2007 HONDA FIT
Paul Sancya  /  AP file
Small cars like the 2007 Honda Fit, shown this January at the Detroit Auto Show, could be the next big thing to hit the U.S. auto market.
By Roland Jones Business news editor
msnbc.com
updated 2/3/2006 10:52:32 AM ET 2006-02-03T15:52:32

In the 1960s, when smaller-sized Japanese cars started to arrive on the American automobile market, there were snickers about their inferior quality and lack of styling. The Datsuns and Toyotas were thought to be poorly built compared to American cars, but Americans bought them all the same, warming to their relatively low prices.

How the world has changed since then. These days, big Japanese car names like Toyota, Honda and Nissan are firmly entrenched in the American automobile market, and unlike their American counterparts, their cars are seen as the vanguard of style and good quality.

Now those Japanese carmakers are sniffing an opportunity to bring small, fuel-sipping cars back into the U.S. car market, and given the potential for growth in the segment, not many are snickering.

At last month's North American International Auto Show in Detroit, Honda said it plans to sell about 30,000 of its little Fit car, due here in April, while Nissan showed off its 2007 Versa and the Japanese automaker also reportedly plans to introduce the Cube into the U.S. market — a boxy mini car that bears a striking resemblance to the Scion xB and has been on sale in Japan for several years.

Not to be left out, Toyota, which unveiled its 2007 Yaris subcompact at the 2006 Los Angeles Auto Show, plans to sell about 50,000 when it is released here this spring. Toyota says the Yaris does 34 miles on a gallon of gas in the city and 40 miles on the highway.

Will these small cars sell in the United States? Unlike Europeans, Americans don’t normally like their cars in small sizes, and for its part Detroit’s mantra has always been “bigger is better.” But with gasoline price still high and Americans’ appetites for big, gas-drinking SUVs waning, there are special conditions that might mean smaller cars a big growth opportunity in the U.S., analysts say.

“People are not rushing out and selling their Chevy Suburbans to buy a Scion, but there is some downgrading and a shift in what people are buying,” said Jesse Toprak, executive director of industry analysis for Edmunds.com, an Internet-based resource for consumer automotive information. “There are trends in car-buying and with high gas prices we seem to be at the height of the compact car period — they are desirable right now.”

Toprak points to the latest data on U.S. car sales, which he says are showing a steady trend: Consumers are downshifting into cars and smaller vehicles. U.S. automobile sales data for January, released Wednesday, show continued strong sales of smaller cars he notes. For example, Honda, the fifth-largest U.S. carmaker, said its sales jumped in January because of a 56 percent surge in sales of the redesigned Civic small car, while sales of the Accord, Honda’s top-selling U.S. model, rose almost 10 percent.

Car sales data also show the small car segment growing steadily over the last few years. Total unit sales of compact cars came to 186,731 in January 2006, up from 157,658 in the same month in 2004, according to Edmunds.com. The U.S. market share of compact cars has risen from 14.1 percent to 16.4 percent over the same period, Edmunds.com data also show.

“Growth of 2 percent over two years might not look like much, but that’s a big sales change for a car category,” Toprak said.

Automakers don’t expect to see sales volumes for these pocket-sized automobiles surge, but analysts like Toprak do expect to see their popularity grow, especially among niche segments, like Generation Y — a marketing term used to describe twenty-something consumers. Members of this young demographic group are generally unable to afford bigger cars, Toprak notes, so they crave low-cost cars with plenty of accessories.

“I think these small cars will do very well in the United States,” Toprak said. “We are certainly not going to see big volume sales, maybe a few thousand, but the cars will appeal to people who live in large cities because of their size and ease of use, and the most likely user will be right out of college, and there’s a loyalty issue here too — although consumers are not as loyal to a car company as they used to be, they’ll hope to keep these young consumers when they are ready to upgrade to something better.”

Automobile customization, championed by Toyota’s Scion brand, is also important. Honda’s Fit, for example, includes an Apple iPod music link, and many of these small cars include plenty of other standard features not normally found in a car of this class.

The growth of the small car segment could lure big European car manufacturers, like France’s Renault and Peugeot, into the U.S. market. Tom Purves, CEO of BMW, has reportedly said the compact BMW 1 series will be coming to the United States. BMW already sells the popular Mini Cooper in the U.S.

American car companies are not uninvolved in the small car segment. Ford, which promised to focus more on premium small cars in its recent “Way Forward” restructuring announcement, has championed its Focus model, and at the Detroit Auto Show this year Ford unveiled a compact concept called the Reflex. For its part, GM’s Chevrolet has the Aveo and the HHR.

But it could be a hard one for them to make money in a segment where cars are cheap and the sales volume is relatively small, says Toprak.

“They do have more products out there and understand this is the time for this segment, but these cars don’t make as much money as SUVs and trucks, so it’s a good news, bad news situation. Yes, they are selling more cars, but if the product mix is changing it’s a concern for the bottom line for these automakers,” Toprak said. “A company like Toyota has a better mix of products — they do well in the compact and midsize segments. It’s like a mutual fund with its stocks picked more carefully; there’s a better balance.”

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