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Popularity of small cars means smaller profits for automakers, dealers

November 10, 2010

When automakers reported their sales for April, most industry watchers were bullish about the numbers. Analysts noted that sales, which came in at an annual rate of 11.2 million, were 20 percent ahead of a year ago, and that consumer confidence was at its highest since September 2007.

But overlooked by most observers is a change in buyer preferences that could make this upturn a lot less profitable than the last one in this highly cyclical industry.

"Consumer downshifting into smaller, and arguably less profitable, segments provides a weak foundation for a robust net income outlook," says Warren Browne, a General Motors executive turned analyst in Detroit.

Browne said volume growth is mostly coming in small and mid-size segments that historically return profits that are small or non-existent. Through April, these two segments represented 38.2 percent of light vehicle sales, compared to 36 percent during the same period last year.

Meanwhile, light truck segments that produce higher profits have remained flat or lost share. That includes large and small pickups, large and small vans, and small and mid-size sport-utility vehicles.

Except for those two hearty perennials, the Ford F-series and Chevy Silverado pickups, and the full-size Honda Accord, the other seven vehicles among the top 10 sellers are on the small side.

That consumers are thinking small isn’t entirely due to gasoline prices or the economy. Analysts attribute it partly to new market entrants and new features creating consumer interest. Both GM and Ford for instance, are introducing important new subcompacts this year: the Chevrolet Cruze and the Ford Fiesta.

Browne remains relatively pessimistic about car sales for the rest of the year, saying downward pressure will come from high unemployment, low housing starts, and weak consumer confidence.

He expects manufacturers to sell 11.6 million cars and trucks this year. While that is up 11 percent from 2009’s dismal performance, it is a far cry from the 16 million to 17 million that was considered normal just a few years ago.

And if the big stuff isn’t selling, that could double the pain.