Thursday, February 9, 2012

Small Car Sales Up? Gas Prices Down?

Many folks are downsizing their car expectations.  Sales of the Chevy Cruz, Chevy Equinox, Ford Focus, and Chrysler 200 are up - at the expense of larger cars.  This is a good thing, long-term, for America.

Car sales are up and the car makers are making money, for a change.  At 13 million sales last year, overall, auto and truck sales are recovering from their low of 10 million in 2009 (but not anywhere near the peak of 17 million annually from 1999-2006.

(of course, the tsnumani in Japan nearly wiped out Japanese production for a while, and this handed the US makers a big break at just the right time.  Before you go out and buy GM stock, bear in mind that tsnunamis cannot be counted on, every year, to boost domestic sales).

And truck sales are recovering, too (up to nearly 7 million, a big improvement over the 5 million of 2009, but a far cry from the nearly 10 million of 2005).  But what is interesting to me is that a lot of people are buying smaller cars - midsized or compact cars, in place of larger vehicles.

Chrysler is even selling a lot of its crappy "200" model, which was excoriated when sold as the "Sebring" model in pre-bankruptcy days, but now restyled and with a new interior, is selling well for them (unfortunately it is still equipped with the same raspy engine and sloppy suspension).  Who woulda thunk it?

Of course, part of this is that so-called "compact" cars are larger now.  The Chevy Cruz is a lot larger than the old Cavalier and Cobalt, from which it traces its roots.  The Corolla today is nearly as large as the Camry of 1990.  And the Focus is nearly as big as the first generation Taurus.

People are buying smaller cars, not because they can't afford more, but because they want smaller.   The number one option on the Focus (and many other small cars) is "leather interior" - there is a demand for quality small cars, and this is a paradigm shift for US automakers.

At GM, throughout the 60's, the mantra was "small car, small profits" and small cars were sold, only reluctantly, as a means of getting "entry-level" buyers.  But usually such buyers were punished - intentionally - with cheap interiors and cramped space.  Doors would be padded out to make hip room smaller and knee-room removed to make sure that a Nova was less comfortable than a Malibu.  The thinking was, if a small car was a roomy as a larger car, then people would have no incentive to move up.

So GM looked at the "competition" as its own cars, and neglected to think about what the foreign car makers were doing - which was offering quality-made small cars with roomier interiors.  In the 1970's, my Sister drove a Volvo sedan, while my Dad drove a Mercury Grand Marquis.  Guess which had more rear seat legroom?  Yea, the Volvo.    Ford decided to "punish" Mercury owners for not buying a Lincoln, and made an enormous car that was cramped inside - particularly in the back seat.

Today, that sort of nonsense is being swept aside.  You can't de-content your cars anymore and expect to survive.  You cannot worry whether a Buick is taking away sales from a Cadillac - you have to make the best car possible, in each price class, in each division, or be creamed by the competition.

So, smaller cars are not the punishment machines that say, the Chevy Vega or Chevette once were.  Today, they can be roomy and comfortable.  And a lot of people are deciding that a smaller car makes sense.  Why?  I think a number of reasons.

First is the price of gas.  While this has dropped from the $5-a-gallon of the Bush era, it still is high and may remain that way for a while.  Buying a car today that sucks gas really makes no sense.  When you are paying $50 to $100 to fill the tank, it better take you pretty far.

Second is demographics.  We are aging at a country, and driving a huge car, when you are 70 years old, is no fun.  Parking is a hassle and even getting it in your garage is a pain.  Smaller cars are easier to handler for our older population.  And many of the new, hip small cars aimed at the younger generation are being bought by older folks.  Toyota was chagrined when its Scion-xB - a Japan Market model added to fill out its line of cars aimed at 20-somethings - was snapped up mostly by people over 50.  KIA launched its Soul with a set of ads clearly aimed at a younger crowd.  Seniors have been snapping them up.  When all you need is a ride to the grocery store, why buy a huge car?

The old adage in the car business is true:  You can sell an older man a younger man's car, but you can't sell a younger man an older man's car.

Third is functionality.  Many midsize or smaller cars have about the same room as their larger brethren.  GM is selling a lot of Chevy Equinoxes, at the expense of the larger, and uglier Chevy Traverse (which wins the "ugly SUV Butt" award for 2012, three years running!).   Why?  Because they are only slightly different in size but miles apart in terms of gas mileage and cost.  Why pay a ton more money for a car that is only marginally roomier, more expensive and sucks gas?  Throw in the ugly factor and the Equinox is a no-brainer - over the Traverse.

What does this mean for the price of gas?  Well, we have been down this road before - in 1979.  During those dark days, gas was bubbling along at about a dollar-a-gallon, an unheard-of price at the time and panic set in.  Gas shortages were the norm, and stations were often out of gas.  Even if they had it, you could buy it only on alternate days.

The automakers responded by dumping their "full size" car platforms and offering very small cars.  Chrysler developed the K-car.  GM offered the Citation.  Both were horrible cars, but they got good mileage.  As I noted in an earlier posting, you could buy a car back then that would get 50 mpg - without a hybrid drive-train.

Demand for gas slackened as a result, and throughout the 1980's, the price of gas leveled off, and eventually dropped.  By the time Bill Clinton was President, it was selling for the astounding price of 87 cents a gallon, in the Carolinas.

Supply and Demand, that old bugaboo.

When gas went that cheap, suddenly things like monster trucks and power boats seemed like reasonable propositions.  So what if your boat got maybe 1-2 miles per gallon?  It only cost a buck-a-mile, at most.  And that giant pickup truck?  You could fill both gas tanks for $50.  What's not to like?

So, moving forward, we may see the price of gas remain somewhat flat, if demand stays down.  And then, like clockwork, we will all decide that the crises is over, and buy the next gas-hog that comes down the road.  Many giant tail fins will be in style this time around.

Complicating the scenario this time around is the fact that we are not alone in our consumption of fuel anymore.  In addition to Europe, the Chinese are starting to fall in love with cars - and gasoline - and are driving up the demand and thus the price of fuel.  China could be the wildcard that keeps the price of oil high - and the price of gas high - regardless of our efforts to conserve.

Buying a fuel-efficient car is a smart move, no matter how you slice it.  Not only do you save money on gas, by decreasing demand, you help bring down the price of gas.  Unless you have a compelling need for a big car, think twice before buying a gas-guzzler.

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