Small is Beautiful

Will American motorists end their love affair with large and embrace downsized luxe? A number of carmakers are betting that they will.
| By Paul A. Eisenstein | From David Caruso, Jan/Feb 2007

Small is big. No, that's not an opening line of haiku nor the mantra from some modern-day incarnation of est therapy. It's simply the reality of today's fast-changing automotive market.

For decades, automakers balanced their books by relying on a basic operating assumption: big is beautiful. American motorists loved large cars and trucks. Remember the classic Cadillac Eldorado, all 21 feet of it? Or today's alternative, Caddy's Escalade ESV, only slightly more modest as it stretches 18.5 feet from bumper to bumper? Who cares if you can't park them in the typical garage? Big says you've got status; it's rolling bling. You've gotten the most for your money. Automakers have loved 'em big as well, because, traditionally, the bigger the product, the bigger the profits.

Or so it seemed—until recently. Then a confluence of factors suddenly set American motorists to rethinking what they're really spending their automotive dollars on. Fuel rates spiking over three dollars a gallon certainly played a role. If you're commuting 50 miles a day, you're likely to grind the enamel off your teeth pumping 25 gallons into an SUV that gets only 14 miles a gallon. (We'll let you do the math.) The politics of imported oil has become a factor as well. Then there's the issue of the environment. "Everybody," concedes Carlos Ghosn, the chief executive officer of both Nissan and Renault, "has to feel a duty to reduce their emissions" of CO2, a gas commonly linked to global warming.

A fundamental shift is also under way in cultural perceptions, according to Mark Fields, an executive vice president at Ford Motor Co. and president of the automaker's Americas division. He points out that the new generation of motorists is accustomed to premiums associated with downsizing, such as a higher price for an iPod Nano than for a comparable MP3 player twice its size. And a variety of industry studies show that young buyers are increasingly attracted to nano-sized transportation, rather than the behemoths their parents favored.

So does that mean Ford is ready to abandon its full-size Crown Victoria sedan and massive F-Series pickup to shift its focus to the Focus, the smallest model in its North American lineup? Might buyers be willing to start forking out more for a compact SUV like the Escape, instead of the massive Lincoln Navigator? Not necessarily. Although they're all but certain to lose market share to more diminutive offerings, big cars and trucks aren't about to go away, predicts automotive industry analyst Dan Gorrell. He explains that "the challenge for manufacturers," whether Ford or Mercedes-Benz, "is to convince buyers that they're getting their money's worth when they spend more for something small."

That's the dilemma that BMW faced when it got ready to relaunch the Mini a few years back. Small enough to fit into the cargo bed of an F-150 pickup, the British-made hatchback definitely didn't comply with the classic rules for success in the U.S. market. Indeed, American motorists reacted to the original downsized version with a big yawn, purchasing barely 10,000 from 1960 to 1967 before Mini, tail between its wheels, packed up and went back to the United Kingdom.

Despite enjoying plenty of demand in the home market and much of the rest of Europe when BMW acquired the brand a decade ago, the company knew that Mini would also have to make a splash in the United States in order to turn a profit. That meant rethinking the car's fundamentals. The first-generation micro-car, designed by the legendary Sir Alec Issigonis, was meant to be the ultimate in basic transportation. With its 10-inch wheels and a spartan interior, the model that debuted in 1959 had a base price of less than $800.

Today you'll spend about that much on some of the Mini's many new accessories, such as the Union Jack roof decal. A base Mini Cooper now goes for $18,000, and a fully equipped version of the supercharged Cooper S GT pushes well into mid-$30,000 territory. According to traditional industry standards, that would qualify it as a so-called "near luxury" vehicle.

The British make's little three-door goes through a complete redesign for 2007, though you'd probably not notice without a close inspection. Mini stylists have wisely chosen to make only minor tweaks to the basic appearance, while focusing on improving the car's ergonomics by offering an expanded range of power trains—a fuel- sipping, 1.6-liter gasoline engine and a super-high-mileage diesel are in the works—and adding still more features and high-end options.

