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Will the SUV Boom Go Bust in 2015?

By John Rosevear - Jan 4, 2015 at 12:02PM

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Soaring SUV sales helped drive big gains for automakers in 2014. Can that trend continue -- or is another SUV bust likely?

The Jeep Cherokee, new last year, has powered the venerable SUV brand to a huge sales gain in 2014. Source: Fiat Chrysler.

It was one of the biggest automotive stories of 2014. But will the recent SUV boom continue in 2015?

A decade ago, small SUVs accounted for just 1 in 20 vehicles sold in the U.S. -- but now the number is 1 in 9, according to The New York Times. It's now the fourth-largest category of vehicles by sales, after big pickups, mid-size sedans, and compact cars. 

It's enough to bring back memories of the SUV boom we saw last decade. Of course, that boom turned to bust as soon as gas prices started to rise, with catastrophic consequences for the Detroit automakers.

So, is this new boom sustainable? Or are automakers setting themselves up to get burned once again?

Big sales gains for small SUVs in 2014
You don't have to look too deeply into the numbers to see the evidence that SUV sales have taken off -- particularly sales of compact SUVs. Sales of Toyota's RAV4 rose 24% through November, and those of Nissan's Rogue grew 25%. 

And despite some early quality glitches, Fiat Chrysler's (FCAU) new Jeep Cherokee has been on fire, helping drive America's all-SUV brand to a 44% gain this year through November.

Sales of Toyota's compact RAV4 crossover have been very strong this year. Source: Toyota.

Why are SUV sales on fire? According to Larry Dominique, executive vice president of online car-shopping service TrueCar, it's because SUVs themselves have changed -- and the latest models have hit a sweet spot in the market.

Unlike most of the SUVs that were popular a decade ago, which were built on pickup-truck frames, today's SUVs are based on architectures developed for cars (this is why they're often called "crossovers"). That means crossover SUVs drive more like cars than trucks, and they get more car-like fuel efficiency than the heavier SUVs of decades past. 

But the new models still offer much of the space and flexibility that made those older models appealing to so many buyers.

A "no-compromise solution" is winning over car buyers
Dominique thinks that with crossovers, automakers have finally hit on a package that represents the best of all worlds.

"They're essentially a no-compromise solution" that fits the needs of many consumers, Dominique said. 

It's not just compact SUVs that have changed; many of the bigger SUVs have evolved, too. A decade ago, Ford's (F 0.23%) popular midsize Explorer SUV was built on a truck frame, with many underpinnings shared with the company's Ranger pickup. 

Ford's Explorer has changed a lot over the last decade, but it remains a popular and profitable product. Source: Ford Motor Company.

Today's Explorer is still popular, but it's very different: Its architecture isn't taken from a truck, it's derived from Ford's Taurus sedan. Likewise, the white-hot Jeep Cherokee is named for a truck-based SUV from the past that is held in high regard by enthusiasts -- but the current Cherokee is a mechanical sibling of the Dodge Dart and Chrysler 200 sedans.

Like its decade-old namesake, the current Explorer is still a very profitable product for Ford. It doesn't cost much more to build than a Taurus, but it can be priced higher. But unlike that old Explorer, its fuel efficiency and ride quality are much more like a car's than a pickup's.

More of the things people like about SUVs, with fewer downsides
That doesn't mean that crossovers don't offer any of the old SUVs' advantages. More advanced all-wheel-drive systems mean the new car-based SUVs can offer a lot of the bad-weather and off-road capability that buyers valued in the truck-based SUVs of old. 

And modern high-tech engines like Ford's turbocharged "EcoBoost" line allow these new crossovers to offer big-engine power for towing when needed -- with smaller-engine fuel economy under less demanding conditions.

The styling of BMW's X5 is much less truck-like than the SUVs of 10 to 15 years ago. Source: BMW.

Dominique also pointed out that today's crossovers are simply more attractive than the SUVs of old, too. Models like the Explorer and BMW's X5 are good-looking vehicles in their own rights, not just "OK, for a truck." That's important: Many customers don't want to drive a "truck" -- they want a good-looking car that happens to have some "truck" capabilities.

And lots of buyers are moving from cars to crossovers. Dominque pointed out that Honda's compact CR-V crossover actually outsold the brand's mainstay Accord sedan in October, a trend repeated again in November's results. For the year to date, it has outsold the compact Civic -- not a surprise in a year that has seen small SUVs from many makers gain ground at their compact cars' expense.

Even smaller SUVs are coming to dealers
More small SUVs are on their way to dealers in 2015, as several automakers bet that this trend will continue for a while. Honda will try to build on the CR-V's success with its new one-size smaller HR-V. General Motors' new Chevrolet Trax, a small (but surprisingly roomy) new crossover, has recently started arriving at dealers. And Jeep is rolling out its own small SUV, the made-in-Italy Renegade.

Like the Trax and HR-V, the new Renegade was originally designed for markets in other parts of the world. In the Jeep's case, the Renegade's main mission is to introduce the Jeep brand to (hopefully young) new buyers in places like China and Europe. 

Long story short: Automakers are betting that this boom has staying power, and that may be a good bet -- not least because the fuel efficiency of today's crossover SUVs means that a bust is unlikely, even if gas prices head skyward again.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends BMW, Ford, and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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