Betting on small cars...

My friend, Sam, is your classic Texan. Big home, big pool, big personality and, of course, a big car, a Chevrolet Silverado pickup that he uses a couple times a year to haul lumber and yard supplies from the local mega-mart. But most of the time he's sitting in Dallas traffic, running up big gas bills.

And that's got Sam thinking about whether he really needs all that much of a truck. The last couple weeks he's been stopping by the local mega-auto mall – where, as you'd expect, they carry just about every brand of car – looking at a number of alternatives, all of them a lot smaller. A classic Chevy truck fan, he's leaning towards the new Equinox, though he could easily afford something more lavish.

When even Texans are starting to downsize, one has to ask what's going on in the American automotive market. "There is an opportunity in small cars," that General Motors hopes to exploit, says CEO Ed Whitacre, with an assortment of new products such as the pint-sized 2011 Chevrolet Spark. His counterpart at Ford, Alan Mulally, echoes that view, and has ordered up a variety of new models, including the subcompact Fiesta and the next-generation Focus.

Import brands are already invested in the small car segments, with models like the Honda Fit and Toyota Yaris. Even highline makers are downsizing, with offerings such as the Mini and the BMW 1-Series.

In a nation that has long felt that big is better, why is small suddenly beautiful? The first sign that things might be shifting came in mid-2008, when U.S. fuel prices soared to record level triggering, in turn, a collapse in sales of pickups and sport-utility vehicles. The trend was short-lived, however. Even before pump prices started slipping back, small car sales began to wane.

So, why is the industry betting so big on small cars now? For one thing, most expect gasoline prices to reach $4 a gallon in the long-term. Meanwhile, tough new federal fuel economy standards also press the industry to downsize.


Paul A. Eisenstein is Publisher of TheDetroitBureau.com, and a 30-year veteran of the automotive beat. His editorials bring his unique perspective and deep understanding of the auto world to Autoblog readers on a regular basis.


But the products they're bringing to market are decidedly different than the stripped-down econoboxes Americans are used to. The old Ford Escort was "cheap and cheerful," a euphemistic way of saying it didn't have much going for it beyond a low base price and high mileage.

The new Focus is a decidedly different animal. It's stylish, sporty and far better-equipped. That would have been a difficult combination to come up with in the past considering domestic U.S. makers, like Ford, traditionally lost money on their smaller offerings. But Detroit is borrowing a page from the Japanese playbook. The American Focus is all but identical to the model Ford sells globally.

The British-made Mini easily outpaced the overall U.S. market.
"There are regional differences," notes product chief Derrick Kuzak, "but the U.S. version shares 80% of its components with the one we sell in Europe."

GM is taking a similar approach with new models like the Chevrolet Cruze and its pint-sized sibling, the Spark, an approach that can shave perhaps a billion dollars off the cost of developing a new small car. And, notes analyst Jim Hall of 2953 Analytics, it dramatically improves economies of scale.

That, the makers expect, will help them turn a profit even on relatively modest small car volumes – unlike old loss leaders like Ford's Escort. Meanwhile, says Kuzak, customers should also benefit, since lower production costs on globally-based products allow a manufacturer to increase the level of vehicle content and refinement.

While it remains to be seen how new products like the Fiesta and Cruze will fare, there are some positive signs – at least when it comes to one particular small car. Though its sales dropped 16% last year, British-made Mini easily outpaced the overall U.S. market. But what's really significant about the BMW subsidiary is that its premium-priced products break the classic paradigm in which American automobiles have been priced, largely, by the inch and pound.

"The new small cars are transformed vehicles. We've never seen anything like them," acknowledges analyst Hall.

"Americans don't want small cars. They want big cars that get good mileage." – Jim Hall
Trying to interpret the disastrous car market of 2009 is tricky, and raw sales aren't a sound indicator; market share is more revealing. Compact cars, overall, did deliver an increase, but from 19.9% to just 20.6% compared to the year before. The trend wasn't much different when parsed for the segment's smallest offerings, like the Nissan Versa and Honda Fit. And the year was a disaster for Daimler's Smart car brand, whose plunge significantly outpaced the rest of the market.

"Small cars are gaining," cautions Stephanie Brinley, an analyst with AutoPacific, Inc, but not by much. "By 2015, we forecast (their) share to be 21.4%. As a percent of American buyers, there isn't much change."

"Generally speaking," echoes anlyst Hall, "Americans don't want small cars. They want big cars that get good mileage," asserts Hall, predicting, "The real winner will be the manufacturer that can deliver a non-hybrid midsize model that gets 40 miles to the gallon."

That's quite a challenge but not entirely out of the question. The new Hyundai Sonata nips the 35 mpg mark – and without all the technological bells and whistles of, say, the Ford EcoBoost engine. Some engineers believe that 40 is an attainable target, at least on the highway side of the equation.

Nonetheless, smaller cars very well could keep gaining momentum, industry experts believe, especially in the nation's more crowded urban markets – and with younger buyers who are more plugged into global trends.

The latest downsize models are economically more viable, and certainly more appealing than more traditional small cars. And should another huge surge in fuel prices come along, their makers will be better positioned to respond. But, barring that big price hike, it seems that those who think small cars will replace big trucks could find that yet again, conventional wisdom is wrong.



Paul A. Eisenstein is Publisher of TheDetroitBureau.com, and a 30-year veteran of the automotive beat. His editorials bring his unique perspective and deep understanding of the auto world to Autoblog readers on a regular basis.