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Gas-guzzling SUVs seize green trend, embracing smaller, cleaner engines
July 20, 2011, Wednesday
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SUPER luxury sport utility vehicles are hardly regarded as environmentally friendly. But now that green is all the go in the vehicle industry, that segment is seriously trying to shed its image as a gas-guzzler.
Super luxury SUVs in China are now coming out with energy-saving smaller engines, thanks to the combined efforts of government, technology innovators and customer initiatives.
A super luxury SUV is defined as a sports utility with a starting price above 1 million yuan (US$154,000). That segment accounted for about 20 percent of up-market SUVs sold in 2008, but the ratio declined by half in 2009 following the global financial crisis and a higher consumption tax introduced for heavy-engine vehicles at the end of 2008.
Before 2008, all the models in the segment came equipped with engine displacements of 4.0-liters or above. With all the changes, only about 60 percent of models will fall in that category now.
We believe that ratio will continue to fall in favor of smaller engines.
Land Rover, Lexus and Mercedes-Benz are the key players in the segment. Of their combined sales of 16,600 vehicles last year, Land Rover took a 30 percent market share, followed by Mercedes-Benz with 19 percent and Porsche with 16 percent.
However, both Audi and Porsche are expected to gain market share this year with variations of smaller-engine models.
Both added 3.0-liter V6 variants at the end of 2010 - Audi to its Q7; Porsche to its Cayenne. The Q7 also added a turbo-charged feature. The Cayenne is a hybrid, which adds to its green credentials.
The substantial increase in the consumption tax rate on engines 3.0-liters and above is a direct factor pushing the evolution to greener cars.
For 4.0-liter and above vehicles, the tax rate doubled from 20 percent to 40 percent. It rose from 15 percent to 25 percent for engines between 3.0 liters and 4.0 liters, including 4.0-liter models.
By contrast, a 3.0-liter engine attracts a tax rate of 12 percent.
Demand for larger engines slowed in 2009 because vehicle makers didn't adjust their product mix quickly enough to address the new tax regime. It was difficult for customers to accept a sudden leap in price.
Stricter limits on carbon dioxide emissions implemented by the European Union were another factor driving original equipment manufacturers to adopt smaller engines.
The ultimate EU target is an average emission rate of 120 grams of carbon dioxide per kilometer for all new passenger cars by 2012.
Not surprisingly, smaller volume manufacturers of higher-emissions cars - such as BMW, Mercedes-Benz, Audi and Porsche - are a long way from reaching meeting that target, while some manufacturers of smaller cars - such as Fiat, Renault and Peugeot-Citroen - are already quite close.
This is why it's more urgent for luxury brands to cut their engine sizes and adopt new, greener technologies.
There is no doubt that advanced power train technologies have helped original equipment manufacturers toward the goal of cleaner vehicles.
We see both turbo-charged and hybrid technologies being widely used in the 2011 models of super luxury SUVs.
The BMW X6, VW Toureg and Porsche Cayenne all added hybrid variants. Land Rover chose the cleaner diesel engine, while Audi leveraged its 3.0-liter turbo-charged engine to put out more power, replacing its 4.2-liter V8 engine.
Each original equipment manufacturer is displaying its own technical prowess in fuel efficiency. We have only to look at BMW's Efficient Dynamics, Mercedes-Benz's Blue Efficiency and Volkswagen's Blue Motion to see the trend.
We expect the percentage of turbo-charged and hybrid engines to continue increasing in the luxury SUV segment in coming years.
Environmentally friendly vehicles are more acceptable to customers who care about social responsibility and cleaner air.
Price and lower fuel consumption are two other considerations, but not necessarily the most important. Thanks to the lower consumption tax rate for small engines, the hybrid variant is not more expensive than models with larger engines.
Lower power might be a concern, but it doesn't seem to be a key factor for most consumers. That sentiment could underpin the long-term development of small displacement engines.
Looking forward, we believe the super luxury SUV market will continue growing in double digits in the next four years, supported by a substantial growth in household wealth.
However, its share among up-market SUVs is likely to decrease because we believe the whole luxury SUV segment will mainly be driven by entry-level models amid rising middle-class consumption.
Meanwhile, the government will continue to push the car market toward more eco-friendly, efficient vehicles through taxes or other disincentives.
