High fuel prices force automakers to think smaller

0 Comments | Deseret News (Salt Lake City), Jul 24, 2005 | by Norihiko Shirouzu The Wall Street Journal

Small is big again.

With gasoline prices at near-record levels, automakers are preparing to introduce a range of small cars, most costing $14,000 or less. After years of pushing hulking SUVs, the industry is betting that fuel-efficient subcompacts are due for a comeback.

Traditionally, Americans' appetite for minicars -- which are even smaller than compact cars, such as the Honda Civic -- has been slim amid concerns that they were too small and dangerous on highways packed with SUVs and powerful sedans. But there are signs of growing consumer interest, not only because of the high mileage, but also due to significantly improved safety technology.

Much of the impetus has been the Chevy Aveo, which was launched at the beginning of last year. It has been a surprise hit for General Motors Corp. and ranks as the best-selling economy car in the United States. Through June, sales of the Korean-made car, which gets more than 30 miles per gallon and has a base price of $9,995, are up 66 percent from the year-earlier period, outpacing Scion xA, the Kia Rio and the Hyundai Accent.

Overall, sales of minicars are expected to reach at least 410,000 vehicles a year by 2007, more than doubling from last year, according to CSM Worldwide of Farmington Hills, Mich., which counts a car as "mini" if it's less than about 14 feet in length. By contrast, a Ford Expedition SUV is more than 17 feet long. Sales of large, gas-thirsty SUVs -- which fueled industry profits in recent years -- have since slowed considerably.

Now the major Japanese automakers, Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co., are looking to grab a piece of the action. As early as the spring, Toyota is likely to launch in the United States a version of a popular minicar currently sold in Japan as the Vitz, according to executives familiar with the plans.

The snub-nosed Vitz, which was recently redesigned and has sort of an egg shape, is expected to replace the Echo, an aging model that has proven to be one of Toyota's biggest recent flops in the United States, in part because it came out in 1999 when gasoline cost about a dollar a gallon but also because of its stodgy styling.

Honda is also expected to roll out a minicar in the spring, most likely a version of its hatchback known as the Fit in Asia and the Jazz in Europe. At Nissan, one of the minicars being considered for the U.S. market next year is the Tiida, a minicar sold in Japan and China, and which has a body shape that hints at the Nissan Murano, the SUV-car crossover vehicle.

Nissan's chief executive, Carlos Ghosn, said his company plans to add at least a couple of cars smaller than the Sentra over the next three years. "Obviously, we are comforted

in this strategy by the fact that gas prices are going up," he said.

In Japan, the vehicles typically sell for between 1.2 million yen to 1.5 million yen, or about $10,800 to $13,500. A Toyota Vitz with a three-cylinder engine is priced at 1.05 million yen. Most Japan- market minis go 16 to 20 kilometers on one liter of gasoline, which is roughly 38 to 47 miles per gallon, depending on models and engine sizes. The mileage would likely differ if measured under U.S. standards.

Ford Motor Co. and Chrysler Group of DaimlerChrysler AG are also considering launching mini vehicles in the United States, but neither has concrete plans. Ford has shown over the past few years three minivehicle concepts, including the boxy van called SynUS. Launching a minicar in the States is "something we are looking at and continue to look at," said Said Deep, a Ford spokesman.

A GM spokesman says the company doesn't have any plans to add additional minicars to its lineup in the wake of its Aveo success. The car is built in South Korea by GM and sold in major markets around the world. A redesign is already on the market in Asia, and is expected to arrive in the U.S. market in the near future.

Small cars such as these are becoming safer to drive amid recent technological innovations that are helping automakers overcome one of the biggest consumer reservations about driving minicars: safety. When it reaches the U.S. market, the Honda Fit will have side airbags and antilock brakes as standard equipment. The Aveo received a five-star crash rating by the National Highway Traffic Safety Administration.

Economical microcars still make up only a small segment of automobiles in the United States, accounting for just 1 percent of total U.S. vehicles sales, according to CSM Worldwide. But automakers have been encouraged by the strong sales of BMW AG's Mini, despite its comparatively high price of $17,500 for a base model, as well as the early success of Toyota's youth-oriented and budget-priced Scion brand. Last year, BMW sold 36,032 Minis, and Scion racked up 99,259 in vehicle sales in the United States across the three cars in that line.

New minicars from the Japanese Big Three also fill a significant gap in entry-level cars for those automakers -- a situation they created themselves over the years by scaling up their small-car entries such as the Honda Civic, the Nissan Sentra and the Toyota Corolla to meet customer demand for more room and comfort.