Detroit's rebound is built on smaller cars

By refocusing on small cars and de-emphasising the gas-guzzlers that had long sustained the industry, General Motors and Ford in particular are preserving jobs and positioning themselves to prosper. Their efforts are already paying off in the marketplace. Ford’s tiny Fiesta is the best-selling subcompact in the United States this year, and GM’s Chevrolet Cruze outsold every other compact car in America last month except the segment-leading Honda Civic.

Nearly one in four vehicles sold in the United States in April was a compact or sub-compact car, compared with one in eight a decade ago. Of the small cars sold in April, about 27 per cent were American models, compared with 20 per cent a year earlier.
“There is a less-is-more mentality,” said auto research site Edmunds.com chief executive Jeremy Anwyl. “The market demand and receptivity for these vehicles just didn’t exist four or five years ago.”

The transformation in Detroit was sparked by the worst financial crisis in generations, but was also assisted by an unusual set of circumstances.

The United Auto Workers made steep concessions on wages and benefits. The Obama administration used the opportunity of the bankruptcies of GM and Chrysler to prod them on fuel efficiency. Japanese carmakers like Toyota and Honda became complacent about their frontrunner status. And the psychology of the American car buyer underwent a stunning change.

“The most important thing we had to do was restore our reputation as a fuel-economy company,” said Ford head (global sales and marketing) James D Farley Jr “Without that, we couldn’t get a wide group of people to even consider these new products.”

After decades of turning out embarrassingly uncompetitive small cars like the Chevy Vega and Ford Pinto that rarely contributed to their bottom lines, GM and Ford have devoted their vast global resources to producing new models that are both fuel-conscious and laden with technology and attractive features. Chrysler, the smallest of the Detroit car companies, has been slower to make the changes, but with the help of its Italian partner Fiat it is headed in the same direction, with a new compact model expected next year.
The emphasis on smaller vehicles has proven to be a necessity for the recovering auto companies. Rising fuel prices have prompted a steady migration away from bigger vehicles since the spring of 2008, when gas hit $3.50 a gallon. Industry analysts and company executives say the shift is likely a permanent one, as consumers flock to small cars packed with features like heated leather seats, Internet access and voice-activated entertainment systems. With every new small car sold, the acceptance of American brands is reinforced as automakers erase the bad memories of their cheap and unappealing “econo-boxes” of the past.

“This car has changed my impression of Detroit, big time,” said Christopher L. Garcia-Rivera of Northborough, Mass., who averages nearly 40 miles to the gallon in the Ford Fiesta he bought for $14,900 in April.

The signs of change are apparent everywhere in the industry’s home state of Michigan, where Ford has converted a former SUV plant to build small cars that will be available in hybrid and electric versions, and GM is preparing to make the first subcompact model it has ever produced in the United States.

Ford got a head start on its small-car push when it hired an outsider, Alan R Mulally from Boeing, to reorganise its operations five years ago. GM, however, had to go through bankruptcy in 2009 before it could shed its big-truck mentality.

“We focused our resources where the market was before,” said GMNorth America president Mark L Reuss. “You have got to spend money to do great small cars.”
The dominance of the Japanese small car has eroded, in part, because Toyota and others didn’t consistently update their models in recent years. “Toyota really dropped the ball with their bland styling and plastic interiors,” said John Menschede, a retired county assessor in High Ridge, Montana, who paid $19,700 for a Cruze with a turbo-charged engine and Bluetooth wireless communication equipment. “I wanted something with a lot of bells and whistles and that’s what I got.”

Still, foreign cars continue to give Detroit stiff competition. The Korean carmaker Hyundai has introduced well-received models, and Honda recently started selling a new version of the Civic, the perennial market leader. But instead of a few Japanese models grabbing the bulk of the sales, the compact-car segment is now a wide open field. Honda’s top American sales executive John W Mendel, said the Japanese carmaker was confident that its small cars would meet the challenge from the latest American models. “Better products from our competitors?” said Mendel. “That’s a good thing for the US marketplace, but the Civic remains the trendsetter.”

In the past, Detroit automakers neglected small cars because they could not make money on them. That has changed for several reasons. Labour costs are lower since the UAW agreed to concessions on health care for retirees and a 50 percent wage reduction for new workers. GM and Ford are also spreading the development costs of compact and subcompact cars across their global divisions in North America, Europe and Asia.
Ford is building variations of its new Focus at factories across the world. The car’s basic design and engineering, however, was done in Europe, where consumers have long appreciated the value, fuel efficiency and performance of smaller models. “The way we work now is to use the teams that know the markets the best,” said Ford global product chief Derrick M Kuzak.

The companies still earn far bigger profits on trucks and SUV’s. But small cars are now commanding better prices in the showroom. A year ago, GM’s previous small sedan, the Chevrolet Cobalt, sold for an average price of $18,400, according to TrueCar.com. Last month, however, the typical Cruze sold for $20,600.

Detroit executives are aware they still have a lot to prove. Reuss cringes when reminded of some of GM’s subpar products of the past, and vows never to repeat those mistakes. “Our company has been changed forever,” he said. “We’ve got a window to get it right this time.”

He knew GM was on the right track when he parked one of the first new Cruzes off the assembly line at a supermarket in suburban Detroit, and a store employee rushed over to check it out. “She said, ‘I can’t believe Chevrolet is building a car this size that’s this good,’ ” Reuss said.