Original equipment manufacturers will be forced to continue to develop new technologies in order to meet government requirements and market sentiment. Car buyers, we believe, will embrace the change and also be looking for fringe benefits in vehicle models.
Super luxury SUVs in China are now coming out with energy-saving smaller engines, thanks to the combined efforts of government, technology innovators and customer initiatives.
A super luxury SUV is defined as a sports utility with a starting price above 1 million yuan (US$154,000). That segment accounted for about 20 percent of up-market SUVs sold in 2008, but the ratio declined by half in 2009 following the global financial crisis and a higher consumption tax introduced for heavy-engine vehicles at the end of 2008.
Before 2008, all the models in the segment came equipped with engine displacements of 4.0-liters or above. With all the changes, only about 60 percent of models will fall in that category now.
We believe that ratio will continue to fall in favor of smaller engines.
Land Rover, Lexus and Mercedes-Benz are the key players in the segment. Of their combined sales of 16,600 vehicles last year, Land Rover took a 30 percent market share, followed by Mercedes-Benz with 19 percent and Porsche with 16 percent.
However, both Audi and Porsche are expected to gain market share this year with variations of smaller-engine models.
Both added 3.0-liter V6 variants at the end of 2010 - Audi to its Q7; Porsche to its Cayenne. The Q7 also added a turbo-charged feature. The Cayenne is a hybrid, which adds to its green credentials.
The substantial increase in the consumption tax rate on engines 3.0-liters and above is a direct factor pushing the evolution to greener cars.
For 4.0-liter and above vehicles, the tax rate doubled from 20 percent to 40 percent. It rose from 15 percent to 25 percent for engines between 3.0 liters and 4.0 liters, including 4.0-liter models.
By contrast, a 3.0-liter engine attracts a tax rate of 12 percent.
Demand for larger engines slowed in 2009 because vehicle makers didn't adjust their product mix quickly enough to address the new tax regime. It was difficult for customers to accept a sudden leap in price.
Stricter limits on carbon dioxide emissions implemented by the European Union were another factor driving original equipment manufacturers to adopt smaller engines.
The ultimate EU target is an average emission rate of 120 grams of carbon dioxide per kilometer for all new passenger cars by 2012.
Not surprisingly, smaller volume manufacturers of higher-emissions cars - such as BMW, Mercedes-Benz, Audi and Porsche - are a long way from reaching meeting that target, while some manufacturers of smaller cars - such as Fiat, Renault and Peugeot-Citroen - are already quite close.
This is why it's more urgent for luxury brands to cut their engine sizes and adopt new, greener technologies.
There is no doubt that advanced power train technologies have helped original equipment manufacturers toward the goal of cleaner vehicles.
We see both turbo-charged and hybrid technologies being widely used in the 2011 models of super luxury SUVs.
The BMW X6, VW Toureg and Porsche Cayenne all added hybrid variants. Land Rover chose the cleaner diesel engine, while Audi leveraged its 3.0-liter turbo-charged engine to put out more power, replacing its 4.2-liter V8 engine.
Each original equipment manufacturer is displaying its own technical prowess in fuel efficiency. We have only to look at BMW's Efficient Dynamics, Mercedes-Benz's Blue Efficiency and Volkswagen's Blue Motion to see the trend.
We expect the percentage of turbo-charged and hybrid engines to continue increasing in the luxury SUV segment in coming years.
Environmentally friendly vehicles are more acceptable to customers who care about social responsibility and cleaner air.
Price and lower fuel consumption are two other considerations, but not necessarily the most important. Thanks to the lower consumption tax rate for small engines, the hybrid variant is not more expensive than models with larger engines.
Lower power might be a concern, but it doesn't seem to be a key factor for most consumers. That sentiment could underpin the long-term development of small displacement engines.
Looking forward, we believe the super luxury SUV market will continue growing in double digits in the next four years, supported by a substantial growth in household wealth.
However, its share among up-market SUVs is likely to decrease because we believe the whole luxury SUV segment will mainly be driven by entry-level models amid rising middle-class consumption.
Meanwhile, the government will continue to push the car market toward more eco-friendly, efficient vehicles through taxes or other disincentives.
Original equipment manufacturers will be forced to continue to develop new technologies in order to meet government requirements and market sentiment. Car buyers, we believe, will embrace the change and also be looking for fringe benefits in vehicle models.
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