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Carmakers bet big on mini-cars

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Carmakers bet big on mini-cars

New products will challenge American ideas about vehicles

Alisa Priddle / The Detroit News

High-profile micro and subcompact cars are poised to change the American automotive landscape over the next few years -- if consumers accept the size and price of a raft of new offerings.

Ford Motor Co. dealers are selling Fiestas as fast as they can get them; Chrysler Group LLC is generating buzz about the tiny Fiat 500 coming in December; and General Motors Co. has a new Chevrolet Aveo on deck for next year, followed by the even-smaller Chevy Spark in 2012.

Automakers hope these newcomers will change the American attitude that bigger is better.

The downsizing is crucial: Carmakers need to sell a lot of fuel-efficient small cars to meet stringent new corporate average fuel economy standards in 2016.

Car companies are taking pains to spread the message that their little cars have many of the amenities of larger vehicles, meet all safety requirements and offer enough value to warrant pricing ranging from a penny-pinching $10,000 to $30,000.

"Consumers are being asked to buy a smaller car and potentially pay more for it," said Rebecca Lindland, director of industry research for IHS Automotive in Lexington, Mass.

Years ago, the smallest car for sale in the United States was a compact, or C-segment, car such as the Chevrolet Cobalt.

Then subcompacts, or B-segment cars, entered the scene, including the Aveo, Honda Fit and Mini Cooper. Today, there are at least nine competitors, including the new Fiesta, Mazda 2 and expanding Mini and Scion lineups.

The B-segment now accounts for about 300,000 sales annually in the U.S. but is forecast to grow to 500,000 next year and 850,000 by 2015 with the addition of a Dodge, the Alfa Romeo MiTo, Volkswagen Polo and Mitsubishi Colt, Lindland said.

Americans got their first taste of a micro car, or A-segment, with the tiny Smart from Mercedes-Benz in 2008. It will be joined by the Fiat 500 in December, the Scion iQ in March and the Spark in 2012, to name a few.

"This segment is a little bit scary and truly uncharted territory," said Lindland, noting A-segment sales went from nothing in 2007, peaked at 24,600 in 2008 and have fallen ever since.

The IHS forecast is for 140,000 vehicles next year.

"It is where the growth area is, but is still a small percent of the market," said analyst Stephanie Brinley of EMC Strategic Communications in Troy.

Combined, the micros and subcompacts account for only 3 percent of U.S. sales. But with so many new entries, volumes are expected to grow.

"The A and B segments will sell -- they have to," said John Sousanis, director of information content at WardsAuto.com in Southfield. "Manufacturers have too much invested in these cars, which obviously play a large role in their strategies for meeting new fuel economy standards."

"Everyone will feel compelled to compete in these segments sooner or later," Sousanis said.

Most automakers make small cars for other parts of the world and there is growing pressure to offer them in North America, too.

The business case allows them to make money because cost is spread across higher global volumes, Lindland said.

And today's smallest cars are fetching high prices.

The average transaction price of the Fiesta is higher than many of Ford's compact cars, said Ford sales analyst George Pipas. Early sales data shows almost two-thirds of buyers are opting for the more-expensive hatchback; 80 percent are adding Sync entertainment and communications system; and the bulk of buyers are either affluent young people or baby boomers who are downsizing but unwilling to give up creature comforts.

Lou Stanford, owner of Varsity Ford in Ann Arbor, is selling Fiestas as fast as they come in.

"I think I could sell 50 a month but I'm only getting 20 or 25. Every dealer only has a couple at any time on their lot," he said.

The Fiesta is spacious up front, but there is little room in the back seat and trunk, Stanford said. But neither the size nor price -- $14,000 to $20,000 -- has customers balking.

"Those who come in know how small a subcompact is. It's the size they want coming in," he said.

Continued viability of the cars will depend on gas prices and economic factors such as youth employment, said Michael Robinet of IHS in Northville.

In part, that's because demand did not originate from a public clamoring for smaller cars.

"Policy and regulations are dictating what automakers bring out, rather than consumer demand," Lindland said.

That, the analysts say, can be a bad recipe.

"If gas prices go to $4 a gallon or above, the segment will sell itself," Sousanis said.

Automakers will maintain their profit margins by competing on performance and amenities, not just fuel economy. But if gas prices stay at around $3 or below, companies will have to compete on price -- which likely means incentives, and they could start removing standard features to maintain profits.

And "the marketing folks will be busy trying to figure out ways to get people to pay more for smaller vehicles," Robinet said.

Size matters too, because some consumers will remain skeptical that small cars can be safe cars, Brinley said. "The deep-seated fear of small cars will be difficult to overcome, but it will happen in time."

And their popularity will be highest in larger cities and areas with greater congestion and environmental concerns.

"They will change the landscape over time," Brinley said.

From The Detroit News: http://detnews.com/article/20100920/AUTO01/9200331/1148/auto01/Carmakers-bet-big-on-mini-cars#ixzz106USYUkd

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