Small cars’ decline a return to the norm

Henry Payne, and Nora Naughton
The Detroit News

To paraphrase Mark Twain, reports of the death of small cars have been greatly exaggerated.

Vehicles such as the Cruze rode high in the Chevy portfolio when GM tried to meet demand for fuel-sipping sedans, but that demand has since migrated to utility vehicles such as the Trax, above.

The surging popularity of SUVs — along with news that Chevrolet will ax the subcompact Chevy Sonic and Ford Motor Co. will drop the Ford Fiesta from the U.S. market — has led to speculation that small cars are an endangered species. The moves seem to accelerate a trend started two years ago by Fiat Chrysler Automobiles NV, when production of its two smallest sedans, the Chrysler 200 and Dodge Dart, was discontinued.

“I can tell you right now that both the Chrysler 200 and the Dodge Dart, as great products as they were, were the least financially rewarding enterprises that we’ve carried out inside FCA in the last eight years,” CEO Sergio Marchionne said. “I don’t know one investment that was as bad as these two were.”

But FCA aside, industry executives and analysts say the small car market is actually returning to historical norms after an unusual period when manufacturers expanded small car lineups in anticipation of rising demand fueled by rising gas prices. Those have since eased — and are expected to stay that way.

Over the last two years, the compact car market, traditionally the entry-level segment in the United States, has seen a surge in all-new vehicles, including the 2017 Honda Civic, 2017 Hyundai Elantra, 2017 Chevrolet Cruze, 2018 Toyota Corolla, and 2019 VW Jetta. Add to the list an all-new compact Focus to be assembled in China, which Ford announced last week.

“This has never been a good market for super-small cars,” says veteran Kelley Blue Book auto analyst Karl Brauer. “Gas prices and a sluggish economy helped bring cars like the Smart ForTwo and Fiat 500 to market in the last decade, but now prices have returned to their historic lows in this country.”

Ford, which has produced the subcompact Fiesta overseas since 1976 (sold briefly in the U.S. until 1980), only brought it to the U.S. in 2010 as the economy tanked during the Great Recession and consumers fled to cheaper, sippier cars.

Honda’s Fit came to America just in time for record-high, $4.11 average gas prices in 2008. Since then, Fit sales have dropped nearly 40 percent.

Japanese manufacturers made their mark here 50 years ago with compact cars like Toyota’s Corolla (introduced in 1968) and Honda’s Civic (1973). Like Ford, Toyota did not commit its subcompact Yaris to the U.S. market until 2012, while Honda’s introduction of the subcompact Fit hit American shores just in time for record-high, $4.11 average gas prices in 2008. Since then, Fit sales have dropped nearly 40 percent to just 49,454 last year.

Other foreign manufacturers have never bothered to bring their mini-cars to the rich U.S. market, choosing instead to broaden their SUV offerings and build them increasingly in dedicated U.S. assembly plants.

“Small cars look weird here in the U.S. next to big SUVs,” Jan Dickmann, U.S. boss of small cars for Volkswagen AG, said in an interview with The Detroit News at the seventh-generation Jetta’s media introduction in Durham, N.C. VW has never imported its subcompact Polo or Up into the United States from Europe.

Continued Dickmann: “You’re not feeling safe in a very small car next to a really big pickup. In Europe small cars are driven by (high) gasoline prices and we have a lot of really small villages with really small streets. And we have a different culture in parking. Here you go into a parking lot. In Europe you really have to circle in your small car (to find) a small street space.”

The Jetta sedan, based on the same platform as the Golf hatchback, has long been the best-selling VW in the United States. But the smaller Golf outsells it in Europe. Beginning with the 2019 Jetta, the U.S. will be the only country to which it will export the compact sedan from its Mexico production facility.

General Motors Co. has invested heavily in its core bow-tie brand since the automaker’s 2009 bankruptcy, resulting in a breadth of product today that ranges from the compact, battery-electric Bolt EV to the Silverado pickup and full-size SUVs. Coming out of the bankruptcy, cars like the compact Chevy Cruze were crucial to meet demand for fuel-sipping sedans as consumers scrambled to ditch their gas-guzzlers.

“We were air-freighting engines in to keep up with demand,” Alan Batey, GM’s executive vice president and president of North America, told The News in an interview. “The Cruze eight and a half years ago was the hottest product in our portfolio.”

Cruze and its endangered sibling, the Sonic, aren’t quite as crucial to Chevrolet as they once were. But selling sedans isn’t just about volume and market share, said Steve Majoros, Chevrolet’s marketing director for cars and crossovers.

“If you think about the role cars play in overall full-line manufacturers’ portfolios, these certainly help us with loyalty and conquest,” he said at a dealer event earlier this month in Las Vegas. In addition to offering a wider array of “use cases” in the portfolio, sedans act as ambassadors to the brand.

“Vehicles like Trax have been a great success story for us because a lot of Trax sales come from people who are currently in passenger cars but are migrating through the portfolio,” Majoros said, referring to Chevrolet’s smallest SUV.

The stalling sedan market is forcing automakers to re-evaluate the segment, but that doesn’t always require axing nameplates: GM is cutting yet another shift at its Cruze plant in northeast Ohio, leaving just one shift building Lordstown’s only car.

Chevrolet just announced a mid-cycle refresh of the Cruze earlier this month at a dealer event in Las Vegas, rolling out new trim levels designed to target more lucrative retail buyers. But for now, the company said, the plant won’t continue with two shifts as the sedan market contracts.

“As we look at the market for compact cars in 2018 and beyond, we believe a more stable operating approach to match market demand is a one-shift schedule,” GM said in a statement.

Over the last two years, the compact car market has seen a surge in all-new vehicles, including the 2019 VW Jetta.

Kelley Blue Book’s Brauer says that the next downturn will be unlikely to see much of a shift back to sedans from SUVs because the latter have made enormous gains in fuel efficiency by light-weighting their chassis and adopting smaller engines. For example, Ford’s India-built Ecosport — introduced this year as a small SUV — shares the same 1.0-liter, three-cylinder engine that once motivated the wee Fiesta.

“We would do better to get into a small SUV segment rather than” subcompact cars, said VW’s Dickmann.

Still, there is concern among some analysts that by exiting $15,000 subcompacts (among Detroit-based automakers, only GM’s subcompact Spark will be under $17,000 if reports of the Sonic’s demise are true), automakers risk losing first-time buyers on a budget.

“In the future if you can’t pull in new customers, then they may have to re-address the situation,” muses Brauer.

Honda, for one, has no intention of pulling its $17,000 subcompact Fit hatchback from the U.S. market.

“Seventy percent of Fit buyers are first-time buyers,” Honda’s general manager for North America, Jeff Conrad, told The News last year. “It is critical to bringing youth into the brand. We’re interested in an entry point for cars and trucks. The Fit is that product for cars and H-RV is that for trucks.”

Brauer thinks other manufacturers are taking a wait-and-see approach on Millennial buyer patterns. “There has been a drop in the number of young buyers in recent years,” he says, citing urban trends toward using ride-share services when they are single. “So as they age and get married they might have more money to buy larger vehicles.”