Big Surge in Smaller Cars

And foreign ones, collectively, move up to No. 2 in the market

One bright spot in the U.S. economy in 1979 was the surprising decline in gasoline use, which was off 4.9% from the previous year. Rising fuel costs are finally prodding Americans to cut back on consumption, and the need for this becomes more acute all the time; indeed, last week Venezuela, Libya, Indonesia and Iraq announced price hikes of 10% to 15%, which could add 5-c- to 7-c- per gal. to the wholesale price of imported oil and a few cents more to gas at the pump. Americans are also reacting to higher prices by switching to smaller autos at a faster pace than anyone had expected.

Demand is so strong for Detroit's more fuel-efficient offerings that at one point buyers of General Motors' new X cars had to wait four to six months for delivery, and Chrysler Corp.'s popular Dodge Omnis and Plymouth Horizons were being sold before they reached the showrooms. The order backlog for Volkswagen's Pennsylvania-built diesel Rabbit remains long. But nowhere is the rush to gas sippers more evident than among the imports. While the overall sales of the U.S. auto firms have plunged, foreign makes are booming--so much so that as a group they have moved ahead of Ford and taken over the No. 2 spot in the U.S. car market for the first time ever.

Americans bought more than 2.3 million foreign cars last year, pushing the imports' share of U.S. auto sales to an unprecedented 22%. That is up from the 16.2% share they gained in 1978 and far ahead of the 12.9% they had in 1972.

While the American carmakers still sell more small autos in the U.S. than foreign manufacturers do, they command only 63% of this market, which now accounts for more than half of all cars sold and is growing fast. The top-selling small models are still U.S. products: the Ford Fairmont and the Chevrolet Citation among the compacts, and the Chevette and Chrysler's Omnis and Horizons among the subcompacts. But the third and fourth bestsellers in the subcompact category are the Toyota Corolla and the Datsun 210.

After 1977, when foreign cars grabbed a then record 16.7% of the market, their sales began to slip, partly because the yen rose enough against the dollar to drive the prices of Japanese imports up by 25%. But suddenly last spring, gasoline shortages reappeared, and demand for small cars took off. Because Detroit does not as yet produce enough economy models, thousands of would-be American car buyers have been forced to turn to imports.

The big winners have been the Japanese. While U.S. sales fell by about 11% for the domestic automakers last year, they rose by an estimated 10% for Toyota, 28% for Honda and 36% for Datsun. Japanese models now account for nearly 70% of all imports sold in the U.S.

U.S. automen complain that the imports are benefiting from unusual advantages, including a somewhat exaggerated reputation for fuel economy. True, the ten most fuel-efficient cars sold in the U.S. are all foreign makes. But the automen say most of the imports that are selling well are not significantly better on gas than the most abstemious U.S. cars. For instance, Toyota's compact Corona gets about the same mileage as Ford's Fairmont; the Corolla gets only slightly better mileage than the Chevette, which, with a rating of 26 m.p.g. in city driving and 36 m.p.g. on the highway, is the most gas-stingy U.S. car.

Another Detroit peeve is the imports' low prices. At least four Japanese manufacturers now offer models for well under $4,000; for example, the Toyota Corolla Tercel's base price is $3,698. The price tags on comparable U.S. subcompacts are significantly higher: $4,289 for a two-door Chevette hatchback, $4,492 for American Motors' Spirit D/L, $5,271 for the two-door Omni hatchback.

The imports are relatively cheap now partly because the yen fell back sharply against the dollar last year. Generally, their prices have risen by just 1% to 5% since the start of the 1979 model year, while those of U.S. cars have moved up sharply: the cost of a Chevette has climbed by 13.1%, the Ford Pinto hatchback by 15.8% and the Omni/Horizon by 17.6%.

Much of the U.S. price escalation reflects Detroit's need to squeeze more earnings out of small cars. Typically, the manufacturer's profit on an economy model is between $500 and $700, compared with more than $1,500 on mid-size autos and as much as $5,700 on luxury cars. So with sales of their larger models going soft, the automakers are hoping to make more money on the cars that are selling.

The import surge could touch off renewed squabbling with Japan over its trade practices. While as yet no one in Detroit is flatly accusing Japan's automakers of "dumping"--that is, exporting cars at prices that are lower than in the home market--U.S. automen grumble that Japanese people pay more for their cars than foreign buyers do. Reason: a 20% value-added tax (VAT) is levied on car purchases in Japan but not on those cars shipped to the U.S. In effect, Detroit automen say, Japanese motorists are subsidizing their auto industry's exports.

Japan exports about half the cars it produces, and its overseas sales are its biggest single source of foreign exchange, amounting to $17.5 billion last year. Fully 41% of those billions come from the U.S., which is by far Japan's most important market. But, as the Japanese themselves are aware, grumbling in the U.S. about the impact of car imports on American jobs and profits tends to mount sharply whenever the foreigners' market share climbs above 20%.

A few weeks ago, the Carter Administration dispatched Deputy Special Trade Representative Robert Hormats to Tokyo to suggest some ways that the Japanese might avoid triggering a new round of protectionist sentiment in Congress. Some U.S. automen would like to see a few import restrictions. But the Administration argues that many cost-conscious U.S. consumers might properly be riled if the availability of Japanese models is arbitrarily curbed. Instead, the Administration is urging the Japanese to consider contributing to the American economy by setting up U.S. production facilities, as Volkswagen has done.

Both Toyota and Honda are at least studying the possibility of building U.S. plants. Whether or not they decide to go ahead, there are some welcome signs that the Japanese have learned that foreign production can be a useful way to build good will with their trading partners. Nissan, which makes Datsun cars, is planning to increase production in its factories in Australia and Mexico and is considering building in Spain. The British, who forced the Japanese to agree to a sharp limit on auto imports in early 1978, last week concluded a striking deal with Honda: starting in 1981, the ailing government-owned auto colossus, British Leyland, will begin turning out a new, medium-sized Honda model. The hope is that the car, code-named Bounty, will help save the company, which employs about 191,000 people, from total collapse. BL has been so weakened by financial difficulties, low productivity and frequent strikes that it currently has only 20% of the British market.

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