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

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.

French Brands Go Their Own Way

French automakers, on the other hand, say they will continue to stay out of the U.S. market for the foreseeable future. Peugeot, the last French holdout, bailed out of the U.S. in 1991.

The company, which has since merged with former rival Citroën as PSA Peugeot Citroën (PEUP.PA), states on its Web site it has no plans to return. Presumably it is successful enough in Europe to satisfy its shareholders. Through the first half of 2007, PSA's market share, which is mostly in Western Europe, was growing and the company's net income was up 61%, to about $703 million year to date. The profit improvement came even though its worldwide unit sales were flat at about 1.8 million units, based on cost cutting and the introduction of a raft of new products.

In addition, the company added a redesigned version of its best-selling model line, the 308, in September. The first model of the new 308 is a four-door hatchback with a prominent but functional rump that creates decent cargo space. Europeans, who tend to own fewer cars per household than Americans, prize hatchbacks for their versatility, but hatchbacks are a tough sell in the U.S. market.

Automotive Convergence

Gas prices are not the only factor driving automotive convergence. It is financially urgent for the automakers to share internally as much hardware and engineering expertise globally as possible, in order to spread costs over the biggest volume possible.

For instance, GM expects to save more than $1 billion on a single product line by sharing among the Opel Vectra, the Chevrolet Malibu, the Pontiac G6 and the Saab 9-3, according to Robert Lutz, GM's vice-chairman for global product development.

A couple of product generations ago, different versions of the same basic model would have been almost entirely distinct, except maybe the Chevy and the Pontiac. Today, they all share a common "architecture," which Lutz said generates big cost savings.

"We expect a 40% reduction in our prototype builds, a 20% reduction in material costs as a result of the common components, and 25% reductions in both engineering costs and overall investment," Lutz said in a speech earlier this year.

By architecture, GM means basics like size, and front-, rear-, or all-wheel drive, but individual brands and markets can be quite choosy in defining their individual needs, said GM spokesman Klaus-Peter Martin.

"The German guy says, 'I need bigger brakes, in my market people drive 150 mph.' The U.S. guy says, 'I need a comfortable ride, my roads are not as good as yours.' The guy from Asia says, 'I need a bigger air conditioner, because it's hot and humid in my markets.' The parts the architecture shares are mainly not the visible part," he said.

Items that are out of sight of the customer, such as the "black boxes" that control the windows and doors, are an example of something that can be shared among different models, said David Leone, global chief engineer for Cadillac, in a separate interview.

He said the Saturn Aura, the Cadillac Escalade and the new Chevy Malibu, which all look completely different from the outside, share "black boxes" without affecting the customer's perception of value.

That frees up money for items Cadillac customers do care about, such as stitched leather, Leone said. "Now instead of buying [parts] at 70,000 units a year, I'm buying them at 300,000 or 400,000," he said. "And you, the customer, you don't care what the wire harness that controls the window looks like."

Room for Improvement

Still, the GM models and those of its rivals lack what Lutz calls "interbuildability." That is, even if they look different on the outside, cars from the same manufacturer will ultimately have so much in common, the automakers will be able to shift production from one plant to another; from one model with the same "architecture" to another; from a slow-selling model to a hot-selling one; without making expensive, major changes in the factory.

It will take at least another product generation for the industry to reach that point, says Wolkonowicz of Global Insight. He points out that Ford is pursuing the same strategy. For instance, the European Ford Focus shares architecture with the Mazda3 and the Volvo S40 and V50 models—but not the current generation of the North American Ford Focus, he said.

Wolkonowicz says global architecture and interbuildability are all but inevitable. "By 2015, I don't think you'll see anything but global architecture," he said.

The trick is to share the right things and to keep the right things distinct.

See BusinessWeek's slide show for a roundup of the best cars not for sale in the U.S.

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