By Keith Naughton
When the engine blew on his eight- year-old Toyota Matrix last year, Shane Wilson needed a new car fast and wanted something good on gas. He shopped the usual suspects: small Honda and Toyota models he’d owned in the past. Then he surprised himself by buying a Chevrolet Cruze.
“I thought American cars were pretty horrid and that they tended to fall apart,” said Wilson, 36, an accounts manager for the Internal Revenue Service in Seattle. “But the Cruze was fun to drive and the interior was light-years better than American cars used to be.”
Small cars, once the Achilles’ heel of US automakers, are becoming a strength. Sales of General Motors’ s Chevy Cruze compact are up 10 percent this year, while Ford’s Focus compact sales have soared 90 percent. Last year, GM, Ford and Chrysler Group’s share of the compact and subcompact market in the US rose to a four-year high of 26 percent, from 20 percent in 2010, according to researcher LMC Automotive.
After losing a generation of car buyers to Japanese automakers, US-based companies are building their comebacks on cars they once dismissed and discounted in favor of high-profit sport-utility vehicles. Small cars from Detroit are no longer utilitarian econoboxes. They have high style and high-tech features, such as voice-activated stereos, previously found only on bigger, more expensive models.
“Remember when smaller cars used to be cheap and cheerful?” Ford Chief Executive Officer Alan Mulally asked reporters March 6 at the Geneva motor show. “Now the consumers want the finest quality, the finest fuel efficiency, safety and design.”
While SUVs and pickups still have higher profit margins, Detroit has discovered that small cars are the foundation of a successful automaker. Since compacts are often a buyer’s first car, they represent the initial step in building brand loyalty. Toyota, Honda and other Japanese companies used small cars as their wedge into the US market in the 1970s, while GM, Ford and Chrysler spent more development dollars on bigger models that burned more fuel.
The weakness of that strategy was exposed in 2008 when the average US price of unleaded gasoline peaked at $4.11 a gallon. The lack of competitive compacts accelerated the collapse of US automakers. Ford posted a record loss of $14.8bn for 2008, and GM and Chrysler entered bankruptcy the following year.
“That was a defining moment for Detroit,” said Jessica Caldwell, director of industry analysis at auto researcher Edmunds.com in Santa Monica, California. “That really pointed out the weaknesses in their small-car lineups and it hit home that they needed strong models throughout their portfolio.”
As US fuel prices return to those levels, small-car sales are rising, too. Compacts and subcompacts will account for 19 percent of US auto sales this year, up from 13 percent in 2005, LMC forecasts. Regular unleaded gasoline averaged $3.80 a gallon on March 11, up 8.3 percent from a month ago, according to AAA.
Without the Cruze and Sonic subcompact that have debuted over last two years, GM wouldn’t weather the rising gas prices as well, said Don Johnson, the automaker’s US sales chief.
“We wouldn’t be in as good a shape as we are today,” Johnson told analysts and reporters on a March 6 conference call. “Cruze continues to be a more and more important part of our portfolio.”
US automakers see rising fuel prices as an opportunity to poach car buyers from Toyota and Honda, which have just fully restocked showrooms after natural disasters in Asia cut inventory in 2011.
“With more competitive models from the Detroit brands, they’re positioned to benefit from the rise in gas prices,” said Jeff Schuster, senior vice president of forecasting at LMC in Troy, Michigan. “Who would have thought that?”
Some of Detroit’s competitors acknowledge the change.
“The steady increase in gas prices over the last few years has forced many competitors to finally get serious about cars again and, for the first time ever, some of them are bringing credible small cars to market,” John Mendel, executive vice president of US sales for Honda, said in an email.
As car buyers return to showrooms, they’re finding significantly better fuel economy in the new models from US automakers. The Cruze, Ford Focus and Fiesta are each rated to get 64km per gallon or better in highway driving.
“As fuel prices went higher in February, so too did small car sales,” said Erich Merkle, sales analyst for Ford, where Focus sales more than doubled last month.
Car dealer Gordon Stewart can’t keep a small car in stock at his four Chevrolet outlets and it reminds him of how models sell at his Toyota outlet.
“If I could get the inventory, I’d double my small-car sales tomorrow,” said Stewart, whose Gordon Stewart Chevrolet Inc is based in Tampa, Florida, and who has Chevy stores in Georgia, Florida and Michigan and a Toyota showroom in Alabama. “People used to come in looking for the big SUV, but now I sell almost two cars for every truck. It’s much more like my Toyota store.”
The primary attribute of Chevy’s old Cavalier compact was its rock-bottom price, Stewart said. Now the Cruze and Sonic sell on style and performance.
“We sold the Cavalier in volume because of price,” Stewart said. “We’re selling the Cruze because the styling is so hot.”
New Cruze owner Wilson says he has been surprised by the 34 mpg he’s averaging and that for $15,096, he got a base-model small car with satellite radio, a six-speed manual transmission and a black-and-cream interior that looks “rich.”
No one was more surprised, though, than Wilson’s friends when he pulled up for the first time in an American small car.
“They were like, ‘Really, a Chevy?’” Wilson said. “Then some of them had a chance to drive it and they were like, ‘OK, this is pretty decent. This is not what we’re used to.’”