Thursday, December 17, 2009

New small cars might struggle in market - The Driver's Seat


They're lighter, more stylish and save gas, but market remains limited
By Paul A. Eisenstein
updated 5:38 p.m. MT, Tues., Dec . 15, 2009

After a nearly two-year wait, the public got a good look at Ford Motor Co.’s new small car, the Fiesta, at this month’s Los Angeles Auto Show. Indeed, the floor of Staples Center was filled with a variety of small cars and downsized crossover vehicles.

Ever since fuel prices soared to record highs last year, American consumers have been trading in their gas-guzzling trucks and full-sized cars for smaller, more fuel-efficient vehicles — or, at least that’s the conventional wisdom. In fact, while the small car segment of the market has gained some momentum, though, U.S. motorists have remained stubbornly attached to their pickups, SUVs and larger passenger cars.

So can a new generation of compact and subcompact alternatives move the needle? The jury is out.

“We’re trying to change the mind-set with this car,” says Moray Callum, Ford’s North American design director.

Unlike the company’s stripped-down offerings of the past, such as the no-frills Escort, the Fiesta subcompact is both stylish and sporty. It offers a surprising array of features not normally found at the low end of the U.S. market, including a full complement of airbags, Bluetooth and a high-end, iPod-ready audio system.

In years past, that would have been difficult to justify considering Detroit automakers typically lost money on their smallest offerings. But with Fiesta, “we (had) to bring the global strengths we had as a company” to the project, says Ford President Mark Fields.

The underlying platform for Fiesta was developed as part of a joint venture with Ford’s Japanese affiliate, Mazda. Mazda is using it for a subcompact it’s also just launching in the U.S., the Mazda2 — with final engineering done in Europe. By spreading out development costs and sharing the platform, Ford has been able to improve its economies of scale, allowing it to offer more content for a lower price.

That’s a strategy that has long been used by the Japanese, with products like the Toyota Yaris and Honda Fit, which currently dominate the subcompact segment.

But that latest research suggests that approach might not be enough to shift the market.

“Our research shows that, despite what the U.S. government is telling us, few Americans want to downsize to smaller cars,” says George Peterson, president of the Los Angeles-based consulting firm AutoPacific, “Finding more buyers inclined to purchase smaller cars will not be easy.”

Exactly how much of the market today is made up of small cars depends on who you ask and how they parse their data. Ford claims the segment has grown from about 14 percent of the market in 2004 to almost 22 percent today. But other data show that small car demand has actually slipped since fuel prices hit their peak in July 2008.

AutoPacific says up to 25 percent of American motorists now in the market say they might consider a small car. But "many of those won’t actually wind up buying a small car,” says AutoPacific analyst Stephanie Brinley.

“Americans just aren’t in love with small cars," she says. "They’re seen as econoboxes and not as safe as larger vehicles.”

Of course there are other factors that can influence demand, such as fuel prices. Last year’s run-up to a record $4 a gallon definitely created a change in the market. Looking at the smallest products, minicars and subcompacts, demand surged from 10 percent of U.S. sales at the beginning of 2008 to 17 percent by May of last year.

But even before pump prices hit their peak in July 2008, consumers were shifting their buying habits again, according to a report by consulting firm Experian Automotive. “Consumers have short-term memory,” said Experian’s Jeff Anderson, noting that by the end of last year, the minicar and subcompact segment was back to around 10 percent.

Most experts predict fuel prices eventually will rise again. Former General Motors CEO Fritz Henderson based his company’s product strategy on the expectation that $4-a-gallon gas will become the norm.

But the industry can’t wait for that reality. It faces the challenge of meeting tough new fuel economy mandates from the federal government, which has set a corporate average fuel economy, or CAFE, standard of 35.5 mpg by the middle of the coming decade.

Getting there will require downsizing, according to most industry leaders. But AutoPacific’s Brinley said that message is lost on the typical motorist. “People want technology to solve the problem of fuel economy," she said.

That’s not entirely out of the question. Makers hope to achieve significant mileage gains by adopting lighter materials and new powertrain technologies, such as diesels, hybrids and advanced gasoline systems like Ford's EcoBoost powertrain. But few observers believe that will be enough to achieve new CAFE standards.

The challenge, said Brinley, is to appeal to various buyer groups, such as one that AutoPacific dubs “affluent progressives,” who are more open to shifting their buying patterns.

There are some signs that this can work. The British-made Mini has attracted a core of buyers who normally would never have opted for a small car before. Ford is hoping to achieve something similar with Fiesta by emphasizing both style and fuel economy.

URL: http://www.msnbc.msn.com/id/34432828/ns/business-autos/

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