Friday, August 22, 2008

Not Your Father's Small Car Business

General Motors announced new plans to build a new small car to adapt to the recent consumer demand for smaller more fuel efficient automobiles since gasoline prices hit such a high spike in the $4 a gallon neighborhood. The cost to build this car is a staggering $500 million in development and tooling costs, a figure that is an awesome amount compared to the much smaller amounts of cash outlays once required to develop new models by the major car makers.

In April of 1970, little American Motors Corporation was able to build the first modern American subcompact, the Gremlin, for a mere $6 million in development and tooling costs by cutting about a foot and half out of it's existing Hornet compact which was developed for a cost of just $40 million dollars from a project that started way back in 1966 to bring out a car for the 1970 market. But the history of the American small car was mostly a smaller segment of the American car market as years and years of cheap gas made smaller cars a real second choice for many American buyers who sought the bigger and more powerful models.

In 1951, American steel tycoon and industrialist, Henry J. Kaiser sought to steer Americans towards the purchase of small fuel efficient cars and his early subcompact, the Henry J, hit the American market with an economical 68hp four cylinder engine. Even Sears Department stores had their own version of the Henry J to sell in their stores rebadged as the Sears Allstate. But in the days of 27cents a gallon gas, both cars were quick marketing failures and quickly disappeared from the market before very long. Many buyers instead opted for the bigger models such as the Chevy Deluxe or the later Chevy 150 instead which were larger and had six cylinder engines. The 1950's were characterized by American cars growing bigger and wider by the year it seemed, and subcompact models had little buyer interest except for a few rare imports like the late 1950's BMW Isetta oddity. The Isetta was a strange little car with only one single door on the front of the car that seated just two. The driver had to connect the steering wheel on the door to the steering gear on the floor in order to drive the car as well. With a 236cc motorcycle two stroke motorcycle engine that produced just 9.5hp, the little Isetta was a success in Europe but not the U.S. American buyers were just ready to give up on so much American car power or luxury to get 50-70mpg like the tiny Isetta offered.

By 1960, as the American economy hit recession in the late Eisenhower years, American carmakers responded with a flurry of compact models to compete with the success of the compact Rambler from American Motors which sold for just $1880. Ford brought out the Falcon. GM brought out the revolutionary, but controversial rear engined Corvair. Plymouth had the Valiant. Little Studebaker had the ultrathrify Lark models. At the time, only the Volkswagon Beetle was the main foreign competitor. Japan was still struggling to build toys out of recycled soup cans in 1960 and the head of the new Sony company in Japan was having difficulty convincing the government and the public there that the transistor was the ticket to economic success for Japan. But by the later 70's, both Toyota and Datsun were able to make serious new dents into the imported small car market and began to challenge the market of Volkswagon a little.

The success of Volkswagon, and rise of Toyota and Datsun by 1970 spurred the development of the subcompact AMC Gremlin, but also Ford to develop the Pinto. GM spent even more money to develop the troubled Vega model. But it was the first serious attempts in modern times for the car makers to build truly smaller and higher mileage cars that were actually Volkswagon sized unlike the bigger compacts of the past.

By the 1980's and beyond, small cars had to become more safe and more high tech in design and the Ford Escort and Focus models were both based off of successful European models that were proven in use overseas.

Today, the development a new small car is an expensive project where the quality has to be very good as well as the fuel economy. It is nothing like the days of the $1300 1951 Henry J that cut costs by having fixed rear windows, no arm rests or no flow through ventilation. Even the 1970 compact Ford Maverick which sold for just $1995 left out the glovebox to cut costs. One of the main selling points of the Competing 1970 Hornet model from AMC which sold for $1994 was that it cost a dollar less and had a glovebox. Today such would hardly become a selling point with most new car buyers. Even small cars are a capital intensive business and the permanent high cost of gasoline will probably make the small car here to stay for good unless alternate fuel technology can make the larger cars or trucks more economical like a Toyota Prius hybrid model.

The American public may finally be ready for the subcompact models to become a permanent major share of the American automobile business for good. Just like in Europe where high gas prices have forced a market of smaller cars, motorcycles and motor scooters, America is adapting to the same sort of models as a response to the new reality of gas that will be priced between $4-$7 a gallon for the future.


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