A little history about North American small cars

There was a nice article in yesterday's Globe & Mail paper about the (mostly failed) attempt of U.S. automakers to enter the small car market in the early 1960's. [article link] A quote from an auto journalist at the time still rings true today; it's taken a recession and high gasoline prices to start to change buying habits, and only slightly.

"Personally I go along with the thinking that America is basically a big-car country with big-car needs. I feel that unless we have a depression of major size or 60 cents a gallon gasoline, the so-called big cars will still grab off 80 per cent of the market.”
-- Tom McCahill, Modern Mechanix (circa 1960)

A tumultuous year: Small never looked so good!

Due to other ventures, this blog has languished to the bottom of my priority list. Perhaps it's fitting given the tumultuous year it has been in the auto business; just keeping up-to-date on the drama of the American Big Three (GM, Chrysler, Ford) would be a challenge, rendering some posts obsolete within days (case in point: the small Pontiac G3: discontinued shortly after being released). After all, this blog is not about mergers, buy-outs, bail-outs, bankruptcies or subsidies: it's about small cars.

Overall, the economic downturn has been good for "small", and not only for cars, but as a general philosophy of frugality, of living more simply. In the car sector, the recession has accomplished what $150 USD/barrel oil, and the resulting high gasoline prices, last year couldn't: people are now actually buying small cars in droves. In Canada, DesRosiers Automotive Consultants showed that by the end of 2008 the market share of sub-compact cars reached 8.7% (of total automobile sales), double the previous year's numbers. It's not a stretch to think that for 2009 the market share will be well into the teens. In the United States, the popular Cash-for-Clunkers program (which was just extended by the U.S. Senate yesterday evening) has propelled the small-ish Ford Focus to a top seller. In the U.K., which has their own scrappage program, it's a small car (the Ford Fiesta) leading the pack as the top car being chosen after trade-ins.

These are exciting times for small car enthusiasts. If this was 1969 again, Honda might have thought twice before dropping the idea of the selling the small 600 here in North America. This time around, I hope companies stop heeding the old stereotypes that imply that we need bulkier, faster, gas guzzlers just because we live on this side of of the world. Let's hope that we the consumers are the ones who are allowed to make a choice from the full spectrum of products, including the small cars available in the rest of the world.

Which ones am I anxiously waiting to test drive? The TH!NK city (a small electric car), the Fiat 500 (just awarded the title of "Best City Car" for 2009 in the U.K.) and the Toyota iQ (a tiny car that's much sexier than the Smart car). Hurry up and bring them over to this side of the Atlantic!

A warning to auto manufacturers that don't take small cars seriously!

I don't mean to pick on GM when it is down (look at that very sad stock chart!), but their situation is so clearly small car related... In fact, I would not be surprised if the course of GM over the last few years becomes a classic case study for future business students.

So what has led to GM's stock price going to below $10, for the first time since the 1950's? They made mistakes on four fronts:

1. Their fleet of vehicles was overly weighted on larger cars and trucks. In a world of increasing environmental awareness and rising oil prices, this lacked any foresight. They simply went with what worked for them in the past, what customers were demanding up to now...
   


2. Not counting sports cars, nor cars like the Vibe, G5 or the Cobalt -- which GM classifies as "small" on its web site, but which are truly low end mid-size cars -- their only true small, fuel-efficient automobile for sale in North America was the hatchback Aveo5. It's a decent car, but the problem is that GM doesn't make any significant profit on it.
   


3. GM's R&D division has churned out the Chevy Volt, a valiant attempt at a smallish, plug-in electric hybrid car. The problem is GM has been dragging it's feet at actually releasing it. Americans would not be able to buy it before 2010, at the earliest. Why has it taken so long? The business acumen of GM headquarters needs to be questioned when we consider that there was a 1998 prototype version of the EV1 (GM's previous electric car prototype from the early 1990's) with a hybrid motor configuration, that had four seats (unlike the first EV1, which only seated two), and the same all-electric range of 60 km as the Volt. In contrast to the current Volt, this car was actually a running prototype. Not to mention that the turbine could run on many fuels, from gasoline to compressed natural gas. 10 years onward and they're still at the prototype stage, possibly even one step behind where they were in 1998.
   


4. GM's factories are not as flexible as those of some of its competitors (e.g., Toyota); they are extremely model-specific. So, even if GM had a larger offering of smaller cars, or if they decided to massively push the Aveos, it would take them over a year and hundreds of millions of dollars to retrofit existing plants.

