America's Next Cars?

For years America imported large cars and let the Europeans and Japanese keep the small ones for themselves. That could be about to change

by Jim Henry

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Why do cars and trucks sold outside the U.S. look and feel so different—even when they are made by U.S. companies?

The answer, as anyone who has recently had the disagreeable experience of buying gasoline in Europe and Japan recently will tell you, is that filling up the tank is so absurdly expensive. As a result, with the exception of some British marques such as Rolls-Royce and Land Rover that continue to display a majestic disregard for fuel efficiency, the bulk of cars in Europe, Japan, and developing automotive markets like India and mainland China tend to be smaller, less powerful, and more multipurpose. They are also far more likely to be diesel-powered, since diesel engines get about 30% more miles per gallon than the same size gasoline engine.

Rising Gas Prices May Bring Minis Home

"That's the biggest difference, between the U.S. market and everywhere else. Here we started complaining when gas went over $2 a gallon. In Europe and Japan, they're paying $7," said John Wolkonowicz, an analyst for Global Insight in Lexington, Mass.

For years European and Japanese carmakers designed larger cars specifically for the U.S. market, keeping the smaller models for domestic consumption. To the extent that the U.S. market starts to more closely resemble those markets—and with oil at a record $80 a barrel, it could—the cars seen outside Sheboygan or Little Rock may one day soon not look that much different from those in Osaka or Ostend.

On the positive side, many models, even those from the overseas divisions of Ford (F) and General Motors (GM), have appealing styling, sharp handling and stopping characteristics, and good safety features for their size. And, in markets with advanced industrial economies, smaller cars come with a high level of standard equipment compared with the Spartan entry-level cars in the U.S. market, albeit at a higher price.

They are also selling well. The European subsidiaries of GM and Ford both reported slightly increased market share year to date through the end of the second quarter of 2007. GM said GM Europe had its best financial results for the quarter since the second quarter of 1996. Its European unit sales were up about 5%, while worldwide sales gained only about 2%. Ford of Europe made $262 million in the second quarter, while North America lost $279 million.

At one extreme, those unfamiliar overseas models include minicars like the Chery QQ from mainland China, or the Nissan Pino from Japan. It's hard to imagine many Americans stuffing themselves into these tiny cars, but some people seem to like the idea. Daimler's (DAI) Smart USA says it has thousands of $99 deposits for its Mercedes-built two-seater, the Smart Fortwo, which goes on sale in the U.S. next year.

At another extreme are cars like the sexy Alfa Romeo 8C Competizione, which proves that fuel-sipping Europeans still know how to have an automotive good time. It is not on sale in the U.S.—nor are any new Alfas, not since the company quit the U.S. market in 1995—but Alfa, which is a subsidiary of Fiat (FIA.MI), is angling for a U.S. comeback, probably starting with the 8C Competizione, around 2009.