Friday, October 16, 2009 6:35 PM
The small car juggle
Jeremy Cato
It's been 15 months since a barrel of oil hit an all time high of $147.27. Today, the price is $77.38, or less than half that peak price (all prices in U.S. dollars). So with oil down, why are car companies busy launching all these new small cars?
Why a new 2010 Volkswagen Golf now, not 15 months ago? Why a new Kia Forte and Soul now, not last summer?
After all, everyone saw that when U.S. gas prices hit a national average of $3.76 per gallon, small-car sales surged six percentage points, to 17 per cent of the overall U.S. market.
American consumers flocked to dealerships to buy Honda Civics and Toyota Corollas and Ford's Focus. The near-$4 gallon was a clear tipping point. Car makers noticed, and this only served to accelerate product plans already in the works.
Of course, we didn't change so much up here when a litre of regular topped $1.50 in parts of Canada. With less disposable income, higher taxes and more expensive fuel, we already buy boatloads of compacts and subcompacts; they comprise about 45 per cent of the Canadian new car market, or three times the peak market share for small cars in the U.S.
But American car-buying habits matter greatly to us in Canada. In a business where sales volumes are critical for creating the economies of scale that maximize slim or even non-existent car company profits, we mostly get what also sells well in the U.S.
I thought a lot about this earlier in the week while driving the reinvented 6th generation VW Golf. It's a very well-made car and the diesel version – the only truly affordable small car diesel sold in Canada – not only has loads and loads of torque (a truck-like 236 lb-ft), it also has great fuel economy and a range of about 1,200 km for a single tank of fuel.
No, it's not cheap; the starter model is $20,175 (a three-door hatch) and the least expensive diesel is a five-door hatchback that lists for $24,975. But the new Golf is refined, roomy, pleasant to drive, functional and pretty.
What it's not is cheap. In fact, the new Golf lands in a niche I call “affordable premium compact.” For a less expensive VW, there is still the older version of the Golf, the made-in-Brazil City Golf starting at $15,300 for the five-door. It's a more basic car using older VW technology, and it's assembled in low-wage Brazil.
VW, like so many other car makers, though, is pushing ahead with a new small-car strategy. The key piece is an all-new Jetta sedan due next year. Look for it to be priced against big Canadian sellers such as the Toyota Corolla ($15,260 base). The least expensive Jetta today lists for $22,175.
In essence, VW is flip-flopping the Jetta and Golf, moving the latter slightly upmarket and the former down to where it can compete with sedans such as the Corolla, Honda Civic, Ford Focus, Mazda3, Kia Forte and Hyundai Elantra.
VW would like to have next year's Jetta right now, but that's not how the car business works. Auto makers typically plan new vehicles three to four years ahead. So when fuel prices began a steady upward move in 2005, auto makers began reviewing and planning new fuel efficient offerings -- worldwide. That oil peaked in July 2008 only helped to confirm what auto makers had already anticipated.
The small car action will get really heated next year. There is the new Jetta, of course, but General Motors and Ford also each have three new small cars coming by the end of 2010. By 2013, all those new models will add 600,000 cars worth of production to a market niche that has traditionally sold about 2.5 million in the U.S., says IHS Global Insight, an industry consultancy.
What we're not going to see is a tsunami of really cheap small cars. That's because auto makers earn very little money on small cars, if any at all. In fact, small cars are often an entirely losing proposition in the U.S., where, when fuel prices are low, car makers must discount their compacts and subcompacts to sell them at all.
In an effort to make a buck, car makers are loading up their new runabouts with all sorts of creature comforts and technological goodies. This allows them to charge a reasonable premium and make a profit.
For instance, Ford's new 2011 Focus compact and Fiesta subcompact will feature the Sync infotainment system; it allows drivers to load music onto an in-dash hard drive, and hands-free calling and navigation. VW right now is offering a leather interior in its 2010 Golf. More of the same is coming.
How all these U.S.-influenced small cars will play out in Canada will be interesting to watch. We buy lots of small cars, but we're also very careful with our money. The Canadian market is incredibly price-sensitive, and this presents an enormous challenge to manufacturers and their dealers to price the new small-car offerings low enough to lure customers, yet high enough to earn a return.
What a juggling act.
