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This isn't your daddy's compact car

The next new thing on American roads? Itty-bitty economy cars. After piling into minivans, sport-utility vehicles and even pickup trucks, Japanese automakers are crowding into this corner of the U.S. market.
Nissan Motor Co. unveiled their subcompact 2007 Nissan Versa at the company's technical center in Farmington Hills, Mich., on Sept. 28.Carlos Osorio / AP
/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true">The Washington Post</a

After piling into minivans, sport-utility vehicles and even pickup trucks, Japanese automakers are crowding into yet another corner of the U.S. market -- itty-bitty economy cars.

Japan's Big Three -- Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. -- all have new small cars hitting U.S. showrooms next year. Toyota is bringing out the Yaris, its best-selling model in Europe. Nissan has the Versa. At Detroit's North American International Auto Show, which begins Jan. 8, Honda will unwrap the Fit, another hot seller in Europe and Japan.

Mitsubishi Motors Corp. is also studying options to bring little cars into the United States. At the same time, Korean automakers are improving their offerings -- the Hyundai Accent and the Kia Rio. General Motors Corp. is beefing up its Korean-built Aveo, currently No. 1 in the market segment known as subcompacts. These cars are even smaller than vehicles such as the Toyota Corolla and Honda Civic. They are priced between $10,000 and $14,000 and can get as much as 40 miles per gallon on the highway, in the same league as gas-electric hybrids.

With rising gas prices, consumer interest in smaller vehicles has surged this year, though Americans have gone through all of this before. After the oil shocks of the 1970s, which included gas lines and government rationing, Americans began flirting with the little boxy cars from Toyota and Honda. Lots of consumers stayed loyal to Toyota and Honda.

But once gas prices settled down, many other Americans returned to their big car and truck roots. Minivans took hold and then SUVs, which zoomed ahead into this decade.

Last week, the Energy Department forecast higher gas pump prices into 2025. But industry analysts are not sure if the higher prices have produced a sea change in consumer behavior this time around, either. Based on history, Americans could quickly shrug off subcompacts. Cautiously, the Japanese are planning modest U.S. sales targets and are leaving even smaller cars at home.

Bad news for U.S. manufacturers
However, the subcompact category is a major part of the car business in nearly every part of the world except the United States. In 2004, automakers sold 177,000 subcompacts in the United States, less than 1 percent of the overall market. But U.S. sales so far this year are slightly ahead of last year, and purchases have been held back only by limited choices, analysts say. Masaki Taketani, director of Asian vehicle forecasting at CSM Worldwide Inc. of Farmington Hills, Mich., predicts the market will increase as automakers pile in with new entries. He expects U.S. sales to grow from 185,000 this year to 359,000, or 2 percent of the overall U.S. market, in 2010.

The new wave of Japanese subcompacts hits as GM and Ford Motor Co. struggle with slumps that have led to massive layoffs and several plant closings. Sales of Detroit's larger vehicles -- particularly big SUVs -- have stalled. At the same time, Toyota is gunning to overtake GM's decades-long lead as the world's No. 1 automaker.

U.S. automakers have long operated as if they could take or leave the subcompact end of the car business. Profit margins on large SUVs equal the price tag on many subcompacts. American car buyers have not been that enthusiastic either -- too many kids, too many shopping bags and too much other stuff. For the status-conscious, the cars, which were often offered as hatchbacks, delivered little cachet and zero sex appeal.

But now, they have something else to offer. High gas mileage is part of it. Secondly, everyone in the industry has had time to absorb the lessons of the Mini Cooper.

Mini, purchased by BMW in 1993, was introduced in the United States in 2002 and remains a hit in the market. "The prevailing opinion was that Americans don't like to buy hatchbacks, especially small hatchbacks," said Richard Steinberg, Mini's manager of product strategy. "They were leftovers from the '70s and '80s that screamed 'economy car.' "

A new model
But Mini didn't follow that form, Steinberg said. Mini is much more of a premium automobile than cars of its size typically are. Mini has more sophisticated electrical and rear-suspension systems passed down from BMW. Mini offers multiple air bags as standard equipment, as well as other optional high-tech goodies not usually associated with budget cars, such as navigation systems.

Toyota followed the Mini with its own small-car brand success story when it introduced Scion in summer 2003. To create the Scion -- best known as its Japanese-styled micro SUV -- Toyota plucked two tiny vehicles from the Japanese market to keep costs low just in case the experimental youth brand failed. Because both Mini and Scion are widely popular, dealers keep low inventories and sell them without cash discounts.

The new entries from Japan say goodbye to the days of the bare-bones subcompacts such as the Geo Metro, with their little three-cylinder engines, crank windows, manual door locks and single rear-view mirror.

Toyota is hyping the Yaris's advanced suspension and air-bag options, an audio system with MP3 capability and seats that slide and fold. Toyota has not yet priced the car, which will be featured at the Los Angeles Auto Show next month. Options on the Nissan Versa include satellite radio, an audio system with a subwoofer, side-curtain air bags and an advanced braking system. Starting price for the Versa is $12,000. Until next month's Detroit auto show, Honda is keeping details about the American version of the Fit hush-hush.

The new Japanese entries will go up against the established players in the segment, which include the Hyundai Accent and the Chevrolet Aveo, also on tap for the L.A. show. In anticipation of the new rivals, Hyundai has updated the Accent's powertrain and interior and made multiple air bags standard. GM's new Aveo, which comes out next year, gets a quieter interior and a radio compatible with Apple's iPod.

Jim Campbell, director of Chevrolet passenger car marketing, said the automaker will pitch the Aveo as a small car with big car attitude. "We will be aggressive because we know the competitors are coming," he said.