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Compacts and subcompacts are up 40% in 2008. But in the long run, more than size will matter
American car buyers are quickly shifting to much smaller, more fuel-efficient models. But according to studies of initial quality done by J.D. Power & Associates, buyers aren't targeting just high fuel economy. Close behind gas mileage is a desire for reliability, followed narrowly by workmanship. If you don't believe the studies, the proof is in the high-mileage cars that are the hottest, and those that are laggards.
Here's a list of 18 sub-$20,000 compacts and subcompacts (save the Toyota Prius (BusinessWeek.com, 6/6/08), which nudges through the $20k barrier). Data listed are the manufacturer's suggest retail price (MSRP), fuel economy (city/highway), and the EPA's measure of annual fuel cost (all figures are for lowest-cost models and manual shift unless the automatic gets superior mileage). The last stat is the percentage increase or decline in sales through six months this year.
Honda Fit $13,950; 28/34; $1,991; +67%
Toyota Yaris $11,550; 29/36; $1,930; +39%
Scion xB $15,650; 22/28; $2,571; +39%
Mini Cooper $18,050; 28/37; $2,038; +33%
Pontiac Vibe $15,310; 26/33; $2,127; +28%
Ford Focus $14,755; 24/35; $2,201; +27%
Nissan Versa 1.8S; $12,980; 27/33: $2,127; +20%
Chevy Cobalt $14,410; 22/30; $2,604; +19%
Honda Civic: $14,810; 26/34; $2,536; +19%
Kia Spectra $12,895; 23/30; $2,374; +15%
Pontiac G5 $15,675; 25/35; $2,127; -4%
Mazda 3i $13,895 24/32; $2,281; -1.8%
Chevy Aveo $12,170; 24/34; $2281; -1.65%
Dodge Caliber $14,965; 24/29; $2,374; flat
Toyota Corolla $14,405; 28/37; $1,991; -3%
Toyota Prius $21,500; 48/45; $1,338; -3%
PT Cruiser $15,970; 21/26; $2,682; -38%
Suzuki Forenza/Reno $14,249; 20/28; $2,682; -43%
Your first impression might be that the Prius isn't selling. But it is, at a higher volume than almost any other car on these lists. In fact, Toyota (TM) had just a four-day supply of Priuses on hand in June—every car that dealers got was spoken for. So Toyota is going to shift production to make yet more Priuses to meet skyrocketing demand. Also, such cars as the Honda Fit (BusinessWeek.com, 8/21/06) and Mini Cooper (BusinessWeek.com, 5/29/07) might have even higher sales numbers if there were more of them to sell. Mini, for instance, had only a five-day supply of cars as of July 1 this year. Honda (HMC) may double its production of the Fit to meet demand, and Civics (BusinessWeek.com, 6/7/06) are also selling flat out.
The real question is why some high-mileage cars are selling and others are moribund. Why is the Chevy Aveo (BusinessWeek.com, 12/27/06), which is roughly the size of the Kia Spectra (BusinessWeek.com, 8/7/07) and about the same price, not seeing increased sales, especially when it gets marginally superior fuel economy? Why is the Mazda 3i losing sales to the Ford Focus (BusinessWeek.com, 4/16/08), a stable mate under the Ford (F) corporate umbrella, when, again, prices and mileage figures are similar? And why, oh why, is the Honda Fit screaming off the lot?
Crucial Dealer Network
The answers aren't always simple. For instance, the Ford Focus isn't as good a car as the European edition of the Focus (the latter's on a newer platform), nor is it three times better than the Kia Spectra, yet three times as many Focuses have sold than Spectras. But Ford has a huge dealer network, and when you trade in your massive F-150 pickup (BusinessWeek.com, 4/19/06) (Ford's sitting on a half-year backlog of those) or your Explorer (BusinessWeek.com, 9/1/06) (it's a three-month supply), you're likely to buy the most fuel-efficient Ford rather than search around for the nearest Kia (KIMTY) dealer. Also, for the money, the Focus is relatively large, if spartan, and delivers quite good fuel economy. By the way, you can lump the Cobalt (BusinessWeek.com, 8/4/08) in the mix with the Focus; its sales are strong because Chevy is massive, and this is the best high-mileage, inexpensive machine they sell.
