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Ford, rivals betting small is beautiful

Higher fuel prices and the drive to save on production costs have automakers lining up a slew of compact models. But are Americans interested in small cars or do they just want more fuel-efficient SUVs.
Image: Ford Focus
The newly introduced 2011 Ford Focus is displayed during the second press preview day at the 2010 North American International Auto Show at Cobo Center in Detroit.STAN HONDA / AFP - Getty Images

Few products recall the bad old days of American cars like the Ford Escort, a vehicle reviewers would euphemistically refer to as “cheap and cheerful.”

A stripped-down econobox, Escort had just two selling points: its relatively high mileage and its low price.

That formula fit virtually all the small cars sold here over the decades and, with rare exception, subcompact and smaller products were seen as something to be tolerated rather than aspired to. So, why is Ford betting big on the all-new Focus, the latest heir to the old Escort?

At this month’s North American International Auto Show in Detroit, Ford President Mark Fields described the 2011 Focus as a critical shift in direction for the U.S. maker, which sees its future increasingly dominated by small cars, rather than big trucks. And it isn’t alone. Cross-town rival General Motors unleashed an assortment of its own downsized models at the show, from the Korean-made Spark minicar to the long-delayed Cruze sedan. And Chrysler is readying its own offerings, including the U.S. version of parent Fiat’s 500 microcar.

“There is an opportunity in small cars,” that GM hopes to exploit, says the automaker’s Chairman and Acting CEO, Ed Whitacre.

Rising fuel prices certainly feed the interest in small cars. Whitacre’s predecessor, Fritz Henderson, revealed that GM’s operating assumption is that gasoline will eventually level off at somewhere around $4 a gallon and encourage consumers to downsize.

That’s certainly happened in Europe, where motorists now pay as much as $8 a gallon and the Ford Focus is billed as a “family sedan,” rather than an entry-level offering. But the version offered to consumers in London, Paris and Berlin is a far more stylish vehicle, and much more lavishly equipped. Or, at least it has been.

The 2011 Ford Focus is part of the automaker’s new “One Ford” strategy. Rather than develop separate models for each key market — an econobox for North America and a well-outfitted version for Europe — Ford’s product development team turned out a single vehicle for sale around the world.

“There are regional differences,” notes Derrick Kuzak, the Detroit maker’s global product development czar, “but the U.S. version shares 80 percent of its components with the one we sell in Europe.”

That approach can shave perhaps as much as a billion dollars off the price tag for developing a new small car and, notes Jim Hall, an automotive analyst with 2953 Analytics, further reduce the price tag by improving economies of scale.

For shareholders, that has the potential to translate into a profit from a segment that has traditionally been a big money-loser for Detroit. And for consumers, Ford promises a more stylish, sporty and well-equipped model that stands in sharp contrast to Escort’s basic transportation.

Ford, meanwhile, is counting on a broader shift in attitude by motorists whom it believes are growing tired of the classic American mantra, “bigger is better.”

There are some signs of a paradigm shift that isn’t bound to fuel prices and affordability alone. Though its sales dropped 16 percent last year, British-made Mini easily outpaced the overall U.S. market and remains a hopeful sign to those who believe the future will be downsized. Better yet, its products command a premium that breaks the classic paradigm in which American automobiles have been priced, to a large degree, by the inch and pound.

For those who believe SUVs will never go away, Mini is aiming to deliver the best of both worlds, this week unveiling the Countryman crossover that is only a wee bit larger than its original offering, the Mini Cooper.

Yet, for all the hope and aspirations of makers domestic and foreign, not everyone is convinced American motorists really will switch, rather than fight the downsizing trend.

“The new small cars are transformed vehicles. We’ve never seen anything like them,” gapes analyst Hall. That said, his basic assumptions haven’t changed. “Generally speaking, Americans don’t want small cars. They want big cars that get good mileage.”

The real winner, suggests Hall, will be the maker who finds the way to deliver 40 mpg from a non-hybrid midsize model like the Chevrolet Malibu or Toyota Camry, not the one who forces its customers to opt for a significantly smaller product.

What’s happening in the marketplace is unclear; so far, the data are inconclusive. There’s no question that sales of subcompact and smaller products soared during the first half of 2008, as pump prices shot to record levels. But research by Experian Automotive shows demand was already returning to normal by the time fuel costs peaked in July of that year.

As for the disastrous car market of 2009, raw sales aren’t a sound indicator; market share is more revealing. Compact cars, overall, did deliver an increase, but from 19.9 percent to just 20.6 percent compared to the year before. The trend wasn’t much different when parsed for the segment's smallest offerings, like the Nissan Versa and Honda Fit. And the year was a disaster for Daimler’s Smart car brand, whose plunge outpaced the rest of the market.

Ignoring Smart, “These were, all in all, subtle changes,” cautions Stephanie Brinley, an analyst with AutoPacific, Inc. “By 2015, we forecast the Compact Car group to see its share of an overall 15.4 million unit market to be 21.4 percent. As a percent of American buyers, there isn’t much change.”

Factoring in the anticipated slow recovery of the U.S. market, AutoPacific predicts that unit sales of compact and smaller models will increase from 2.6 million in 2008, to just 3.3 million at the mid-decade mark. And AutoPacific research suggests the driving factor is more likely to be the arrival of new, alternative powertrain products, like the Chevrolet Volt plug-in hybrid and the Nissan Leaf battery-electric vehicle.

“Small cars are gaining,” Brinley concludes, “But we are not seeing a dramatic shift. Overwhelmingly, buyers continue to choose the vehicles sized for their needs.”

Does that mean the new Ford Focus, never mind the Chevy Spark and Fiat 500 are doomed to failure? Hardly, analysts like Brinley and Hall caution. They’re economically more viable than past offerings, and certainly more appealing than any more traditional small cars that might remain in showrooms. And should another huge surge in fuel prices come along, their makers will be better positioned to respond.

But, barring that big price hike, it seems that those who buy into the conventional wisdom that small cars are about to replace big SUVs will likely find that yet again, conventional wisdom is wrong.