US Automakers and Consumers Shifting to Small Cars

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The preliminary figures for vehicle sales in September are out and they were not as good as the August numbers. Sales were flat for Ford Motor (NYSE: F) and sales at General Motors (NYSE: GM) were only up 1.5%. Sales at Chrysler, majority-owned by Italy's Fiat S.p.A. ADR (NASDAQOTH: FIATY.PK), motored ahead in September at a 12% rate. 

The most interesting aspect of the sales figures for Detroit's Big 3: All three companies boasted about their fast-growing sales of smaller models of passenger cars. This is almost unheard of in the United States, famous for its gas-guzzling SUVs and pickups. 

General Motors said its sales of mini, small, and compact cars were up 97% from the year-ago period. Ford reported that small car sales jumped 73% from a year ago, to a record for the past 10 years. Meanwhile, Chrysler's Dodge Dart sales rose 72% from August, and sales of the Fiat 500 subcompact climbed 51% year-on-year. 

These sales reports are outstanding. But do they represent the beginning of a long-term trend? Thanks to high fuel prices, is America finally moving away from driving gas guzzlers? 

If so, the Big 3 automakers will have to learn to adjust. After all, smaller cars carry smaller profit margins. That's why U.S. automakers largely abandoned the field to foreign competitors, concentrating instead of high-margin larger vehicles. 

One way the automakers are coping with possible tighter profit margins on small cars will not make most Americans happy: The Big 3 are shifting production to places like Mexico. Ford makes its Fiesta model there, and Fiat manufactures its Fiat 500 for the U.S. market in Mexico as well.

GM should be commended, though. It manufactures the Chevrolet Sonic, the smallest passenger car mass-produced in the U.S., at its plant in Lake Orion, Mich. It copes with small profit margins by actually moving suppliers in-plant in an effort to shorten the supply chain . 

Of course, one big plus that U.S. automakers have in their corner is that they have moved toward using global platforms for the production of many of their vehicles. Chevy's Sonic and Ford's Fiesta, for example, are both built on the same platforms as vehicles in Europe. This is a real long-run cost-saver for automakers. 

But the question still remains whether U.S. consumers are ready to switch to smaller vehicles permanently. The answer is probably as it has always been in the past: No. As soon as the price of fuel starts falling again (if it ever does), Americans will rush back into driving their favorite gas guzzlers. 

Right now, according to Edmonds.com, compact and subcontact cars account for 21.5% of the U.S. car market, versus 24.6% for SUVs. The two numbers will likely only reverse if gasoline climbs to more than $4 a gallon and stays there.

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