The Future of Small Cars: Is there a Dim Outlook or a Glimmer of Hope?
The automotive industry is currently undergoing a major transformation as the world shifts from combustion engines to electric power. This transition is not only changing the way cars are designed and developed, but also how customers interact with and drive them. However, not all countries and manufacturers are equally prepared for this change, and different vehicle segments face varying challenges.
While SUVs and premium cars are more adaptable to new powertrains, other segments such as subcompacts face more obstacles. One of the main hurdles is the cost of batteries, which remains a significant factor in the production costs of an electric vehicle, regardless of whether it’s a high-end luxury vehicle or a small city car. This cost factor has led European and American automakers to focus their efforts on expanding their EV portfolios with luxury and premium vehicles. Buyers of these vehicles are already willing to pay a higher price, but those seeking affordable subcompacts and city cars are not as keen to make the switch to electric. As a result, the market for small EVs is significantly smaller compared to other segments.
Looking at the numbers, in the first half of 2023, Europe had only 18 different small EV models available for A and B segments, while China offered nearly double the options with 34 different models. The United States, on the other hand, had only two small EVs for sale: the Chevrolet Bolt EV and the Mini Electric. These figures are in stark contrast to the wide variety of small combustion engine cars available to buyers.
The future of small cars seems to have two distinct perspectives. In Europe, the survival of small cars depends on whether manufacturers can find ways to reduce battery costs. Europe is already an expensive region for car production, so any increase in costs would further damage the financial viability of less profitable segments. In fact, the pressure from government regulations favoring electric vehicles has already led some manufacturers to either stop producing small cars altogether or to move production outside of Europe.
On the flip side, the Chinese industry has a perfect opportunity to fill this gap created by European manufacturers’ struggles. China has a strong commitment from the central government to produce cheaper electric cars, coupled with a more competitive workforce. On average, a Chinese subcompact costs 58 percent less than a non-Chinese subcompact, making it a potential disruptor in overseas markets.
However, for European-produced city cars and small cars to survive, manufacturing costs would need to decrease or regulations would need to be implemented to limit the influx of Chinese cars into the region. Otherwise, these segments face an uncertain future.
This begs the question of whether US and European automakers will continue to prioritize the production of small cars, which are generally less profitable than larger segments. Will these companies abandon the segment entirely, leaving small cars to Chinese manufacturers? Or could there be a melting pot of production, with Western brands investing in plants and manufacturing cars in China for both the domestic market and export?
Despite the challenges, small cars are still a significant segment in terms of volume. In 2022, they accounted for 23 percent of passenger car sales in Europe, 51 percent in India, 28 percent in Southeast Asia-Pacific, and 38 percent in Africa. This data suggests that small cars remain important to consumers, even if they don’t offer the same profit margins as higher segments.
In the end, the future of small cars is uncertain. It remains to be seen whether US and European automakers will yield to Chinese manufacturers in this segment, or if they will find ways to make small electric cars financially viable. The transition to electric power is reshaping the global automotive industry, and the fate of small cars hangs in the balance.
Note: The views and opinions expressed in this article are those of the author, Felipe Munoz, an Automotive Industry Specialist at JATO Dynamics.