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Chrysler Group CEO Dieter Zetsche promises that Dodge's next small car, due next year, won't be another frumpy hauler either. "The Neon is a nice vehicle," he tells TIME, referring to the current model, "but it's just another box." DaimlerChrysler, Mitsubishi and Hyundai have co-developed a high-tech, more fuel efficient small engine to be built at a new plant in Michigan, and sharing costs should save Chrysler as much as $100 million annually, money that could go toward packing more premium content into compacts and in theory boost their appeal.
The other side of the small-car equation: automakers see a new opportunity in premium-price vehicles. Volkswagen has tried that for years in the U.S. with mixed results, and the concept would have got you laughed out of most planning meetings a few years ago; indeed, BMW tried it in the 1990s, marketing a four-cylinder hatchback in the U.S., which fizzled. But that was before the Mini attracted Porsche and Hummer owners alike with its outsize personality. Four years into its life cycle, the Mini is selling strongly despite a price tag nearing $30,000 for a loaded convertible. Eyeing that market, Pontiac and Saturn intend to move up with forthcoming roadsters based on rear-wheel-drive platforms; meanwhile Audi and Mercedes-Benz plan to head downmarket, importing luxury compacts this year, with Mini's parent, BMW, to follow with a derivative of the compact 1-Series launched in Europe last year. "We need to maintain our appeal to young people," says Tom Purves, CEO of BMW USA, explaining the idea behind the budget Beemer, scheduled to arrive in 2006.
Whether there's profit in these products is a matter of debate. The industry is terrified that the SUV party is winding down, forcing carmakers to scavenge for sales in segments once considered a dead end. Large-SUV sales weakened last year, driven down by higher gas prices (or lofted by low interest rates and generous finance deals, depending on your take). Ford is killing its largest, thirstiest and priciest SUV, the Excursion. "Detroit's biggest fear is that consumers don't want big SUVs anymore," says Stephen Girsky, a managing director at Morgan Stanley. "Dealers have a 109-day supply on their lots, and all of a sudden their bread-and-butter market may be going away." Girsky compares the situation with that in 1980, when the industry had a glut of big V-8 vehicles just as energy prices spiked and interest rates started rising. No one is panicking, but the Big Three face mounting pressure to profit from small and mid-size vehicles--not least because of ongoing encroachment by import brands into the light-truck market.
The free-for-all is terrific for consumers, of course. Some 300 nameplates are vying for shoppers, and features like power windows and antilock brakes are becoming standard equipment in modest-price models. Virtually all the new vehicles are roomier and faster too, including the small ones. Today's Corolla sports larger dimensions and more horsepower than a 1983 Camry; every Civic has outgrown its predecessor. Seating positions are getting higher too. After all, everyone wants to feel big and tall in their small car. --With reporting by Adam Pitluk/ Dallas and Joseph R. Szczesny/Detroit