Success has its price. Demand has repeatedly outstripped supply, and with Mini struggling to keep its U.S. dealers stocked, BMW has been less inclined to rush out a planned assortment of spin-offs. But several are finally on the way. The convertible was the first into showrooms, and the next-generation ragtop will reportedly come along in less than a year, while the all-new, wagon-like Mini Traveller is expected in late 2007. That stretched five-door will offer enough room for five, a big improvement over the original, with its less-than-comfortable back seat. And you'll also find room for plenty of cargo, with easy access through an unusual, split barn-door hatchback. Rear-seat passengers in the new model will reportedly climb in through a pair of reverse-opening doors, much like those on Mazda's RX-8.

After the last Mideast oil embargo, in 1979, upscale European marques debated a fundamental question: could they persuade buyers to pay an upmarket price tag for a downsized automobile? The introduction of the Mercedes-Benz C-Class sedan solved that riddle. It has become not only one of the German maker's biggest sellers, but also one of its more profitable models.

In recent years, Mercedes has expanded its lineup with an array of even smaller offerings, including the B-Class Sport Tourer, a sort of pint-sized minivan, as well as the A-Class, a car designed specifically for urban commuters. Plans to bring both of these models to the United States have been put on hold, though another run-up in oil prices could cause Mercedes to reconsider. And it's not alone. BMW has added several models smaller than its immensely popular 3 Series, and after some waffling has confirmed it will bring the 1 Series to the States in 2007.

Audi, on the other hand, has come through with its own small entry, the A3, which landed in U.S. showrooms a bit more than a year ago. The compact sport wagon has received a welcome that even optimistic Audi planners didn't expect, and like Mini, the automaker is struggling to keep up with demand. Base-priced at $25,340, the A3 doesn't come cheap. But this is no basic econobox. It delivers an array of decidedly luxurious touches, including Quattro all-wheel drive, leather-clad seats and sophisticated safety features such as electronic stability control.

Under the hood, the A3 has the same 200-horsepower, 2.0-liter, turbocharged, direct-injection, in-line four-cylinder engine as the A4 sedan. The smaller car's lighter weight makes for a peppy package, especially when mated to the optional Direct Shift Gearbox electronically shifted manual transmission. With DSG, there's no pedal; the transmission control computer opens and closes the clutch automatically. The system is more efficient than a traditional automatic and arguably quicker than your everyday stick shift.

Few cars have developed more of a cult following than DaimlerChrysler's minuscule smart, with its odd proportions and its quirky lower case 's'. It's measurably smaller than the Mercedes A-Class, and makes even BMW's Mini seem positively huge. The pint-sized version, the fortwo, is so small, you can park it nose-to-curb and it will still fit inside a conventional city parking space—or more precisely, several can fit in. Smart was originally conceived as a joint venture between Mercedes-Benz and Swatch, the hip Swiss watchmaker. Over the last decade the project has gone through a series of changes, Swatch has dropped out and DaimlerChrysler has had to repeatedly rethink smart's business strategy, dropping several models, including an unusual open-top roadster, in the process.

Plans to introduce smart in the United States have had repeated delays. The original idea was to develop a micro-sized SUV specfic to the American market. That project has been scrapped, but at last, the division is getting ready to enter a new network of showrooms that will, in a typically unusual move, be set up and run for DCX by the United Auto Group, a large independent U.S. dealer network.

The timing couldn't have proven better, says Dave Schembri, the veteran automotive executive who will manage smart operations. "This is absolutely the right car at the right place at the right time. The latest energy crisis has brought that back to the forefront. We're looking at the version of the car we're bringing to the United States rating out at about 40 miles per gallon, combined city/highway."

