USA TODAY International Edition
Automakers start killing off smaller models
A combination of falling gas prices and the boomlet of higherriding crossovers is forcing automakers to stop making certain passenger cars that don’t generate sufficient sales or profits to satisfy Wall Street or American consumers.
Last month, Fiat Chrysler CEO Sergio Marchionne said production of the Dodge Dart compact and Chrysler 200 midsize sedan would stop in the near future.
Last Wednesday, Toyota said it would scrap its youth- oriented Scion brand that targeted younger consumers with quirky, sometimes cube- shape vehicles. Scion sales peaked at 173,000 in 2006, and aside from a modest resurgence in 2012, withered to 56,167 in 2015. Remaining stocks of Scion models will be sold as Toyotas for now.
Other manufacturers are shifting small and midsize car produc- tion to Mexico. Last year, Ford decided to stop building the Focus compact car and the C- Max hybrid and C- Max Energi plug- in hybrid at the Michigan Assembly Plant in 2018, and move it out of the U. S., most likely to Mexico where it already builds the subcompact Fiesta and is consolidating all midsize Fusion production.
Those moves mark a sharp turnabout.
“There has been a permanent shift toward utility vehicles and pickup trucks,” Marchionne said. “And we have seen, certainly in terms of our ability to meet market demand, some severe restriction in terms of the dexterity of our manufacturing system to accomplish that end.”
Contrast that statement with what Marchionne said in 2009, “In this market, if you don’t have a competitive midsize sedan, you’re a nobody.”
This shift from subcompact and compact cars to higher- riding and not much larger crossovers and sport wagons is not new, but it’s accelerating. In January, when Americans bought the same number of new vehicles as they did a year earlier, sales of small cars fell 11.3%; sales of sport wagons and crossovers rose 10.3%.
Falling gas prices also have nudged consumers to look at larger vehicles than they may have considered three years ago.
It’s no secret that profit margins correlate strongly with vehicles’ size and price, so this trend is what industry financial folks call a “tailwind.”
Investors now expect automakers to earn a steady 10% gross profit ( sales divided by number of vehicles before taxes). While pickups, SUVs and luxury models exceed that, products in the middle or small end of the spectrum fall short.
It’s unclear whether more small passenger cars will be dropped, but even General Motors, which will boost profit margins on its new Chevrolet Malibu and Cruze by about $ 1,500 per car because of a move to Mexico and some other factors, is closely watching the profitability of each model.
“We continue to re- evaluate how we deploy capital, where we deploy capital in order to drive appropriate returns across the business,” Chuck Stevens, GM chief financial officer, said last week. “How do you effectively deploy capital in those segments with lower margins like small cars and compact cars?”