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Auto Expert: Small Car To Become More Endangered, But Not Extinct

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Auto Expert: Small Car To Become More Endangered, But Not Extinct

General Motors Company (NYSE: GM)’s announcement last month that it would contract and reorganize its workforce continues a long trend among automakers.

“The shift away from traditional sedans to utility vehicles has been ongoing for several years but has dramatically quickened in the last couple of years,” Autotrader executive analyst Michelle Krebs told Benzinga. “In recent months, the share of new cars sold has dropped to a historical low of under 30 percent.”

Where The Small Car Has Gone

The passenger vehicle has taken a hit. This April, Ford Motor Company (NYSE: F) said it would pare its North American car portfolio to just the Mustang and Ford Active. CEO Jim Hackett justified the shift to focus on more profitable products, and analysts praised the strategy as highly sensical.

GM warned at the time it would continue to shrink its own car investment going forward.

Fiat Chrysler Automobiles NV (NYSE: FCAU) had already exited the U.S. car market a few years earlier — but it hadn’t anticipated demand declining much more than it already had.

“The worsening of the passenger car market from here is hard to imagine,” now-deceased former CEO Sergio Marchionne said in January. “We’re now at the bottom of the barrel ... we made a right call over three years ago to disentangle ourselves from the passenger car market.”

Where The Small Car Is Going

Marchionne was right to exit, but wrong on his forecast for a bottoming demand. Analysts previously estimated cars settling at 30 percent of sales, but now some consider that proportion too high.

“We expect it will continue to decline,” Krebs said. “There will be a bottom, but it is not clear where that bottom is or when it will be reached. [...] We do not expect sales of passenger cars to completely go away — 30 percent is still significant.”

In the meantime, the OEM reductions aren’t expected to stop. Krebs suggested GM’s sizable car portfolio remains ripe for pruning.

“This is not a fad but a permanent shift and it is global,” she said. “And we likely will see more elimination of car production and shifts of production from cars to utilities.”

Yet the Trump administration suspects trade policy could stimulate car production as much as it has truck production.

Analysts consider any such reversal unlikely. Consumers prefer the features of SUVs and trucks, and sellers realize shrinking margins on passenger cars. There are few incentives to buy or sell.

And with technology improvements, the preferences are not particularly exposed to traditional macroeconomic factors.

Automakers remained undeterred in their strategy amid widespread fears of oil-price spikes earlier this year, which historically have spooked buyers into shifting from trucks or SUVs to previously more fuel-efficient cars. Today, automakers have improved traditional “gas hog” fuel efficiency to buffer sales from such concerns.

Winners And Losers

The industry shift toward trucks and SUVs has inspired a bullish outlook for traditional OEMs. But Krebs said their exit from the small-car market also bolsters the argument for their lingering competitors.

“The winners will be those automakers who have strong reputations for cars, notably Toyota and Honda,” she said. “Toyota has made it clear here at the Los Angeles Auto show that it has no intention to get out of cars. If you look at Toyota’s past, it has stayed in segments when others abandon them and then they dominate. Small trucks is a great example. Everyone got out but Toyota (and Nissan). Now others are returning and the Toyota Tacoma dominates.”

Toyota Motor Corp (NYSE: TM) has consistently beat FCA in North American sales volume, and this fall, it even surpassed Ford.

Related Links:

Auto Pair Trade: Goldman Sachs Buys Toyota, Steps To Sidelines On Honda

Morgan Stanley Warns Ford Layoffs Could Outpace GM Cuts

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