Friday, May 2, 2008

The big car era is not over

There are many news stories today about how Americans are "flocking" to small cars when they purchase new automobiles. The stories invariably feature someone quoted as saying something along the lines of "the big car era is over." George Pipas from Ford says it's the most dramatic shift he's seen in his 31 years at the company. Perhaps if he had been there 35 years he would remember things differently.

There are many instances in automotive history where the big car era has been declared dead. Perhaps the first was in the late 1950s, where Volkswagen threatened tailfins and chrome with the Bug. American automakers responded with smaller cars and streamlined styling, because the excess of the previous era was "over." At least until the horsepower wars of the late 1960s and early 1970s, when the average fuel economy was under 12 mpg. Then two things happened that are interrelated. First, the oil shock of 1973 sent the price of gas skyward. But this can't be viewed as the only cause of a shift towards more fuel efficient cars. The second event that happened, and which may have had a larger impact on engine size, was the switch from leaded to unleaded gas and the addition of catalytic converters. CCs reduced fuel economy and power but produced much cleaner air. Unleaded gas also was generally of lower performance than leaded gas, too. I suspect that the clean air regulations provided cover for the automakers to reduce their engine sizes. Had they not been required to pollute less I doubt that engines would have gotten smaller. Car sales definitely declined during this era. This is the era that Mr. Pipas is not remembering.

There are other periods where the big car era has been declared over, but to return to today's news, there are many reasons to be skeptical of a profound shift in the desires of Americans when it comes to buying cars.

First, the SUV has been in a sales decline for a while. Crossovers, which are smaller and car based, have been where the new investment has been going. For instance, the Honda CR-V had sales that are essentially flat.

Second, the trucks that saw the biggest decline are often work trucks. As the construction sector has been losing jobs and/or future employment has become less certain, you'd expect sales of work trucks to decline.

Third, and directly related to the second item, is that the collapse of the credit market means that a lot of people who have been buying expensive (and large) cars from home equity or with cheap credit are not buying any more cars. There may even be a flood of slightly used cars on the market as people shed expenses and try to avoid losing their credit or homes.

Lastly, the cars with the highest sales gains are new models or updated ones. The Honda Fit, Ford Focus and Toyota Yaris are new products, and new products always tend to sell better because they have more promotional resources. That's why it's unfair to compare sales of the trendy Toyota Prius to the long-in-the-tooth Ford Explorer, which is at the end of it's product life cycle.

Small cars are still only about 20% of the market. The sales gains currently reported don't necessarily mean that people are "flocking" to small cars, and they certainly don't mean the era of the big car is over. The next cycle will see even bigger cars, but hopefully we will have better propulsion options for them.
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