Time is Right for Small Cars - As Long as Somebody Else is Driving ThemBy Karl Brauer September 22, 2010
You've heard the phrase, "Not in my back yard." It's usually used to extol the virtues of nuclear power plants and halfway houses - righteous things as long as it's somebody else who has to live with them.
The auto industry might have to get ready to adapt the tenet to "Not in my driveway," to apply to the arriving wave of new compact and subcompact cars. The government and its regulators effectively have decreed their increased use. Environmentalists want us to drive them. Even Wall Street's done its best to encourage a little, ah, downsizing.
But unless something drastic happens to make American consumers markedly more altruistic in their vehicle choices, recent history suggests small cars are going to remain a hard sell.
Answering the Call for "Small"
With several all-new or redesigned compact cars entering the market this year and next, along with recent CAFE mandates to achieve 35.5 miles per gallon by 2016, there's more focus on small, fuel-efficient cars than ever before.
The list of all-new, high-profile economy cars launching now or in the next few months include the Chevrolet Cruze, Chevrolet Volt and Chevrolet Spark, Chrysler's Fiat 500, the Ford Fiesta and Ford Focus, the Honda Civic, Hyundai Elantra, the Mazda2, the all-electric Nissan Leaf and the Toyota Scion tC.
Is it an overstatement to say these companies are betting their future on U.S. small car sales, (despite minimal signs of growth in the market)? Some auto execs have used almost those exact words when speaking to us about future product plans. At the very least, these companies must recoup the sizable investments in their new compact cars. They'll need to sell enough of them to help live up to those rising CAFE numbers.
But does any of that matter to the U.S. car shopper? Will this fleet of all-new small cars convince them to change their purchase patterns of the last three decades, or will they shrug and continue buying the biggest, most powerful vehicles they can afford? Small-car sales over the next 12-24 months should answer the question, though history suggests it's an answer automakers, government officials and a number of special-interest groups might not want to hear.
Added together, these models represent billions of dollars in R&D, plant resources and government certification efforts. A few, such as the Cruze, Civic and Focus, will sell in high volumes. But they nonetheless comprise a market segment that has made minimal strides in market share over the past 20 years.
Can The New Generation Of Small Cars Change Everything?
The call for small isn't new. It began with the first oil crisis of 1973 and opened the door for struggling import brands like Honda, Nissan and Toyota. But while small, fuel-efficient models were the foundation of these brands throughout the 1970s, an undeniable trend has taken place over the past few decades. All cars (not just those from U.S. brands) have grown considerably larger and more powerful, while fuel efficiency improvements have been modest at best.
Stable Corporate Average Fuel Economy (CAFE) requirements and (relatively) stable fuel prices over the past 30 years have likely contributed to the physical growth in vehicle size and a corresponding increase in power. Essentially, advances in engine technology allowed carmakers to meet the EPA's longstanding fuel-efficiency requirements (27.5 mpg for cars) while producing ever larger, more powerful models.
Just because technology meant cars could get larger and more powerful over the past 30 years didn't mean they should, right?
Not according to market forces, at least. Bigger cars mean bigger profits, so when it comes to selling large sedans and SUVs or small, fuel-efficient economy cars, automakers always have had an incentive to go big. And although fullsize trucks and SUVs typically are associated with American auto companies, size creep has been the business plan for nearly all automakers - at least for the models they sell in the U.S .
Everything Must Change - Not
Take consistently low fuel prices, advances in drivetrain technology and combine them with automakers' profit motives and these market forces almost inevitably led to larger, more powerful vehicles for a two-decade period from 1985 and 2004.
But starting with Hurricane Katrina in August, 2005, the price of fuel has been anything but stable. The national price fluctuated between $1.70 a gallon at the beginning of 2005 to $4.12 a gallon in July of 2008, with several peaks and valleys in between. It currently sits around $2.68 a gallon and, perhaps to the chagrin of every automaker pushing a new fuel-efficient model, has been relatively stable for nearly two years, prices and demand damped by the recession.
But shouldn't three prior years of big-time price fluctuations convince Americans to abandon their large, gas-guzzling vehicles in favor of smaller, more fuel-efficient models? Our national fixation on gasoline prices (and oil spills) has been higher over the past five years than in the previous three decades.
Shouldn't recent passion and worry about the stability of gasoline prices be reflected in new-vehicle buying patterns? Not really - the majority of consumers are right back to assuming gasoline will always be cheap and continue buying vehicles without much concern about fuel efficiency.
When the price of fuel does spike, it can affect consumer buying behavior, but the impact typically is short-lived. With the exception of the fuel-price spike during the summer of 2008 and the five weeks encompassing the government's Cash for Clunkers program in July and August of 2009, the number of people trading in a larger vehicle for a smaller vehicle has remained within a few percentage points of those trading a smaller vehicle for a larger model.
Even more telling, today the market penetration of large and small vehicles remains almost exactly as it was five years ago. Simply put: there's been no quantifiable or longstanding uptick in U.S. car buyers' demand for smaller, more fuel-efficient models.
And for now, at least, no reason to expect one.
Bill Visnic, AutoObserver senior editor, edited this post.
Data and analysis provided by Edmunds.com analysts Ivan Drury and Jeremy Acevedo.
Mark Holthoff, Edmunds.com manager of customer support, created the graphics
Photos by Manufacturers
1 - The Chevrolet Cruze went on sale in early September. (Photo by GM)
2 - The Ford Fiesta went on sale in June. (Photo by Ford)