Detroit dilemma: Big prices for small cars

The Detroit 3 are adding premium equipment to small cars to replace lost profits from big trucks. Automotive News reports.

Automotive News
4 min read

Automotive News

DETROIT--The Detroit 3 are adding premium equipment to small cars to replace lost profits from big trucks.

A small car with big profit margins? It may sound like one of those hand-is-quicker-than-the-eye magic tricks, but European automakers do it, and now American marketers are learning how.

"It comes down to product execution," says Jim Farley, Ford Motor's group vice president of marketing and communications. "You can't just put leather and a sunroof in an EX or an XLE version of your C-D car and expect people to get excited."

Over the next three years, Ford will bring six small vehicles from Europe to the United States. Farley is counting on equipment such as Ford's EcoBoost power trains to add value that consumers will pay for.

EcoBoost technology combines turbocharging and gasoline direct injection to achieve better fuel economy.

General Motors is pursuing a similar strategy for its own small cars. American consumers may choose small vehicles because of high gasoline prices, "but they're not going to want to drive strippers," says Jon Lauckner, GM's vice president of global program management.

But pricing will be tricky. The cost of satisfying new safety and fuel economy regulations will translate to higher prices, which will make it harder to add pricey features.

In the past, automakers might have compensated for federally mandated costs by taking features out of a vehicle. But that's not likely if small vehicles have to appeal to customers moving down from larger models, Lauckner says.

"What you don't see is people saying...'Let's go ahead and take something out,'" he notes.

Analysts say the Detroit 3 must achieve three goals:

1. Add enough content to their small cars to justify higher sticker prices.

2. Sell enough small cars to compensate for the decline in sales of high-profit SUVs and pickups.

3. Manage inventory to avoid price cutting.

Jesse Toprak, executive director of industry analysis for Edmunds.com in Santa Monica, Calif., says that adding premium content and limiting inventory can make small cars aspirational.

But, Toprak says, setting prices too high will hurt volume. What works for niche brands like Mini won't work for mainstream brands that need high sales volumes.

"Once you get over $25,000 in...small cars, then you're getting into the next category and diluting sales, unless there's something hot about that car, like the Mini," Toprak says. "Most mass-produced cars are not going to be able to demand a premium in the market because there's wide competition."

Small cars, big hopes

The Mini Cooper has defined small-car exclusivity in the United States with its cool interiors and BMW-based power train. But Mini sold 42,045 units in the United States last year. The Detroit 3 need more volume.

A manufacturer must sell several small cars to replace the profit from one full-size SUV, says an industry source who asked not to be named. The average profit on a small car is about $500, compared with $3,500 to $4,000 for a full-size SUV, the source says.

Current small-car transaction prices show little discounting, Edmunds' Toprak says. But there is still a big difference between the average transaction price of a domestic small car and that of a Japanese car.

Ford wants to emulate the Mini's success when it brings the 2011 Fiesta subcompact to the United States from Europe. Ford says it is finding ways to offer more content in small cars while keeping manufacturing costs in line.

"The challenge is: how do we keep complexity down?" says Sam De La Garza, Ford's Focus brand manager. "That is a huge issue on our side. Toyota and Honda have mastered that."

Bundling options

Ford is banking on bundling options, he says.

"We're not raising our prices very much from a base standpoint, but we're trying to drive more content that helps us on an average basis," De La Garza says. For example, Ford's Moon and Tune option package, which offers a high-end sound system, gives the customer a $475 discount for taking a moon roof, too.

GM's attempts to sell small vehicles at higher prices have had mixed success. The subcompact Saturn Astra has struggled since going on sale in January. Prices that start at $16,495, including shipping, are part of the problem, GM executives have said. But the company is locked into the pricing because the Belgium-made Astra is produced in a euro country but sold for weak U.S. dollars.

Like Ford, GM is tapping its small-car expertise in Europe. Coming vehicles such as the Chevrolet Cruze, a compact sedan going on sale in 2010, were developed in Europe and were influenced by European tastes. "The U.S. is not there yet, but you can certainly see where the U.S. is on the move to be more like Europe than in the past," Lauckner says. But, he adds, GM is not yet sure of the specific features that U.S. consumers will pay for in their small cars.

'Jewellike' execution

In 2010, Chrysler's small car portfolio will expand when a version of the Dodge Hornet concept appears. The car will be built to Chrysler specifications by Nissan in Oppama, Japan. The Hornet concept car first appeared at the 2006 Geneva show.

John Wolkonowicz, analyst for Global Insight, predicts that the Hornet will be "jewellike in its execution" and will compete with the Mini but at a slightly lower price: "It will be more premium than any small car ever from Chrysler.

"I think that's just the right thing to do right now," he says.

"People don't want a cheap small car. They want a really nice small car."

Jim McDowell, the U.S. brand chief for Mini, says there's no question that consumer preferences are moving toward smaller vehicles.

"As we enter the second decade of the 21st century, small is the new black," McDowell says. "Comfortable and enjoyable sustainability is what is 'in trend.'"

Bradford Wernle, Amy Wilson and Diana T. Kurylko contributed to this report.

(Via: Automotive News)