Market Overview

US Consumers Shifting to Smaller Cars

The preliminary figures for vehicle sales in September are out and they were not as good as the August numbers. Sales were flat for Ford Motor (NYSE: F) and sales at General Motors (NYSE: GM) were only up 1.5%. Sales at Chrysler, majority-owned by Italy's Fiat S.p.A. ADR (NASDAQOTH: FIATY.PK), motored ahead in September at a 12% rate.

The most interesting aspect of the sales figures for Detroit's Big 3 is the fact that all three companies boasted about their fast-growing sales of smaller models of passenger cars. This is almost unheard of in the United States, famous for its gas-guzzling SUVs and pickups.

General Motors said its sales of mini, small and compact cars were up 97% from the year ago period. Ford reported small car sales jumped 73% from a year ago, to a record for the past 10 years. Meanwhile, Chrysler's Dodge Dart sales rose 72% from August and sales of the Fiat 500 subcompact climbed 51% year-on-year.

These sales reports are outstanding. But does it represent the beginning of a long-term trend? Thanks to high fuel prices, is America finally moving away from driving gas guzzlers?

If so, the Big 3 automakers will have to learn to adjust. After all, with smaller cars you have smaller profit margins. That is why they largely abandoned the field to foreign competitors, concentrating instead of high-margin larger vehicles.

One way the automakers are coping with possible tighter profit margins on small cars will not make most Americans happy. They are shifting production to places like Mexico. Ford makes it Fiesta model in Mexico. Fiat manufactures its Fiat 500 for the U.S. market also in Mexico. GM should be commended though. It does manufacture the Chevrolet Sonic, the smallest passenger car mass produced in the U.S., at its plant in Lake Orion, Michigan. It copes with small profit margins by trying to shorten the supply chain by moving actually moving suppliers in-plant.

Of course, one big plus that U.S. automakers have in their corner is that they have moved toward using global platforms for the production of many of their vehicles. That is, auto manufacturers build many vehicle models atop the same architecture. So Chevy's Sonic is built on the same platform as Opel in Europe and Ford's Fiesta is built on the same platform as vehicles in Europe. This is a real cost saver in the long run for automakers.

But the question still remains whether U.S. consumers are ready to switch to smaller vehicles permanently. The answer is probably as it has always been in the past . . . no. As soon as the price of fuel starts falling again (if it ever does), Americans will rush back into driving their favorite gas guzzlers.

Right now, according to Edmonds.com, compact and subcompact cars account for 21.5% of the U.S. car market versus 24.6% for SUVs. The two numbers will likely only reverse if gasoline climbs to over $4 a gallon and stays there.

This article originally appeared on the Motley Fool Blog Network. Be sure read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: News Retail Sales

 

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