Small Cars Lose Ground In Changing New Car Market

Does it seem to you there are fewer small sedans on the new car market these days? That’s because there are. “Americans are finally figuring out what Europeans have known for years, that hatchback style vehicles are more efficient in space and storage,” says Dave Sullivan, an industry analyst with AutoPacific. “That’s why a Buick Encore (crossover) can sell so well and a Buick Verano (subcompact) does not.”

In 2010, passenger cars were 52% of the market while light trucks and SUVs were 48%. Today, as gas prices have tumbled to historic lows, the new car market for passenger cars is down to only 43% of sales while trucks and SUVs have soared to 57%. Chrysler just announced that it will discontinue the Dodge Dart and the Chrysler 200, as it pumps up production of Jeeps and Dodge Ram trucks. In January, 80% of FCA sales were light trucks and SUVs, the highest percentage in the industry.

How can Chrysler afford to do that? Doesn’t it have to worry about meeting tighter government fuel economy standards?s Actually, those standards encourage  companies to build less fuel efficient vehicles. There is a built in fudge factor called the “footprint adjustment” that lowers the standards for less efficient models but increases it for more efficient models. Translation — the more gas guzzlers you sell, the lower your CAFE number needs to be.

“Each manufacturer has a different target, John Graham, dean of Indiana University’s School of Public and Environmental Affairs, tells the Detroit Free Press. “If you sell more small cars, you have a stricter target.” Tell me this isn’t a government operation. The rules are set up to provide a disincentive to complying with the rules! Beautiful.

Toyota has just announced it is shutting down its Scion small car division. What Scions remain on dealer lots will now be rebadged as Toyotas, which of course they are anyway. Scion had its best year in 2006, when 173,000 were sold. In 2015, Scion moved a mere 56,157 cars.

Will other manufacturers also pare back their small car offerings? Light trucks and SUVs are the most profitable vehicles. Companies often barely break even on small cars. Given a choice, the outcome is obvious. And that sets up a coming conflict between making profits and pleasing regulators.  Chuck Stevens, GM’s chief financial officer, states the dilemma clearly. “We continue to re-evaluate how we deploy capital, where we deploy capital in order to drive appropriate returns across the business. How do you effectively deploy capital in those segments with lower margins like small cars and compact cars?”

The car companies are already pressuring the California Air Resources Board to loosen its highly restrictive mandate that calls for 10% of all cars to be zero emissions in a few years.  In 2017, the National Highway Traffic Safety Administration will seek public comment on whether the fuel economy standard should be revised for model years 2022 through 2025, John Graham says. A decision on whether to change the 54.5 mpg target is expected in early 2018. Of course, by that time, a new president will be sitting in the White House and the membership of the US Congress may have changed significantly after the national elections this November.

Every job in the auto industry creates many more jobs in industries that support it. If the car companies suffer shrinking sales, the national economy will be impacted directly. Will politics play a role in future emissions and fuel economy standards? Oh, you betcha.

“The industry is trying to build what people want while still complying with what the government says they should build,” says AutoPacfic’s Sullivan. “Right now, however, regulator and consumer demands are pulling in opposite directions. Now, if someone wanted to stand up and propose a higher gasoline tax, that gap might be smaller.” Hmm, isn’t that what Obama just did in his new proposed budget?

For electric car advocates, one of the factors holding back the proliferation of EVs is the decision by manufacturers to make most of their electric offerings small sedans — precisely what the public doesn’t want. Tesla is predicting great things for its coming Model 3 but that, too, will be a small sedan. Chevrolet, at least, has made its new Bolt a crossover SUV style vehicle, but even it is barely bigger than the sub-compact Chevy Sonic.

Weight is the issue. Bigger cars need bigger batteries. Bigger batteries mean higher prices. Bob Lutz has gone on record as saying the market for electric cars is “super lousy” right now, mostly because people want larger cars and are not worried about how much they cost to fill up at the pump. Who is going to win the contest between lower emissions and profits? At least for the moment, emissions seem to be losing the battle — and the war.