Chinese Are Coming, But They Need a Distribution Network

DETROIT — North American sales of subcompact cars under $10,000 will increase more than 40% in the next six years, but remain a small part of the overall market.

So predicts Wim van Acker, managing partner-North American operations for Roland Berger Strategy Consultants.

There is no great demand for the so-called A- and B-car segments in the U.S. Those include compact vehicles so small that some are virtually “dressed-up motorcycles,” says Acker.

Tiny A-segment cars are not yet sold in the U.S., although DaimlerChrysler AG plans to sell Smart minicars here next year through the United Auto Group dealership chain.

The reason small cars are not in big demand in the U.S. — compared with Asian and European markets — is the low cost of gasoline here, Acker says.

Americans complained and fullsize SUV sales softened last year when gasoline prices nearly reached $3 a gallon. Nevertheless, the U.S. remains “a low-cost gas haven,” similar to oil-rich Venezuela, Acker says.

In contrast, gasoline “everywhere else” runs $6-$7 a gallon, enhancing the attractiveness of tiny fuel-efficient vehicles, he says. “For us, a 50-cent price increase is huge. A low-price day in Europe is a $50 fill-up.”

The A- and B-car segments accounted for 14 million unit sales worldwide last year, with 5.5 million of those deliveries in Europe. Globally, the two segments are expected to grow 4% this year, driven by demand for low-cost individual mobility in emerging markets, Acker says.

Small-car sales in the U.S. are expected to increase from 400,000 now to 700,000 by 2012, says Acker, a panelist at the Society of Automotive Analysts' 19th annual industry outlook conference held here.

Acker does not foresee a flood of low-priced, small import vehicles threatening domestic auto makers.

But a “latent demand” for such vehicles could run as high as 3 million units if the segments gain momentum and if people are sold on them, he says.

“It is something to pay close attention to.”

He notes that government-subsidized auto manufacturing in China is over capacity, prompting the industry to look for overseas markets. Chrysler Group recently struck a deal to bring Chinese-made small cars to the U.S.

Fellow conference panelist Michael Robinet says Chrysler cannot profitably produce such low-margin vehicles domestically.

American vehicle preferences are not expected to swing to minicars. But, says Robinet, vice president of Global Forecast Services for CSM Worldwide Inc.: “Five years ago none of us would be asked to talk about A and B cars, even though outside the U.S. they are the norm.”

He says the U.S. demand for such cars is moving ahead, but sputtering.

Acker says Chinese auto makers looking to enter the U.S. market may hit turbulence in fostering brand identity and establishing a stable dealership network for selling, financing, insuring and servicing vehicles.

Robinet agrees distribution is a vital component. “China will eventually come here, but it is all about distribution,” he says. “The U.S. is littered with brands that couldn't make it because they couldn't go coast to coast.”