For now, GM is burning through over a billion dollars a month. We'll see what the geniuses at the top come up with now. Bankruptcy is more than just "not impossible" (quoting Merrill Lynch analyst John Murphy in his statement today), in my opinion, it's getting increasingly likely every day. The best case scenario for them right now would be for a white knight firm to come buy them out and force their hand at making the tough, yet obvious, decision to "go small".

A sign of things to come?

GM just announced this morning that they will be closing 4 truck production plants, including the one in Oshawa, here in Canada. In addition, some SUV plants will also be shut down. Full details are available in the news release placed online just over an hour ago. Perhaps we could finally be seeing a peak in large vehicle sales in the U.S., eventually to be overtaken by smaller cars. Here in Canada, small cars already appear to be on track to passing larger vehicles (see related post here).

The news release also mentions that GM is definitely going ahead with their electric vehicle (the Volt), with a target of having it in showrooms in the United States by 2010.

Fiat to go micro in 2009 and green by 2012

In an interview last week with Automotive News Europe, Fiat CEO Sergio Marchionne mentioned that the company is hoping to sell its first microcar by 2009. It's a "true beauty," said Marchionne. We can speculate that it might look quite a bit like the concept microcar that Fiat presented to the world in 2005, pictured here. Perhaps they can call it the "Piccolo" (italian for small), but more likely it will end up being a variation on the Panda, their current (slightly ugly) almost-micro car.

Fiat has been having great success with its updated version of the Fiat 500, the Fiat Nuova 500; it's selling very briskly in Europe and is garnering many awards, including the prestigious EuroCarBody 2007 and the European Car of the Year 2008. It would appear that this success is giving Fiat confidence to go even smaller... Roughly 30 centimeters smaller to be precise (to get into the microcar category).

In the same interview, Marchionne asserted that "Fiat will be the carmaker with the lowest average emissions in 2012," and that they "do not need hybrids to get there." To all the hybrid devotees out there (yes, it almost seems like a religion these days), this must sound scandalous. But it's actually quite simple; going with increasingly smaller cars is likely the way they are going to achieve this goal. Perhaps he was reading my post from March...

Slowdown in new car sales is slower than trucks

Following up on my last post, although I wasn't able to find the data for small cars specifically (for now, it seems that all sales data that is publicly reported in Canada lumps all car sizes into one "passenger cars" category; this needs to change!), there do seem to be some noticeable divergence in car sales vs. truck/SUV sales in Canada. In the last Statistics Canada New Motor Vehicle Sales report published November 15th, we find that 4% less passenger cars sold in September 2007 than a year before. In the same period, trucks and sport utility vehicle sales declined 5.2%. Canadians were buying less new vehicles, but the slowdown was more acute for bigger vehicles. This is consistent with the anecdotal reports I've heard of increasing sales of small and economy cars; my suspicion is that the passenger car data is being buoyed by this segment.

Interestingly, the slight positive lead in growth (if you want to call a slower slowdown a "lead", at least for September) for cars has only been evident back to July 2007. Before that, for a solid year, and generally prior to that, the truck and SUVs category was the one growing faster in Canada. It would seem that the Canadian addiction to larger vehicles is only barely starting to fade. Let's hope we don't fall off the wagon...

Sales of the smallest of cars are growing fast

But still not as fast as small SUVs. This chart, from the seattlepi.com, is for the U.S. I wonder if, in Canada, the small cars might have started to outpace the growth of the ever-popular SUVs. I'll try to find out...

ChryslerDaimler is interested in small cars after all

Looks like Chrysler is smartening up. They have decided to go after the small car market after all. Albeit by partnering with a Chinese company who only pays its employees up to a whole $2 (USD) a day; looks like building a higher fuel efficiency compact automobile is not the only "efficiency" they have in mind. And, yes, Chery is the same company GM complained, not so long ago, that it had a deceptively confusing, trademark-infringing, name. Potential entrepreneurs take note, choosing a deceptively similar product or company name could eventually land you a large deal, or a partnership... with the the copyee's competitor.

Today's announcement:

PRESS RELEASE: Auburn Hills, Mich./Stuttgart, Germany, Feb 27, 2007 - The DaimlerChrysler Supervisory Board today approved the framework of a limited partnership to develop small vehicles between the Chrysler Group and Chery Motor Company of China. The deal is still contingent upon approval by the Chinese government, but the final pact of the framework is expected to be signed by the end of March. Under the non-equity partnership, Chery-built vehicles will be distributed under Chrysler brands, primarily in North America and Western Europe. Chrysler Group indicated that the partnership would allow the company to become a bigger player on the global automotive stage by giving it access to products in new segments more quickly, with less capital spending.

