Is Small the Next Big Thing?

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Yet the old thinking about small cars looks increasingly dated. A fashion-conscious generation of Americans is coming of driving age, and automakers that fail to entice them with fun, inexpensive cars risk losing brand loyalties and future sales of pricier vehicles. At the same time, manufacturers are leveraging more components and platforms across a global portfolio of nameplates, defraying development costs and making it cheaper to adapt cars from Europe and Asia to American tastes. At the Detroit show, Mazda will unveil a compact minivan based on a Mazda3 platform, which also underpins the Volvo S40 and the European Ford Focus (Ford owns Volvo and a controlling stake in Mazda). Indeed, the concept of the small car is shifting as automakers slap different body styles onto similar architectures, reconfigure the interior and then niche-market the result to demographics like urban singles and upscale retirees, aiming to profit from annual sales of as few as 30,000 units.

What's in store? At the low-price end, Ford, Honda and Nissan are developing U.S. subcompacts with maximum roominess and funky exterior packaging--taking cues from Toyota's successful, boxy Scion xB--at basement prices under $15,000. "There's a growing opportunity down there," says Jed Connelly, senior vice president of sales and marketing at Nissan North America. "Everyone paid attention to what Scion did." With eye-catching body styles (geared to the MTV generation) and a broad custom-parts program for hot-rodders (who boost profit margins when they load up on options like body kits and turbochargers), Scion has carved out a compelling niche. Jim Press, executive vice president of Toyota Motor Sales, says Scion helped boost sales past 2 million units for the first time in 2004. Toyota's rivals aren't planning their own youth brands; they don't have $22 billion in cash and marketable securities to play around with as the Japanese automaker does. But Scion's success wasn't lost on the world's largest automaker. "Scion said you can do things differently, be more expressive, have more fun [with small cars]," says GM design executive Mike Simcoe.

Simcoe acknowledges that bold styling has hardly been a hallmark of GM's U.S. small cars. Chevy left its flagship compact, the Cavalier, to languish for 15 years without major changes in design, and Saturn has been cranking out dull iron like the Ion, whose sales have sputtered since it was introduced in 2002. But Simcoe says there's a "change of consciousness" about small cars at GM, and executives vow to retake share in the segment with models like the Cobalt, an all-new Chevy that replaces the Cavalier. Critics have given the Cobalt solid marks for improvements in build quality and cabin design, and Chevy is pitching it hard to the Pimp My Ride crowd as the Corvette's little brother; a hot-rod edition is already out. GM aims to market four more models based on the same platform, starting with a retro-themed small wagon called the HHR due this summer. As for Saturn, GM is pumping an estimated $3 billion into overhauling the lineup, and executives say they have reacted quickly to slack demand for the Ion with an interior redesign. "Small cars are an integral part of our strategy," says Lori Queen, an engineer in charge of GM's compact fleet.