Smaller is better? Some might call that idea an affront to a deeply ingrained American mantra of bigger, better, stronger. In the auto business, however, the answer to that question is getting increasingly obvious.
U.S. sales of small cars surged 23% in December, while sales of large cars and SUVs dropped 12% and 8%, respectively. For many in the industry, including the CEOs at this year's North American International Auto Show, smaller isn't just better, it's the future.
It's the environment, stupid
But not just any kind of small will do. As John Mendel, executive vice president of Honda (NYSE:HMC) America put it after unveiling Honda's new sporty Hybrid CR-Z, customers want a car that both excites them and "satisfies [their] conscience." That conscience aspect goes far beyond just great fuel efficiency. It's about low emissions, alternative fuels, improved battery technology, and less energy-intensive manufacturing processes.
Indeed, green was the theme at this year's auto show. In place of the show's usual festivities -- light shows, confetti showers, wacky stunts, and oversized concept vehicles orbited by scantily clad models -- the 2010 version was all about small and green. You would have been hard-pressed to find a presentation that didn't put these more staid concepts front and center.
Takanobu Ito, Honda Motors CEO said: "We are working in a comprehensive way dedicated to research and development of next-generation technologies in every field, to create products that bring joy to our customers and lead the way in reducing CO2 emissions." In addition to the Hybrid CR-Z, Honda also unveiled the FCX Clarity, a hydrogen-fuel cell vehicle that Ito claims is ready for market.
Ford (NYSE:F) also showed off a green thumb. "We are committed to, with every new vehicle, unsurpassed fuel economy," explained Derrick Kuzak, Vice President, Global Product Development. Ford's 2010 Fusion Hybrid was the North American Car of the Year at this year's show.
For an industry that for decades thrived on American demand for increasingly powerful trucks and spacious SUVs, time will tell whether or not this is a genuine paradigm shift. But this year's auto show showcased efforts that appear much greater and more far-reaching than a reaction to high gas prices or a short-lived marketing ploy to attract environmentally conscious consumers.
"Make no mistake ...Toyota is all-in, with advanced batteries ... and fully intends to raise the stakes in the years to come," explained Jim Lentz, President of Toyota Motor (NYSE:TM) Sales, right before he introduced his company's new Fuel Cell Hybrid Vehicle Advanced concept. The FCHV-advanced model, set to make its debut in 2015, is purported to have a single-tank fuel range of more than 400 miles.
General Motors maintains its plans to debut the all-electric Chevy Volt later this year. Whether or not the bankrupt U.S. automaker meets that promise or not, Vice Chairman Bob Lutz says GM plans to build as many as 60,000 Volts per year at full production. Not to be outdone, Chrysler, another Uncle Sam beneficiary, is also betting on fuel efficiency by bringing new parent Fiat's 500 microcar to the U.S. later this year. And motorists are already very familiar with Daimler's (NYSE:DAI) Smart car, and BMW's successful Mini line.
The auto majors aren't the only companies on a green kick. Chinese automaker BYD, a maker of battery electric technology and an investment in Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) portfolio, unveiled its new all-electric e6 vehicle to complement its established line of plug-in hybrids. South Korea's CT&T already has several electric commuter cars on the road in California, and Silicon Valley-based Tesla Motor introduced a new all-electric sedan. "In my view, the future is all electric," proclaimed Tesla Founder and CEO, Elon Musk. "It's only a matter of time."
Why so green?
Without question, high gas prices in recent year have the primary catalyst for this so-called green revolution in the auto industry. Former GM CEO Fritz Henderson assumed gas prices would reach $4 per gallon.
This was confirmed by our interview with Ford CFO Lewis Booth, who lamented the affect high fuel prices have had on the F Series pickup trucks, Ford's best-selling vehicle: "... clearly there's been a shift in sentiment from full-size pickups to smaller vehicles. At one stage, large pickups were up to 15% of the total market, now it's down to 11%, maybe with high gas prices it goes to 7%-8%."
At their peak in 2004, Ford sold more than 900,000 F Series trucks in the U.S. alone. This past year, Ford sold slightly more than 400,000.
Meanwhile, compact cars are gaining as a share of the U.S. total vehicle market, climbing 20.6% from 19.9% last year. AutoPacific, an automotive research marketing and consulting firm, forecasts a boom in small cars in the coming years, as customers increase their demand for better fuel economy and more environmentally friendly vehicles.
And though it's perhaps only a minor factor when it comes to car purchasing, you can't discount the stigma that foreign oil has in the minds of many U.S. consumers. Aside from the environmental benefits, wide adoption of alternative fuel sources would drastically reduce dependence on foreign oil. At the very least, it's a great marketing pitch. Honda's U.S.-built 2010 Civic GX uses only natural gas, a fuel that's both cheap and domestically abundant. Talk about your all-American car.
Regardless of the reasons, the green revolution in the auto world looks like it is here to stay. Those automakers best positioned to both ride the upward-sloping demand curve and drive innovation in the space could be big winners in the decade to come.
Who wins?
As this year's auto show revealed, almost everyone is looking to go green. Automakers that get it right will be big winners in the years and decades to come. Our Stock Advisor team has picked a few winners, but who do you think takes the crown? Sound off in the comments section below, and let us know what you think the future holds for the auto industry.
