Editorial: Event Horizon For Compact Crossovers

Wednesday, August 14, 2013

Editorial: Event Horizon For Compact Crossovers

Normally this is something I would have saved for our "TTAC Staff" news items, but I'm the arrival of the Mercedes-Benz GLA is significant. We've reached the event horizon for compact crossovers and their global proliferation.

There's long been a dichotomy in North America regarding SUVs and station wagons. Ask a certain group of car enthusiast and they'll tell you that Americans, in their profligacy and pig-headedness, preferred wasteful, dynamically unsatisfying SUVs built on archaic ladder-frame truck underpinnings, or worse, crossovers, which had all the drawbacks of both cars and trucks. According to our wagon evangelists, Europhiles and tenured academics (oftentimes the three intersected), Europeans were wiser in preferring more efficient, car-based station wagons, which were more European and therefore superior to two-box vehicles with taller ride heights.

The past two years have turned that notion on its head. Buyers from Amsterdam to Mumbai to Zaragoza have been flocking to compact crossovers like the Opel Mokka and Dacia Duster, while those who have been less hard hit by the Eurozone crisis are flocking to the Audi Q3 and BMW X1. Even in emerging markets like Brazil, small crossovers are in demand (click here for Marcelo's definitive explanation of why these vehicles are so well suited for developing countries). It turns out that a raised driving position, higher ride height and SUV-like styling have resonated with consumers the world over. A list of France's top-selling crossovers shows that 9 of the top 10 sellers are available in North America as well as Europe.

Products like the Mokka, Duster, the Renault Captur and VW Tiguan are all first-generation vehicles, and the segment itself is one of the few bright spots in a dismal European car market. There is plenty of room for growth too. The Nissan Qashqai, credited with inventing the segment in outside North America, has only been on sale since 2007, but its instant success has meant that nearly every brand is readying a competitor for the Qashqai or the smaller, B-segment Juke, for sale in the next couple years.

Beyond Europe, these vehicles are also gaining ground in global markets like the BRIC countries, Australia and even America, where Buick can't keep enough rebadged Mokkas (dubbed the Encore) on dealer lots. Globally, Range Rover's Evoque has been an unprecedented success, with Jaguar Land Rover unable to meet demand despite building the cars literally 24 hours a day.

Consumers aside, small crossovers are a profitable proposition for car makers as well. The Encore and Mokka share the Gamma II platform with more modest offerings like the Chevrolet Spin (a low cost minivan built in Indonesia and Brazil) and the Sonic subcompact in North America and Australia. While a Sonic can cost just over $14,000, an Encore's base price is roughly $10,000 more. And one look at an Encore will reveal that the two cars aren't terribly different both inside and out (even sharing the same 1.4: turbocharged powertrain).

For luxury car makers like Mercedes-Benz, which is introducing a new compact front-wheel drive architecture, the GLA will serve a similar purpose as the higher margin version of a premium compact sedan. Crucially for Mercedes, it will finally have something to compete against the Audi A3 and BMW X1, rather than letting its two rivals gobble up market share. While BMW continues to build the X1 in Germany, Audi and Mercedes have chosen lower cost production sites like Spain and Mexico (for Audi) and Hungary (for Mercedes) which can help maintain profit margins while also keeping assembly costs down.

The success of these vehicles mean that these vehicles aren't going anywhere, and current conditions will only help entrench them further. Consumer tastes, the need for ever greater economies of scale through increased volume and utilizing of existing platforms. The enhanced potential for profit through these vehicles means that auto makers will be doing all they can to sell them worldwide. They also provide a regulatory boost for many OEMs when it comes to CAFE or Euro emissions regulations, as the smaller, more-efficient compact crossovers offset less efficient luxury and performance vehicles.

Luckily, wagons aren't going anywhere, especially outside North America. But compact crossovers are here to stay. And I was totally wrong about them.