Small vehicles such as these will allow Chrysler Group brands to compete in segments in which the brands do not currently compete, and which are especially important in price- and fuel-economy sensitive markets. Some 67 percent of all vehicles sold outside of North America are in these segments. Chrysler Group’s major competitors in the U.S. and Western Europe have similar arrangements with Asian manufacturers for vehicles in these segments.

Chrysler: The canary in the "big car" coal mine?

This week DaimlerChrysler announced some pretty significant job cuts. The affected plants are located in Michigan, Ohio, Indiana, and Ontario -- speficially, those involved in the production of sport utility vehicles, pickup trucks, and other large vehicles. These types of vehicles, we're told by DaimlerChrysler, are just not selling as well as they used to. This is certainly not just a Chrysler-specific phenomenon. Rather, it is early evidence of the eventual move towards smaller vehicles in North America. Although the general public is not clamoring for small cars quite yet, there is an unmistakable trend towards higher fuel efficiency. This the first step. Unfortunaely for Chrysler, they are not very well positioned for the "small" future -- their smallest vehicle available is the PT Cruiser -- perhaps destining them to be just a small player in the auto field. There is currently a lot of buzz around about Daimler spinning off Chrysler, and business news headlines are filled with talk of potential buyouts or mergers (particular with GM). If I were a potential suitor looking at Chrysler, I would only value it as a future niche player; they are pretty good at making "pimp-mobiles" after all, such as the Chrysler 300 that's still a hot item in the hip-hop world.

Economic myths about small cars

We (I'm including you, the loyal reader of the small car blog) are not the only ones lamenting the lack of small car options in Canada or the U.S. Is it a conspiracy? Not likely. It's primarily a matter of lack of demand. Although we North Americans do follow the trend of lusting after smaller cell phones, smaller cameras, smaller computers (Although I'm starting to doubt this last one. Have you seen the size of laptops these days? Forget portability, big wide screens are what the masses want apparently.) we buck the world trend when it comes to cars. Mr. John Smith wants his car big; Ms. Jane Doe wants her car to be higher up for a better view and more security. So the car makers (North American for not making them, Foreign for not importing them here) are not totally to blame. It's a culture thing. But we all know that clever marketing (aka. brain washing) can change the psychology of our wants and needs within a generation, heck even less than a decade (my commute to work is 10 minutes, I can't listen to music at work, I have a great stereo at home... why is it that I need an iPod again??)...

But wait! (I hear you economists rumbling out there...) Even if there was a demand for small cars, wouldn't the margins be too low to be worth the while of any manufacturer? Perhaps. But consider this:

First myth: Small cars, small profits. That's the thinking, but great car companies have been built on small cars. The Model T was pretty small and low-priced at times--$500, or some $7,500 today--and it made Henry Ford one of he richest men in the world. Volkswagen came out of the rubble of World War II with a small car, the Beetle, and grew into a world power. Toyota and Honda built their empires on small-car profits. Ford did quite well with its Escorts not too long ago, too. Small cars can make money.

Second myth: Wages here are too high for small cars. VW, Ford and Opel (German GM) make small cars in Germany, where wages are high. That Model T was built by very high priced labor: $5 a day.

-- Excerpt from "The Plot Against Small Cars" in the latest issue of Forbes (if you have a subscription, you can view the article here).

Convinced yet? Anyone want to try to get rich? You need a great psychology-altering marketing campaign, oh yes, and a great car to sell...

Will Ford make a new small car?

Yes, there is the 2007 Ford Focus, but only the 3-door hatchback (formerly known as the ZX3) could be considered a borderline small automobile (it is longer than 4 meters). So, are there any plans for anoter small car in the North American Ford lineup? I suppose they could just bring back the Fiesta, which is actually doing quite well in Europe (sales of the Fiesta in the first three quarters of 2006 were up 8.5% over the same period in 2005). But what about something new? Probably not any time soon:

"We have decided to keep away from entering the [very] small car market." -- Ford India's Vice-President for Marketing and Sales, Mr Scott McCormack (in an interview on 2006.10.13 with the indian Business Line newspaper)

Reading the rest of the interview, one gets the impression that Ford doesn't see much future in small cars; they seem to have decided that the profit margins in this segment are too low to be interesting. Margins or not, it seems short-sighted not to have at least some model in the development pipeline. With fuel prices going nowhere but up in the future, Ford's emphasis on big vehicles (SUVs, trucks, excessively large sedans) might put the company further behind than they currently are.