The Trouble With Small Cars

Felix Salmon is back from vacation and considering the fortunes of RBS and General Motors, the latter of which just decided to not sell Opel, its main European division, to an unholy investment consortium made up of Canadians, Russians, and German laboristas. He uses both companies to make a valid point about why big and boring can be better than big and not boring, in the pre-financial crisis sense. (Too much risk!) But he also says this about GM:

“Opel is GM’s best hope for the future, in that it’s very good at making small, fuel-efficient cars. Selling it makes much less sense than trying to import that technology into the US. If GM’s management can work out a way in which keeping Opel costs less than selling it, that’s a great result for the company.”

There are several problems with this, although it could be that Salmon is simply not being specific enough about what GM might do with Opel. Opel platforms have been used for cars sold in the United States, but GM rebranded them as Saturns and tried to sell them to younger customers who might have considered Chevy insufficiently stylish. GM is now in the process of shutting Saturn down, so the sales channel for Opels is closed. Opel engines are another story; those could wind up in a variety of GM vehicles.

Admittedly, both the Chevy Malibu and the new Buick LaCrosse use Opel platforms. But neither is a small car.

There’s also the question of whether GM even wants to sell small cars. Back in 2007-08, when rising gas prices pushed consumers toward more fuel-efficient cars, GM luckily had a small vehicle, the Chevy Aveo, based on a design produced by Daewoo, its Korean division. But profit margins on small cars tend to be ridiculously thin, and the common wisdom was that Detroit was happy to give the business to the Japanese and the newer Asian imports so that it could concentrate on more profitable, larger cars and trucks.

On top of this is the fact that Americans only intermittently like small cars. When gas prices spike, they buy them. When gas prices level off, they realize that they don’t fit the American lifestyle very well, and they get rid of them. There’s already a backlash, or episode of buyer’s remorse, mounting after increased small-car sales in 2008.

Plus, looming on the horizon are ultra-low-cost small cars from India and China—cars that are so cheap that it would be pointless for GM, Ford, or Chrysler to even try to compete with them.

However, a car doesn’t have to be small to be efficient. The forthcoming Chevy Volt, while not inexpensive, will be relatively good-sized, but with its combination of an electric and gas-motor, produce high MPGs and low-emissions. GM builds a hybrid version of its massive Cadillac Escalade that gets 20 mpg. Ongoing advances in engine technology will lead to higher-displacement engines, as well as turbocharged engines, that can produce the kind of power that Americans typically want while still managing the kind of MPGs that will fulfill the 35.5 mpg CAFE fuel-economy target that the EPA has set for 2016.

The real question here is whether GM is keeping Opel because it needs small cars—or because it wants access to international markets that it would have lost if Opel had gone to Magna and the Russians. A bright spot in GM’s ordeal over the past decade has been its international business. While it continues to lose market share and shed profits in North America, it makes money in China. I doubt it wants to leave Europe, and the potentially large Russian auto market, to Ford (F) and other global competitors.