Current Trends in Small Cars - Small is Big

Haven't we seen this movie before? Carmakers bring out a flurry of new small entries in response to a sudden rush of demand driven by spiking gas prices. TV talking heads intone that "gasoline is not going to get any cheaper," but then it does, and U.S. car buyers, whose collective memory is about as long as a snail darter's, revert to form and embrace size and power again.

But it really does seem different this time. While most international auto shows have pushed a green theme recently, at the Detroit auto show in January, it was all about small. Noting the lack of truck and SUV debuts, Audi chief designer Stefan Sielaff said, "I have a feeling that there is a paradigm shift."

With gasoline prices well off their historic highs - which were nearly two years ago - why are carmakers so eagerly jumping on the small-car bandwagon? Well, there are new Corporate Average Fuel Economy (CAFE) standards - 35.5 mpg by 2016, although that's not a hard-and-fast figure, as it will vary for each carmaker depending on the size of its vehicles (bigger vehicles get lower standards). More significant is that the slice of the new-vehicle pie taken by small cars has grown by 50 percent over the last five years, and nothing attracts automakers' attention like a growing market.

B- and C-size passenger cars have gone from 14 percent of the market in 2004 to 21 percent in 2009. Sure, they got a boost by the $4-a-gallon gas panic of 2008 (although prices later dipped below $2 in many places by the end of the year) and by "cash for clunkers" in the summer of 2009, but we're still talking about five years of annual market-share growth. Clearly, larger forces are at work.

Baby boomers and the generation aged 15 to 30 are the two biggest demographic groups, and they've both been driving this growth. Boomers, now often empty nesters and entering retirement, are trading down in size. Meanwhile, half of first-time buyers under age thirty are choosing small cars. Another demographic shift favoring small cars is the urbanization of America: in 2009, according to Ford, we saw more people living in cities than in suburban/rural areas.

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