Small cars make big gains in United States market

Raye is one of a growing number of buyers hopping into small cars. U.S. sales of subcompacts such as the Fit and compacts such as the Honda Civic reached a record 2.7 million in 2006, according to George Pipas, Ford Motor Co.’s top sales analyst. Small-car sales are expected to set a new record this year despite an overall weakening in the U.S. auto market.

“The things that have fueled the growth of these (small) cars are really not going away: Gas prices, the housing market, the fashion aspect of these cars,” said Jesse Toprak, senior analyst for the Edmunds.com automotive Web site. “The segment is really hitting at the right time.”

The boom has left some automakers scrambling. Foreign automakers control 76 percent of the U.S. small-car market, Pipas said, a sobering statistic for Detroit since small cars help capture young buyers and keep them for life.

The Toyota Yaris was the best-selling subcompact in the first seven months of this year, while the Toyota Corolla was the most popular compact car, according to Autodata Corp. The Chevrolet Aveo is the only domestic subcompact in the U.S. market right now.

“Your share of the small-car market predicts your later share,” Pipas said.

Chrysler LLC recently announced it will develop a small car with China’s biggest automaker, Chery, that will be exported to North America in 2010. Ford, which sells subcompacts outside the United States, will unveil a concept car next month at the Frankfurt Motor Show that likely will be the basis for a global subcompact that will come to the U.S. market by 2010. General Motors Corp. plans to bring a redesigned Aveo hatchback to North America in June, spokeswoman Nancy Libby said.

U.S. automakers have historically given short shrift to small cars because of their weak margins. With a starting price of US$10,000 to US$15,000, small cars can’t give automakers the kind of five-digit profits they can get from a fully loaded sport utility vehicle.

But Laurie Harbour-Felax, managing director of Stout Risius Ross, a financial and operational advisory firm, said Honda and Toyota Motor Corp. showed the industry how to make money off small cars. Both Japanese companies use common platforms and parts on a wide variety of vehicles, Harbour-Felax said.

For example, every Toyota and Lexus vehicle in the world might have the same horn, so the company can save money by having one supplier make 9 million horns.

“That is not something the domestics have traditionally done very well,” she said.

Libby wouldn’t say whether GM makes a profit on the Aveo, but said GM intends to make money on every product it sells. Toprak said most automakers probably break even on their subcompacts.

Toprak said there’s another reason automakers need to have small cars in their lineup: Government fuel economy standards. Small cars help automakers bring down their fleetwide fuel average, balancing big fuel guzzlers like SUVs. That’s a hot issue now that Congress is debating an increase in fuel economy standards.

High fuel prices have prompted much of the shift to small cars, but they now are safer and have far more style than in the past, said Aaron Bragman, an auto industry analyst with the consulting firm Global Insight.

BMW’s Mini showed that small cars can have deluxe features despite being tiny, he said.

“The Mini was not cheap. That started people thinking that size doesn’t necessarily equate to how good something is,” Bragman said.

Now competitors have upgraded small-car interiors and safety systems, and U.S. buyers are responding because the cars are far safer than their predecessors, he said.

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