GM's Robert Lutz: Higher gasoline prices will fuel desire for small cars.
While Hurricane Katrina caused a spike to the $3-plus per gallon range in the United States, it was the steady climb in gasoline prices in the months preceding the killer storm that caught the attention of automakers.
GM Vice Chairman Robert Lutz says higher fuel prices, if sustained, inevitably would push Americans toward smaller cars.
"If U.S. fuel prices start equaling fuel prices in Europe, we will have the same vehicle type over time that Europe does - a very large B-class at the bottom with the vast majority of people driving Cobalt-sized cars," Lutz said in an interview at the Frankfurt auto show.
"Fuel prices would have to go to European levels for that to happen. If it stays (in the $3 to $4 per gallon range) it will result in some market shift. It has to."
Indeed, the shift already is under way at the upper extreme of the U.S. market. In a market that was up 3.8 percent overall in August, sales of the biggest SUVs and pickup trucks tanked.
August sales of the Ford Expedition slid 40.2 percent from a year earlier; the Chevrolet Tahoe was down 33.9 percent; the GMC Sierra, 30.3 percent; and the Toyota Sequoia, 29.4 percent.
Even at $3 a gallon, U.S. pump prices still are significantly shy of European levels. Gasoline in western Europe was selling for the equivalent of about $6.08 per gallon last week.
At that level, it's easy to understand what drives European buying preferences. Colin Couchman, an automotive analyst at Global Insight in London, says the two smallest car segments, A and B, accounted for about 31.6 percent of all western European sales in 2004, or about 4.6 million units.
Those cars, which include such nameplates as Volkswagen's Polo and the Opel Corsa, are powered by 1.5-liter engines and smaller.
European penetration of fuel-efficient diesel engines was 48.2 percent in 2004, according to ACEA, the European automakers' trade group.
Jeff Schuster, automotive analyst at J.D. Power and Associates, doubts that A-segment minicars and B-segment subcompacts will ever become significant players in the United States. But he expects automakers to boost their C-segment compact offerings with different body styles and added utility.
These vehicles, typically powered by 2.0- and 2.5-liter engines, will be "small for Americans, but not in the global sense," Schuster said.
Schuster says European makers, in particular, would have a hard time exporting smaller cars profitably while the weak dollar dilutes U.S. buying power of products from European countries.
Facing a choice
European makers face a choice of raising prices or accepting lower margins - a dilemma that has stalled the U.S. launch of vehicles such as the BMW 1 series and the Mercedes-Benz B class.
Americans would only move to subcompacts or minicars if they were convinced high gasoline prices were here to stay, Schuster says.
"If we were to hold in the $3.50 to $4 per gallon range, and it were not perceived as temporary, we would be on the cusp of a fairly major shift," Schuster said.
Lutz said U.S. automakers are better positioned than in the past to make appealing small cars.
"I think the American industry has stopped considering (small cars) as commodity vehicles," Lutz said.
"There used to be a view expressed: 'Hey, let's just make these cars. Nobody cares about them. Nobody cares whether they are bad or good. It's for the people who can't afford anything better, and price is the only thing that counts.' "
Paul Halata, CEO of Mercedes-Benz USA, questions whether vehicle size will change. Instead, he says he expects automakers to handle rising fuel prices by producing more efficient engines, particularly diesels, in existing size vehicles.
"It's really not the size of the car," Halata said. "It's the engine that you've got in it."
Tom Purves, CEO of BMW of North America, says he already sees evidence of pump-price-influenced shopping - at the company's Mini brand.
"I can't tell you I have any hard evidence," Purves said. "But I can tell you that in the last month, Mini dealers have been inundated on Saturdays by SUV owners saying, 'I've had enough of this.'