"I was in the headquarters and my predecessor made this decision," said Klaus Maier, the company's China boss. "We were wondering whether we could sell this car."

They shouldn't have worried. Seven years later, SUVs -- from modest Hyundais to gleaming, $500,000 Range Rovers -- are muscling aside smaller cars on China's crowded and chaotic streets.

Chinese consumers bought 2.1 million SUVs last year, up 25.3 percent from 2010 and representing 11.6 percent of light vehicle sales, according to J.D. Power and LMC Automotive. That is about half of the 4.1 million SUVs sold in the United States, where SUVs were 32 percent of the light vehicle market.

The increase in sales illustrates China's car market is maturing, analysts say, and presents another opportunity for foreign makers to expand their presence in China.

Mercedes sold 54,000 SUVs in China last year and the cars accounted for 27 percent of its total China sales in 2011, a nearly two-fold percentage point increase since 2007.

"SUV is certainly the growth segment in China and the manufacturers are on to this," said William Russo, an industry veteran who runs the consultancy firm, Synergistics, in Beijing. "We will see more and more SUVs actually built in China."

In many ways, the Chinese infatuation with gas-guzzling SUVs is an unlikely one. Most car owners live in crowded, urban areas, with few opportunities for the rugged, dirt-road driving that features in car advertisements. But sitting high above the traffic in an expensive off-road vehicle has an appeal in China's status-conscious society, especially for younger buyers.

A CHANGING MARKET

Land Rovers crowd Cao Jinwei's showroom in Beijing where the long-time dealer says he increasingly sells to wealthy, younger customers.

"I could only sell about four or five Land Rovers every month back in 2005, but now I can do nine or 10," said Cao. "Our clients were mostly middle-aged business owners at the time, but now, more and more young professionals, accountants and engineers in their 30s are also buying Land Rovers."

SUV sales also reflect a changing market, according to analysts.

"The Chinese market has now reached a more mature level. The buyers who are coming in are not as much first-time buyers," Russo of Synergistics said. "When you buy your second car, you tend to look for more variety. It's bought for the family. It's bought to do more recreational things. That's a pattern we've seen in many other markets."

Beijing resident Enya Xie ditched her tiny, five-year old Suzuki Swift last summer for a 2.5 liter Subaru Forester, which was three times as expensive.

"I feel safe and cool in an SUV," Xie said. "It can also handle any road condition and take me to anywhere I want to go. Many cars got stuck half way on a slope in a recent camping trip. Only my Subaru and a pickup truck made it."

J.D. Power and LMC statistics show female SUV drivers, mostly young professionals, have been increasing steadily in China, from 14 percent in 2007 to 19 percent in 2011.

"The SUV is expanding its appeal," said Jacob George, managing director of J.D. Power's China operations.

RISING COMPETITION

Mercedes wasn't the first foreign carmaker to try selling SUVs in China. Nearly 20 years ago, Chrysler produced the Jeep Cherokee at its venture with state-owned BAIC, but failed to make any inroads because of quality troubles and its own restructuring. Today American carmakers have a comparatively small share of the market.

Instead, Japanese and Korean makers prevail in the compact segment while German companies dominate the luxury segment.

With an annual tally last year of some 160,000, Honda's (7267.T) CR-V was the best-seller. Nissan's (7201.T) Qashqai, Hyundai's (005380.KS) iX35, Toyota's (7203.T) Highlander, RAV4 and Kia's (000270.KS) Sportage SL also made the top-10 list.

Nissan, which started making the Paladin in China in 2003, saw SUV sales at its China venture surge 48.3 percent year on year in 2011, nearly twice as fast as the industry average.

It added the Murano in September last year to its local lineup, which also includes the X-trail and Qashqai. Toyota, which started localizing SUV production in the same year, is now making Prado, Land Cruiser, RAV4 and Highlander SUVs in China.

Local production can pay off quickly, even for relative latecomers. Volkswagen's (VOWG.DE) Tiguan became the runner-up in the compact segment in 2011, only around 22,000 units shy of front-runner CR-V.

General Motors (GM.N), a leading player in the sedan and mini-van segment in China, has started to make the Buick Encore SUV locally and Ford (F.N) plans to build Kuga and possibly EcoSport SUVs in the country. Chrysler, hoping for a comeback, has pinned its hopes on local assembly of the Jeep Cherokee.

ONE IS NOT ENOUGH

For sales of expensive SUVs to continue on their upward trajectory, dealers will need more people like Chen Yuming, a 32-year old Beijing property developer.

One SUV is not enough for Chen. He has three -- a Porsche Cayenne, Mercedes G55 and GL450 -- and can't wait for the Mercedes G65 to hit the showrooms next year.

Decades of fast economic growth have swelled the ranks of China's rich and those customers are being drawn to European luxury brands.

The luxury segment is growing fast. A total of 285,704 luxury SUVs were sold in the country in 2011, four times the 2009 level. Market share climbed to 13.7 percent from 8.4 percent, J.D. Power and LMC statistics show.

The expansion has drawn European luxury brand makers to add SUVs to their local assembly lines.

Audi, whose Q5 was the frontrunner in the luxury segment last year, will soon make the Q3 at its Changchun plant alongside the Q5, which first hit the market in March 2010.

China-made Mercedes-Benz GLKs and the BMW X1, which rank second and third on the top-seller list, are also racing to make a debut ahead of the Beijing autoshow in April.

Even Lamborghini, better known for sleek supercars than boxy off-road vehicles, plans to announce an SUV at the Beijing autoshow for a 2016 launch, according to people familiar with the strategy.

Mercedes-Benz's Maier says demand has barely been tapped.

"I would assume that this trend will continue," said Maier, who has been at the helm at Mercedes China operations since early 2007. "I can't see an end for the next 10 years, especially for the luxury segment."

(Editing by Don Durfee and Matt Driskill)

• A Permanent Economic Emergency