Blog: Dave LeggettThe small car challenges ahead

Dave Leggett | 26 October 2009

I was in Detroit last week and I had a number of conversations in which the subject of small cars cropped up. It's a subject that is getting considerable attention at the OEMs and major suppliers in terms of anticipating future market trends.

While there is a general consensus that car market segmentation globally is shifting toward more efficient and 'smaller' cars, there is considerable uncertainty about the pace of downsizing, how it will actually play out in particular markets and ultimately what it means for the auto industry.

The thing is, while passenger vehicle market segmentation across the world may be undergoing a degree of convergence, there are still some pretty big differences out there.

Those big differences in vehicle operating environments and lifestyles have fed through to the supply-side, with volume and cost per unit  figures for major model offerings and market segments looking very different on either side of the Atlantic. Production cost economics is of particular importance in the mass-market segments where the volume brands are active and where cars are commodity-type products (a BMW, by way of contrast, is a 'world car' in the sense that it sells on its same specs in all markets – its European product characteristics also constituting a positive attribute in non-European markets).

There is a price-point at which, say, a typical C-segment car may work in Europe that doesn't apply to North America where those same consumers will naturally be in a bigger car with a lower retail price. If consumers equate value with size then a highly contented small car may be an uphill struggle to sell profitably in the US, even if consumer demands are changing (at the margin).

Market segmentation differences can mean that the 'same car' (quite possibly with a different body style mix, for starters) offered in Europe and North America by a volume maker will be selling to a different demographic. In that case, it will require a different interior spec and how far do you go to customise the car to local market conditions with adjustments that take account of homologation rules, radically different driving styles, engine preferences and so on?

At some point the spec changes mean that it becomes more economic – and I haven't even mentioned exchange rates in that respect - to simply do a different car for different markets, with heavily localised production.

And even in places like Europe there is the thorny question of how you build small cars – which inevitably come with relatively thin margins - with increasingly highly specified content more cheaply over time so that you can make a profit on selling the things.

We heard a little bit last week about how Nissan is planning to engineer its B-segment small cars to make them easier and cheaper to build, while also making them more attuned to local market conditions and 'high-end'.

Making 'small' cars profitably will be a big challenge for the auto industry as consumer downsizing continues. Manufacturing economics – alongside a changing vehicle operating environment - will take the industry so far. There is also the small matter of persuading customers that less really can mean more.

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