Detroit’s Big 3, Japan diverge on small cars

Posted by hpayne on August 22, 2017

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Los Angeles — Amid a market shift away from sedans to SUVs, major Detroit and Japanese automakers appear to be charting different courses for the future of their entry-level compact-car lines.

Fiat Chrysler Automobiles has stopped production of both its small cars, the Chrysler 200 and Dodge Dart. And The Detroit News has reported that General Motors Co. and Ford Motor Co. are looking to end production of compact cars as they see a fundamental shift to more profitable five-door crossovers.

But while Japanese giants Honda and Toyota have capitalized on the ute craze with hot-selling crossovers like the CR-V and RAV-4, they remain bullish on the future of small cars. Toyota is even expanding it compact offerings, for what it and Honda see as continued demand for cars, especially among young, first-time buyers.

“We established our roots in this market with sedans,” said Jeff Conrad, executive vice president of American Honda, as the Japanese carmaker introduced its refreshed Fit subcompact for media here. “Sedans have always been the mainstay of our business. They continue to do very well. We intend to build sporty, performance-oriented cars, and we think there are a large group of buyers for it.”

The versatile Fit hatchback is getting a mid-cycle update for 2018 even as Ford may quit selling its subcompact Ford Fiesta in the U.S.

“It comes back down to shareholder value,” said Joe McCabe, CEO of AutoForecast Solutions. “If you can push more-profitable crossovers, SUV and trucks, basic math says that you’re going to improve profitability and therefore shareholder value.”

Industry analysts say Detroit automakers don’t find it makes economic sense to build small cars amid changing demand and cheap gas.

“GM is looking at every aspect of its portfolio, and if it’s not making money then they are going to get rid of it,” said AutoPacific auto analyst Dave Sullivan. “There’s no reason pickup truck sales should subsidize low-margin small cars. Dealers don’t want them because they can’t sell.”

Both GM and Ford declined comment, saying they don’t discuss future product plans.

Yet, amid the same market realities and slackened sales for their small cars, Toyota has added two entries this year: the subcompact Yaris iA and compact hatchback Corolla iM. The additions come as Toyota shifted product from its axed Scion youth brand experiment.

The $16,816 Yaris iA sedan gives Toyota a double threat in the subcompact segment along with the tiny Yaris hatchback. Toyota also introduced a subcompact crossover this year, the $23,460 C-HR. Despite its name, the Yaris iA shares little with the Yaris and is built on a different platform shared with the Mazda 2 (that Mazda is not sold in the U.S.).

“You need product across all economic status,” Toyota spokesman Curt McCallister said. “Small cars get our buyers hooked from cradle to grave. If you get them into the family early, then you can keep them on up the family tree.”

Honda’s Conrad echoed that strategy for the $17,065 Fit which has gained a “Sport” trim to take advantage of the subcompact’s inherent handling advantages over taller compact SUVs.

“Seventy percent of Fit buyers are first-time buyers,” he said. “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.”

Last year Fit sold 56,630 units while the HR-V sold 82,041.

Many analysts feel a sense of déjà vu as U.S. automakers retreat from small cars. They remember the early 1980s when Japanese automakers made huge inroads into the U.S. by capitalizing on American demand for small, fuel-efficient cars amid rising gas prices and a dearth of reliable offerings from Detroit’s Big Three.

But Kelley Blue Book auto analyst Karl Brauer said that that was then and this is now. He said that Detroit automakers are correct in assessing a fundamental change to SUVs — and not just because they ride high for better visibility. Compact utility vehicles are filling a niche formerly dominated by small cars.

“The next time an economic shift comes, I think a careful analysis will reveal consumers won’t lose much mpg with modern CUVs,” he said. “Crossovers now are much more car-like in their engines and in their mpg.”

AutoPacific’s Sullivan agrees. He points to the runaway success of Fiat Chrysler’s strategy in producing more small Jeep compact utilities — the compact $18,990 Jeep Renegade and $22,090 Compass have both debuted in the last two years — as the automaker abandoned small cars. Even if gas prices top $4 a gallon as in 2008, he said buyers will stick with compact utilities because they get similar gas mileage as cars. A 4-cylinder Renegade, for example, gets 25 mpg combined city/highway; that nearly matches the fuel economy of Fiat Chrysler’s outgoing, comparably priced 27 mpg Dart sedan.

“Fiat Chrysler doesn’t have small cars? Oh, yes they do,” said Sullivan. “Subcompact crossovers like the Renegade have displaced the small car. Renegade sales are far exceeding Jeep’s expectations.”

Honda’s Conrad still likes to have small cars in his lineup if gas prices rise. “In today’s environment I don’t think people look at CUVs vs. sedans as a fuel economy argument,” he said, echoing auto analysts. “But there are buyers who have seen peaks and valley in gas, so some… want the highest fuel efficiency they can get. Sedans still get better fuel economy.”

KBB’s Brauer said a Big Three abandonment of compact segments could be risky.

“Even if the sedan market doesn’t come back, the Japanese are making a good investment,” he continued. “If you make a good product, customers will come. Companies like Honda and Toyota and Nissan are very good at making cars that sell at high volumes. And that breeds customer loyalty from an early age.”

Honda’s Conrad looks at the market as an endurance race, with Honda’s patience paying off as trends come and go.

“People have abandoned segments for a long time,” he said. “A few years ago a lot of manufacturer sold minivans. How many manufacturers really make a serious run at selling (them) anymore? Not many, but we’re still in it and we sold over 120,000 last year.”

The Fit has also sold steadily, holding on to the No. 3 spot in the segment behind Nissan’s Leaf and Hyundai’s Accent. “We think you need balance in your business,” said Conrad. “People run towards what’s hot — the shiny object — on one side of the ship and abandon something else. Well, we like to keep the ship from listing.”

KBB’s Brauer said that, as the market undergoes a fundamental shift to SUVs, different automakers are taking different approaches: “We’ll find out who did it right.”

 

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