Small Cars Profitable, Who'da Thunk?

By Bill Visnic July 21, 2011

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With average transaction prices soaring and incentives almost nonexistent, the latest flock of redesigned compact cars is driving a hoary industry adage for a U-turn: It’s starting to look like you can make a profit on small cars, after all. Keenly honed manufacturing efficiencies and a historically favorable currency exchange rate meant Japanese automakers have always managed to turn compact cars into black ink. But the new breed of high-content, high-economy compact cars is placing profitability within reach of the rest of the industry, as U.S. consumers finally seem willing to pay for the privilege of downsizing.

A jobless economic recovery and high gasoline prices have caused a realignment of buyer priorities and almost unprecedented demand for small cars. With a stable of tech- and content-rich new models launching at this opportune time in the demand cycle, automakers are cashing in. According to new data from Edmunds.com, average transaction prices in the compact-car segment have ballooned in the last year by more than $1,300 per vehicle. And various automakers are crowing about extraordinary leaps in the kind of pricing these new-age compact cars command.

The industry-wide compact-car average transaction price of $20,491 in June was an 18-month high compared with $19,263 in January, 2010, and was $1,332 higher than June of last year, according to Edmunds.com data. In both May and June this year, compact-car average transaction prices surpassed the $20,000 plateau and -- short of the bottom falling out of gasoline prices -- it looks like there may be no turning back. Some of the boost in small-car transaction prices likely is attributable to low inventories caused by the March 11 natural disasters in Japan, but there was steady upward pricing trajectory before those events. Buyers seem to be accepting that the feature content, electronic technology and improved fuel economy they seek comes at a price – and appear less concerned that the package is small.

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Even those living under rocks know Hyundai Motor America’s all-new Elantra is one of the market’s hottest tickets. At a media event earlier this month, CEO John Krafcik said the new Elantra is selling for an average of $4,000 more than the previous-generation model. Moreover, Krafcik insinuated profit makes up a large percentage of that $4k the company is reaping on each Elantra sale. Days-to-turn -- the time it takes for the Elantra to sell once it reaches a dealer – was a skimpy seven in June. The next-closest competitor, Ford Motor Co.’s new 2012 Focus, was at 19 days to turn in June; Honda’s Civic took 34 days to turn, Toyota’s Corolla, 55.

In the spring, General Motors Co. said the average transaction price for its all-new Chevrolet Cruze is around $19,000, indicating heavy content levels for a small car. Don Johnson, GM vice president of U.S. sales, pegged the rise in the Cruze’s average transaction price at $4,000 more than the Cobalt that preceded it. Busting the convention that Japanese-brand compact cars always command a price premium compared with domestic models, Johnson said Cruze maintained a premium of about $2,000 compared with Honda Civic (prior to availability of the new 2012 model) and $3,000 more than Toyota’s aging Corolla.

Auto-company executives wishing for increased small-car supply in the U.S. happens about as frequently as an appearance of Hailey’s comet, but with prices reaching new highs and almost no incentives required, compact cars are the auto companies’ new BFFs. “One of the advantages GM has (right now) with the Cruze is availability,” Krafcik said. “I would love to have a 300,000 capacity for the Elantra.” When’s the last time anybody heard that about a compact car?

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