Still, Honda's numbers on the Fit are through the roof because of those demands cited above—for quality and workmanship. And, yes, as with the Fit vs. the Yaris (BusinessWeek.com, 6/13/06), Honda charges more for its Civic than Toyota gets for its Corolla (BusinessWeek.com, 5/30/08), and that allows Honda to invest in details that increase the sense of superior design. In the Fit, for instance, a rear seat bench lifts up, away from the floor, freeing the flat space behind the front seats for any large, awkward load that may not ease snugly into the hatch.
Hatch? But Detroit says Americans don't like hatchbacks, right? Hey, Detroit, feast your eyes up there at the winner's box and note that nearly all of those cars are available with a back door. And don't forget to look at the Prius, which is a hatchback. Hatchbacks give the ex-Explorer/Tahoe/Armada owner some of the utility he had with his SUV, and ex-SUV owners got used to back doors on their cars. So whatever stigma the hatchback may have had is probably dead. A hint: Honda will bring a high-volume, five-door (read hatchback) hybrid to market in early 2009 to duel with the Prius.
That's not to say you can add a hatch to any car and solve all your troubles.
Part of the difficulty is the carmaker reputation, not just a product's features. Tom Libby, senior director of industry analysis at J.D. Power, says that the Chevy Aveo may be a weak product, but a bigger problem is likely that Chevrolet doesn't have a strong brand image as a maker of small cars. "And Dodge has almost no track record with small cars," which is why, he says, the Caliber is so weak relative to the rest of the segment. (J.D. Power, like Businessweek.com, is owned by McGraw-Hill.)
By contrast, says another J.D. Power expert, Neal Oddes, the firm's director of product research and analysis, look at sales of the Scion xB (BusinessWeek.com, 8/17/07), which has really taken off despite not getting great fuel economy. It's new and unique, and that still sells cars, especially to younger buyers who, in Power's studies, show a greater interest in the newest products, "whether it's an iPhone or a car," Oddes says. He also says that one reason for the success of the Fit is that Hondas sell to younger buyers; it's seen as a cool brand.
Other makers simply show a lack of foresight. Mazda makes the fun Mazda3, but you can't get it with both a hatch and its thrifty, smaller engine. Instead, the hatchback sells for more than $18,000 and gets a thirstier 2.3-liter, which forces Mazda to fight with erstwhile buyers of the hotter-than-hot Mini Cooper. That's a critical misstep for Mazda, the kind of thing product planners need to heed more than ever going into this fiercely competitive market—especially during a recession.
On the Docket
As awful as this year has been for nearly all carmakers in the U.S. (Toyota and Nissan are also being hit hard by the plunge in truck and SUV sales), the future should smell like a big opportunity, albeit one freighted with risks.
For instance, Ford is about to undertake a critical shift toward small cars. For starters, we'll see the Fit-size Fiesta (BusinessWeek.com, 2/27/08) finally coming to market (2010), as well as at least a few variants of the newer, better Focus (2010/11). General Motors (GM), too, is suggesting it will leave the SUV market for dead. Chevy promises a new compact model, called the Cruze (BusinessWeek.com, 7/10/08) (2010), but right now says it will be a sedan, not a hatch. Likewise. the interesting Chevy Beat concept (BusinessWeek.com 7/27/08) may arrive in 2010, as well. The question is, will GM, Ford, (and let's pray, Chrysler get the right mix of powertrain, fuel economy, and cleverness that has made the difference between winners and losers? They'd better. Since there'll be yet more competition coming by then from Honda, Toyota, Nissan (NSANY), Mini, Kia/Hyundai, and that original mass seller of small, cute cars, Volkswagen (VOWG). Detroit can't counterpunch fast enough.