May 28, 2014 at 1:00 am

Compact car production could leave U.S. to cut costs


Some automakers may look to shuffle where they build small cars to narrow the difference in manufacturing cost between subcompacts and compacts.

Most compact cars for the U.S. market are built on American soil. Most of the smaller, subcompact cars are built in countries like Mexico where costs are cheaper.

That means automakers can offer significantly better deals on the smaller cars. And it hurts the competitiveness of the largely U.S.-built compact segment, which is more than three times larger and is slightly more profitable than the subcompact segment.

One solution may be for automakers to move production of compact cars from the U.S. to regions where it costs less to build them. U.S. manufacturing lines could then be used to build high-volume mid-size cars and compact crossovers, which better fit Americans’ appetites.

“There’s definitely credence in the notion of the smaller vehicles being built in low-cost locations,” said Jeff Schuster, senior vice president of forecasting at Troy-based market researcher LMC Automotive. “But the story here is about localization and how automakers will re-balance where they build cars to find efficiencies.”

Dave Zuchowski, CEO of Hyundai Motor America, said this month that subcompact cars produced by competitors could hurt sales of the automaker’s compact Elantra, which is built in Alabama. He said if the problem persists, Hyundai could open a plant to build the Elantra in Mexico. Hyundai builds its subcompact Accent in South Korea.

Hyundai is not alone in facing competitive pressures from the subcompact segment.

Ford Motor Co., for instance, plans to move production of its subcompact Fiesta from Mexico to Thailand in 2016. Manufacturing costs in Thailand are comparable to Mexico. By shifting production, Ford can open up the Mexico plant to produce other models.

Fiat in 2015 is slated to move 500 production from Mexico to Poland to open up Mexico manufacturing space for higher-volume models.

Neither company has said it will move production of compact cars to those soon-to-be-vacated Mexico plants.

Eric Ibara, an analyst at Kelley Blue Book, has a prediction about U.S.-built compacts: “I think there will be increasing price pressures which may cause manufacturers to move production elsewhere. It’s a problem that the subcompacts can undercut price of the compacts, so the manufacturers need to be careful with the pricing.”

The growing number of subcompact offerings in the U.S. has limited growth in the compact car segment. In 2009, nine subcompact models were sold in the U.S. Today there are 15.

Subcompacts like the Ford Fiesta, Fiat 500 and Honda Fit are not the “econo-boxes” that consumers remember from decades ago. In fact, a greater percentage of consumers are now going for subcompacts, some of which come with all the options.

The difference in size between a subcompact and a compact is less significant than the difference between and a compact and a mid-size. So is the price difference, which is then magnified because of the higher incentives automakers can offer on the subcompacts.

The compact segment’s stagnation has come even as fuel prices remain constant; consumers are either opting for the cheaper subcompacts or increasingly efficient compact SUVs.

The top five-selling compact cars — the Ford Focus, Hyundai Elantra, Chevrolet Cruze, Honda Civic and Toyota Corolla — all are built in the U.S. Those five models account for about 60 percent of segment sales, which through April have totaled 743,413.

Many of the popular subcompact cars — including the Honda Fit, Ford Fiesta, Kia Rio, Hyundai Accent and Fiat 500 — are assembled outside the country. Chevrolet’s Sonic is built on U.S. soil.

In Mexico, hourly manufacturing costs total about $6.50, according to the U.S. Bureau of Labor Statistics. In the U.S, the rate is more than five times higher, at about $35.50.

Automakers who build their subcompacts in lower-priced labor markets can offer better discounts on those cars than they can on compacts built in the U.S. The average transaction price — or average price paid for a new car — is slowly rising on compacts, while remaining steady and in some instances falling on subcompact cars, according to data compiled by Kelley Blue Book.

“Compacts will continue to move up in price out of necessity,” Ibara said. “The migration upwards is just never-ending, but the manufacturers have to be careful with pricing and contenting to avoid cannibalization.”
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2014 Hyundai Accent (Hyundai)