Sales will launch late this year with the all-new 2008 version of the fortwo. Much like BMW treated the new Mini, smart designers have tinkered very little with the car's original look, but there are significant changes under the skin, including an all-new, racing-inspired safety cage and side airbags—a, er, smart move considering that safety remains one of the top concerns American motorists have about small cars. Like the original fortwo, the new two-seater will feature a roll-back canvas top, as well as new removable roof rails. The top can be operated even while driving. A variety of engines will be offered on the European version of the Fortwo, though only an 84-horsepower, three-cylinder engine will be offered in the States—at least initially. Smart sources have indicated that if fuel prices start to climb again, the automaker could bring over a diesel-powered version too.

Even with gas prices slipping back to more normal levels—if you're willing to consider $2.30 a gallon acceptable—industry experts and analysts assert that there's a sea change under way in the U.S. auto market. Across the board, motorists are downsizing. The traditional large sport-utility vehicle is losing ground to smaller, lighter, more fuel-efficient crossover vehicles. Over the last year, subcompacts have gained several points of market share, a significant movement in today's automotive arena.

Just how much smaller will tomorrow's cars get? In part, that depends on the business case automakers can make. That's relatively easy in the luxury market: get the design right and you can command the Mini's maximum premium.

It's far more difficult in the highly competitive mainstream automotive market, where most of the new minicars are targeted. Even so, there's a flood of new product available. Honda has slotted its new Fit below its perennially popular Civic. Toyota has introduced the Yaris, which comes in a variety of body styles, starting at less than $12,000. And Nissan has weighed in with the Versa hatchback. "There must be something there," says Brad Bradshaw, Nissan's senior vice president of sales and marketing, "because everyone is going there."

Japanese automakers have been most aggressive in the so-called B-Car segment. (Automobiles are segmented by size, with a C designation referring to the typical U.S. subcompact.) But the Big Three are getting active. Chevrolet, the "value" division of General Motors, has launched the Aveo. To hold down costs, Chevy turned to South Korea, where the various Aveo models are produced by what was once known as Daewoo, now a GM subsidiary.

Late last winter at the Geneva Motor Show, the Chrysler side of DaimlerChrysler unveiled what could be its own minicar entry. Acknowledging Chrysler's late arrival to the party, senior vice president of design Trevor Creed stressed that the company can't bring out "just another B" car, so it is looking for a design that blends style "with European space and sensibility." The Dodge Hornet, which might best be described as a tall hatchback, sports a design that minimizes the car's footprint while increasing room for passengers and cargo. "Will we make such a product?" asks Chrysler Group CEO Tom LaSorda. "We just might," he says, answering his own question, though he stressed that the U.S.-based automaker will probably not build a production version of the Hornet itself. It is considering a variety of other sourcing options, including the idea of finding a Chinese partner.

As for Ford, the striking Reflex concept vehicle revealed at the North American International Auto Show in Detroit last year could be an indication of what's to come. With its sleek and sporty shape, set off by a pair of gull-wing doors, Reflex is anything but your typical econobox. Under the hood, a diesel-electric power train provides a reasonably quick and fuel-efficient ride, getting an estimated 65 miles a gallon in city driving and accelerating from 0 to 60 in less than seven seconds.

Ford president Fields is aware of the pitfalls of producing little cars. "We're not in the business to lose money," he says, a reference to the fact that Ford's old base model, the Escort, typically went into the red on every sale—a problem shared by many other small-car manufacturers. But looking at the growing competition, Ford can no longer sit on the sidelines. The struggling No. 2 carmaker is expected to put several of its own B-Car models into production for the U.S. market by 2009. To hold down costs, Ford's European operations will head up the design and engineering work, since small cars are already well established across the Atlantic.

Of course, if gasoline prices continue to fall as they did during the waning months of 2006, some of the steam could be taken out of the small-car market. But fuel prices alone aren't likely to determine the segment's long-term success or failure. American buyers aren't abandoning big cars and bigger trucks—not entirely. But the downsizing trend seems to be taking hold for a variety of social, political and economic reasons. It's only a question of time until everyone agrees that "small is beautiful."

Paul A. Eisenstein, a Cigar Aficionado contributing editor, also publishes the Internet magazine