to do is go down to Texas and take a look."

Gasoline prices reached a high of $3.06 on September 5 and were recently at $2.75, according to AAA.

"Every time gas prices go up another 20 cents, you know you see some people making a decision based on that," said Paul Taylor, chief economist for National Automobile Dealers Association.

General Motors Corp. (GM) in late August acknowledged it was worried about high gas prices, saying it was not expecting the same growth in the large SUV segment that the industry has seen in the past.

While SUV sales are down, demand this year for crossover vehicles that combine the cargo space and high seating of trucks with the smooth ride and better gas mileage of cars is up 20 percent, and large car sales are up 3 percent.

Some see that trend only picking up steam as Americans suffer from sticker shock at the gas pumps.

"The (large) SUV segment, I predict, will be 25 percent of what it once was in the next 24 months," said Peter DeLorenzo, publisher of the closely watched industry Web site autoextremist.com (http://www.autoextremist.com).

"People are going to abandon (large) SUVs in droves," he added. "We are a faddish nation, from hula hoops to pet rocks and absolutely (large) SUVs were fad and fashion."

Even worse, automakers, especially the U.S. Big 3, face large losses of $3,000 to $6,000 a vehicle as hundreds of thousands of large SUVs go on auction as their leases expire, DeLorenzo said. That could drastically force down prices in the used-car market and even affect what consumers pay for new models.

While Japanese automakers will probably benefit most from the changes in buying habits due to their ability to quickly switch output at plants to smaller vehicles, U.S. automakers have some smaller, fuel-efficient cars, including the Chevrolet HHR (search) and Aveo and the Ford Fusion (search), he said.

Gas prices are already affecting how buyers think, however.

Michael Jackson, chief executive of car dealer AutoNation Inc. (AN), said fuel-efficiency now ranks among the top 10 attributes consumers weigh when buying a vehicle, up from about 16th six months ago.

"Right now a full-size SUV that gets ... 16 miles per gallon doesn't look very good," said David Cole, chairman of the Center for Automotive Research.

To address that, Japan's Mitsubishi Motors Corp. (search) on Wednesday said it would offer U.S. consumers one year's worth of gasoline with its vehicles in a new incentive program.

Ford CEO Bill Ford (search), in a letter Thursday, called on President Bush to convene a group of industry executives, consumer groups, fuel providers, government officials and others to discuss national energy security.

However, executives said gas would need to reach $6 a gallon to have the same psychological effect as the fuel shortages of the 1970s. They don't see the good times and high profits of big SUVs ending any time soon.

"Americans like big," said Jim Press, head of Toyota Motor Corp.'s (search) U.S. operations. "We have big distances to cross. We like large homes. We like big hamburgers. We like supersize. There will always be a proclivity in the marketplace for large vehicles."