When top brass from Sweden's Volvo visited executives of France's Renault before their Sept. 6 merger, one of the most popular sessions of the day featured test drives of Renault models. The French looked on in surprise as Volvo executives scampered past fancy sedans, such as the Safrane, and headed straight for Renault's bottom-of-the-line Twingo minicar. "There was a mad rush to get to the Twingo," recalls one participant.

Now Renault and other auto makers are hoping the rush to small cars will be the trend that helps end their worst slump since World War II. Since its March launch, the $9,700 Twingo has carved out a 6.2% market share in France. Italy's Fiat launched the Punto, a new small model with a price tag between $9,000 and $15,000, at the Frankfurt Motor Show. The show also featured plenty of prototypes. Volkswagen has its new small Chico. Ford showed a concept car with a two-stroke engine. GM-Opel has plans for an "O-car" that would be smaller than its subcompact Corsa model. Even luxury carmaker Mercedes-Benz unveiled a prototype of a small car currently dubbed Vision A 93, while archrival BMW showed the second-generation design of its small E1 electric model. The BMW and Mercedes minis would sell at around $18,000.

MICROSCOPIC. The allure of these mighty midgets is apparent. Europeans looking for fuel efficiency and easy maneuvering on small city streets already buy about 4 million cars of subcompact size and below--about a third of Western Europe's market. And though most models have never been quite this microscopic, European carmakers have a tradition of building good-quality small cars, such as the Renault 5. Fears about pollution reinforce the trend.

As a result, sales of the low-priced subminis, called A-class cars locally, are resisting Europe's sharp economic downturn far better than bigger models. London-based consultants DRI/McGraw-Hill forecast submini sales will fall 2.7% this year, a fraction of the 16% drop expected for European auto markets as a whole. "There's a segment developing below the [subcompacts]," says Ford-Werke board member Rainer Strang. "We can feel it very clearly." Marketers have other motives for pushing this new category: The cheapest minis could also become best-selling starter cars in Eastern Europe. And in the West, they could reinforce brand loyalty to European nameplates and keep market share out of the hands of the Japanese.

To build this new market, the minis' designers are providing car buyers with a surprising amount of space as well as features that constitute astounding value for the price. The Twingo, for example, has a tilted transverse engine that occupies minuscule space, giving the passenger compartment a lot of room. Another attraction: The Twingo's back seat slides forward and backward, like conventional front seats, creating plenty of leg room. And the Twingo's designers went wild with bright, contrasting colors in dashboard controls, upholstery, and exterior. The result is a car that may not roar by at 93 miles per hour on the highway, but that still offers plenty of sex appeal--and can travel 62 miles on about 2 gallons of gas.

But manufacturers also realize they just can't ride smoothly to recovery in a fleet of itsy-bitsy autos with perky names. For starters, design and tooling for a new model can quickly top $2 billion in costs, a big outlay when auto profits are under such pressure. Besides, margins on small cars traditionally are as narrow as the back seat of a VW Beetle. "It is very difficult to make money with A-class cars, " says Karl Ludvigsen, president of London-based consultant Ludvigsen Associates. That's why makers such as General Motors, Ford, Mercedes, and BMW have yet to give their projects the final go-ahead for full production.

NEW BOOST. There are ways to turn a profit in this category. Both GM and VW are trying to develop superlean production processes that will squeeze out costs. Fiat has moved production of its Cinquecento to Poland. A third of Renault's Twingo capacity is in Spain, a lower-cost manufacturing site compared with France. Renault also has a no-frills marketing strategy for the Twingo, which features just one engine size and offers only two options: air-conditioning and a sun roof. That relative austerity kept investments down to $654 million and trimmed 15% off production costs.

The Twingo's success has unveiled another customer trend with big implications. "It's not just impecunious young people buying it," says DRI/McGraw-Hill chief analyst John Lawson. "There has been a tremendous take-up by well-heeled, middle-aged people who want something with good environmental credentials." That seemed to spell opportunity for Mercedes-Benz' new chief executive, Helmut Werner. Within four months of moving into the top job, he wheeled out the small-but-pricey Vision A 93 prototype, with air-conditioning, anti-skid brakes, electric seat adjustment, and air bags as standard items. A turbo-diesel engine boasts fuel consumption of about 1 gallon per 62 miles.

Werner already is talking about producing 200,000 Vision A 93s annually in four years' time. Such a move would radically change Mercedes' culture, boosting present total output by a third and making the company a volume producer over at least part of its range. Profits could be elusive: Mercedes is fighting to close a 30% cost gap with the Japanese.

But the German auto maker may have no choice. Says Werner: "The market at the top of the high series is getting slimmer." In Europe's era of diminishing expectations, that realization is driving auto makers to think small.

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