Compact Cars, Can They Convince Consumers?

Compact Cars, Can They Convince Consumers?

On a windswept airfield near Niagara-on-the-Lake, Ont., dozens of automotive scribes spent last week putting a new crop of 2011 vehicles through their paces as part of a consumer-oriented annual testing event. And, for the first time in years, the excitement wasn't limited to pricey "prestige" vehicles with nameplates like Porsche, BMW and Jaguar. Instead, it was in the unassuming compact and subcompact categories - the so-called "econobox" segment that has been historically associated with puny engines, bland styling and hard plastic interiors.

After soaring gas prices and the recession exposed Detroit's penchant for focusing on big gas guzzlers as an epic folly, the North American AUTO INDUSTRY has been forced to get serious about the small car market and heed government demands for better fuel economy. That's particularly the case at General Motors and Chrysler, which were bailed out with billions of taxpayer dollars.

The result is a plethora of stylish little fuel sippers hitting showrooms over the coming months, ratcheting up the competition in an already competitive segment. Some, like Ford's Fiesta, are being plucked directly from foreign markets. Similarly, Chrysler plans to begin selling the Fiat 500 in the U.S. later this year after being forced into a marriage with the Italian carmaker. Others, like the Chevrolet Cruze, which GM describes as "the most important car" it has ever built, and the 2012 Ford Focus, have been designed as vehicles to be sold globally. Meanwhile, Toyota rolled out its youth-oriented, small-car Scion brand to Canada in September, hoping to solidify its grip on the small car segment after its reputation took a beating earlier this year amid massive global recalls.

But there's a hitch: fuel prices hit a high of around $1.40 a litre in some parts of the country two years ago, but have since fallen back to around $1.00. In the U.S., where small cars have always been a tougher sell, it didn't take long for consumers to fall back on old habits. "As for the real small cars, now that the gasoline prices have come out of the clouds, the consumer really doesn't want them," says George Magliano, the director of North America auto forecasting for IHS Global Insight. "The subcompacts are a real tough sell and we have a lot of activity there - all of the manufacturers are bringing them in."

Even in Canada there's evidence of a tough slog ahead. Data compiled by consulting firm DesRosiers Automotive Consultants Inc. suggests that subcompact and compact sales have fallen by 19 per cent and five per cent respectively to the end of September, while sales of light trucks, which includes SUVs, are up more than 20 per cent. Gerry Malloy, an organizer of the testing event and the editor of Canadian Auto Dealer magazine, says Canadians are once again paying more attention to things like interior space and cargo capacity. "It's always been the trend in the North American market that people will buy the biggest car in their price class, and that's because of our lifestyle."

It could spell big trouble for cash-strapped automakers in the near future. While long-term industry forecasts predict rising demand for smaller vehicles, small cars have not historically been big profit centres for Detroit because many North American consumers equate "small" with "cheap," meaning margins on the vehicles can be razor-thin.

That's something automakers are desperately trying to change. GM, for example, touts its new Cruze as superior to anything in its class, which includes such stalwarts as the Honda Civic, Toyota Corolla, and more recent arrivals such as the Mazda 3. "We have 10 standard airbags, they have six," says GM spokesperson Jason Easton. "The refinement of our interior materials is superior, as is the technology that we've put in it." The price? The entry level model starts at $14,995 while the LTZ Turbo model is listed at $24,780. The question, however, is whether the cars can command anything close to their manufacturer's suggested retail price in an increasingly cutthroat segment. Easton says GM has no choice. "Moving forward, the new GM is not going to build or sell any vehicles that are not profitable."

Magliano, for one, says it's not yet clear whether small cars will ever be the big money-makers for North American manufacturers that trucks and large SUVs once were. "That's the $64,000 question," he says, calling the Cruze and Fiesta a real test for the industry. "I think the issue is not only whether consumers are going to want something small with a lot of style, it's whether they're going to pay a lot of money for a Ford or for a Chevy."

The country's automotive writers are on board. They awarded the Fiesta and Cruze top honours in their respective categories at Niagara-on-the-Lake this year. At the very least, Detroit now has some worthwhile small cars to offer buyers the next time gas prices spike.

Maclean's November 15, 2010