Suddenly Revved about Small Cars

Auto makers at the Detroit show are busy hawking their tiniest offerings. Behind the change: Concerns about gas prices and eager Gen Y buyers

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Forty years ago Volkswagen of America ran an ad for its celebrated Beetle that's still considered a classic. The headline read: "Think Small." After several years of bombarding the car-buying public with hulking SUVs, though, auto makers seem more interested than ever in reintroducing consumers to small cars. Call it the "small can be beautiful" strategy.

At this week's North American International Auto Show in Detroit, Ford (F), Toyota (TM), Nissan (NSANY), Honda (HMC), and Chinese company Geeley are all making noise about small cars. They're driven by growing interest in fuel-efficient cars, demographic trends, and even a bit of fashion.


  Dodge, which has been limping along the last few years with a dated-looking Neon entry-level car, unwrapped the Dodge Caliber, the first Chrysler vehicles equipped with its new generation of 1.8-liter, 2.0-liter, and 2.4-liter four-cylinder engines.

A continuously variable transmission improves fuel economy over a conventional four-speed automatic. An AutoStick feature allows manual driving and the simulation of six gears without a clutch.

The Caliber also will offer electronically controlled all-wheel drive, which works on demand, driving only the front wheels until power to the rear wheels is needed. The company aggressively priced the base model at $13,985.


  Ford, which has led auto shows in recent years with gas guzzlers such as the Ford Excursion, Expedition, and Explorer, as well as the F-Series pickup this year is showing off a concept car, the Reflex. The car is so small that just one adult (or two small kids) fit in the rear seat. It also features a hybrid diesel-electric engine that can return up to 65 mpg.

"This is about creating desire in a segment that has been sadly devoid of that in the U.S.," says Ford designer Freeman Thomas. "We all know people who like their small, fun-to-drive car and moan when they have to give it up when a child arrives because it's no longer practical," he adds.

The Reflex is but a design "concept," which means Ford wouldn't build this exact car. But it represents a "direction" the company is pursuing, says Mark Fields, president of Ford operations in the Americas. "We have a gap in the category of small cars priced below $13,000, and we're looking for a way to fill it with a vehicle that is stylish and functional," says Fields.


 . Ford is trying to figure out which of its existing global small vehicles it could adapt for the U.S. It would almost surely build the car abroad, where labor costs are much cheaper than in the U.S. General Motors (GM) is already in the market with a car it calls a success, the Chevy Aveo, which it builds in Korea and sells in the U.S. for a starter price of $12,000. It's the best-selling subcompact car in the U.S., with some 68,000 bought by Americans last year.

With upstart companies like Kia and Hyundai, and soon Chinese carmakers, targeting American buyers, U.S. and Japanese companies can ill-afford to ignore the small car market. "I consider the Rio (Kia's smallest and lowest-price car) our flagship car rather than our most inexpensive vehicle, because it brings so many people into our showrooms," says Kia Motors Chief Operating Officer Len Hunt. "This is no econo box. The interior is on a par with Volkswagen, we have eight air bags. And a lot of people who come in attracted to the price ($10,570 to start) end up leaving with a more expensive car," he says. Kia sold 30,000 Rios last year.

Japanese companies, of course, sell minicars in their home market, but they have long seen the U.S., with its truck culture, cheap gas (relative to the rest of the world), and more open space and highways less interested in small, fuel-efficient cars. But Toyota this spring will launch the Yaris, a two-door hatchback with a starting price of $11,530. A four-door sedan version starts at $12,405. These cars will be offered on top of Toyota's slightly more expensive three Scion models, which are also small.


  Toyota Chief Operating Officer Jim Press says it's not that the market for SUVs and large cars is going away, "But we clearly see interest in small, well-appointed cars, especially as families and individuals keep multiple cars." Toyota, he says, expects that a lot of the buyers for these vehicles will have one as their second or third car.

Like many auto makers, Nissan sells small cars, even minicars, in Asia and Europe where they're the norm. "Journalists would often ask us, why don't you try offering this in the U.S.," says Nissan North America sales and marketing chief Jed Connelly. That was especially true after BMW's launch of the Mini Cooper in the U.S. in 2001 drew a warm reception. But the Mini managed what few car companies thought was possible in the truck-centered U.S.: It made a market for a premium-price -- $20,000 and up -- small car, thanks to the Mini's fun design.

Nissan will launch the Versa hatchback this spring at $12,000. It gets 38 miles per gallon combined city and highway mileage. Nissan also is showing a concept roadster, called the Urge, which won't be quite as cheap as the Versa if it's built. But it wouldn't break the bank either. The three-seat design concept would be very fuel-efficient and carry a price closer to $20,000.


  Honda has never really been out of the small-car market, consistently offering a small, hatchback version of its Civic as a fuel-efficient, bare-bones model for cost-conscious buyers. But in the spring, it goes the Civic one smaller with the Fit, a front-drive, 4-door hatchback that scores 33 mpg in the city and 38 mpg on highway. The Fit has almost the look of a micro-minivan.

Small cars have accounted for only about 1% of the U.S. car market in recent years. But that's in large part a function of auto makers not offering them and hardly advertising the ones they have. Besides considering the heightened interest in fuel economy, the companies expect that would-be buyers of used cars will be hot prospects for the new models. "People would still rather have a new car with a warranty over a used car, even if the used car is a bit bigger," says Kia's Hunt.

Marketers say a convergence of demographic trends will also support the market. These include: people staying single longer and putting off the need for large kid carriers; a population spike in the so-called Generation Y (57 million born between 1981 and 1995) population; the pumping of huge numbers of budget-conscious, first-time buyers into the market; the rising population of Hispanic immigrants, who tend to be budget-conscious; the debt load of young people who are credit-challenged and can't qualify for or won't choose more expensive wheels.

If the auto makers are correct, then, some of our U.S. cities could be looking decidedly European and Asian soon.

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