Commentary

Auto Industry Shifting Gears As Market For Small Cars Shrinks

The North American consumers’ disenchantment with small vehicles rolls on, helping to fuel worries that the auto industry -- despite low unemployment and favorable fuel prices -- may be headed toward lean times.

“Sales of the passenger-car body style that’s dominated the industry since the Model T will sink to 21.5% of the U.S. market by 2025, according to researchers at LMC Automotive, relegating sedans to fringe products. That leaves automakers with excess factory capacity that can turn out about 3 million more vehicles  than buyers want. And overcapacity is precisely what spurred losses the last time a recession wracked the industry,” write Bloomberg's Keith Naughton, David Welch and Gabrielle Coppola.

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“You could classify this as a car recession,” Jeff Schuster, senior vice president of forecasting at LMC Automotive, tells them.

“The car recession and the retail recession have already arrived in the sense that retail sales peaked in 2015 and have gone down ever since,” Mark Wakefield, head of the automotive practice at consultant AlixPartners, adds. “Cars have just been crushed.”

General Motors is phasing out the Chevy Cruze compact car in the U.S. and reportedly will also pull the Chevy Sonic subcompact, Chester Dawson reports for the Wall Street Journal. Ford is dropping both the compact Focus and the subcompact Fiesta. Dodge discontinued the Dart in 2016 and Volkswagen is bidding tschüss to the Beetle at the end of the year.

“The shift reflects a broader auto-industry move away from traditional sedans to higher-margin crossovers, SUVs and pickup trucks. This transition has helped boost profits for many car makers but is also pushing new-car prices higher, challenging the the ability of some buyers to afford new vehicles. The average price paid for a new car was about $32,500 last year, up from $29,300 five years ago, according to J.D. Power,” Dawson observes.

“Historically, the smaller, low-price models have delivered thin profit margins. Some auto executives have said that the weak demand has made the cars unprofitable to keep around,” he adds.

In his preview of the Detroit Auto Show that opens for the press today, the New York Times’ Neal E. Boudette tells us that electric vehicles will be the stars as manufacturers begin the arduous task of winning over mainstream consumers to a niche currently populated by “wealthy luxury car buyers, hard-core environmentalists and early adopters.” 

Part of that strategy involves delivery of larger cars.

“One advantage that automakers are counting on is the wider variety of cars they will bring to the market. The Model 3, the Chevrolet Bolt and the Nissan Leaf are all small cars, a type of vehicle that fewer Americans are buying. Like Ford, Nissan is working on a roomier, S.U.V.-like model that it thinks will have wider appeal,” he writes.

“There’s not a lot of variety right now, but as more vehicles come up in the small and midsize S.U.V. body styles, it will bring in more people,” Brian Maragno, Nissan’s director of E.V. sales and marketing strategy tells, Boudette. “The market, in just a couple of years, is going to look very different.”

Against this backdrop, General Motors on Friday delivered a promising forecast to investors in New York that CEO Mary Barra attributed to a two-year push to “to exit unprofitable markets in Europe and developing markets, restructuring money-losing operations in South Korea, and killing unprofitable car lines in North America,” Reuters’ Nick Carey and Ankit Ajmera report.

Its future includes making Cadillac “the tip of the corporate spear” on electrification as the company gears up to challenge Tesla, GM president Mark Reuss said.

“GM is relying on profit from sales of large pickup trucks and sport utility vehicles in North America to fund its electrification push. The battle in that lucrative market is intensifying among the Detroit Three automakers as sales of small cars in the United States shrivel,” Carey and Ajmera write. 

GM believes the market will remain strong in the U.S. this year and is forecasting earnings per share between $6.50 and $7 and free cash flow of up to $6 billion for 2019 “as a sweeping restructuring plan executed this year saves the company up to $2.5 billion,” Nora Naughton points out in the Detroit News.

“GM's rosy outlook for 2019 bucks analyst expectations that the Detroit automaker would forecast a more challenging year,” she writes. Its shares jumped 7% as a result, as happens when one bucks expectations.

“We are no longer investing in things that don’t make money,” Reuss declared. “The future is coming fast. We are doing everything we need to do as fast as we can.”

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