Small-Car Segment Getting CrowdedSmall-Car Segment Getting Crowded

LAS VEGAS – Some automotive residual experts wonder who will buy all of the small cars auto makers are bringing to market.

They speak of a potential glut while questioning whether U.S. consumer interest in that segment is great enough to justify the additional products.

“I’d be concerned with the subcompact and compact segments because of the number of cars and players today,” says Ricky Beggs, managing editor of Black Book, a used-car pricing guide. “A lot of auto makers have joined in.”

The lower-small segment now includes seven contenders, including the all-new Chevrolet Sonic and redone Kia Rio. There are 23 upper-small contenders, such as the Buick Verano, just arriving on dealer lots. The eight competitors in the small-specialty segment include the newly introduced Fiat 500 and Hyundai Veloster.

Through November, small-vehicle sales totaled 2.1 million units, 18.5% of the U.S. light-vehicle market, according to WardsAutodata.

Many new arrivals have received accolades for high quality despite their relatively low prices.

At one time, the Toyota Corolla and Honda Civic were considered just about the only well-built small cars available, says Joe Spina, senior manager-remarketing for Edmunds.com. “Now, there are so many good cars in that segment.”

Citing the growing numbers, he predicts slim profit margins for today’s small cars when they hit the used-car market.

Some auto makers’ financing units offer attractive lease programs for small vehicles, Spina notes. “The captives will pressure dealers to absorb these vehicles when they come off lease in two or three years.”      

Stricter prospective government fuel-economy mandates are spurring auto makers to build more little gas sippers, despite limited consumer demand, says Jonathan Banks, executive auto analyst for the National Automobile Dealers Assn.’s used-car pricing guide.

The Obama Admin. proposes a corporate average fuel economy of 54.5 mpg (4.3 L/100 km) by 2025. That likely will become law next summer.

“CAFE basically is forcing auto makers to make all those small cars,” Banks says at the 2011 National Remarketing Conference here. “But you can’t create demand.”

If the government stands firm on the 54.5 mpg target, “there would be so many small cars,” he says. “There would be too many.”

Because of CAFE requirements, “the small-car segment is getting crowded,” says Eric Ibara, residual risk analyst for Kelley Blue Book.

“We don’t see the demand for these vehicles meeting supply,” he says, predicting weak prices in coming years for the segment. “It just doesn’t work when government legislates what demand should be.”

But if gasoline prices dramatically increase, prices for new and used compacts will go up too, he says of future values. “If that happens, and you have small cars in your portfolio, you are golden. Otherwise, our thinking is that segment will be hard-hit.”

[email protected]