Small Isn't Beautiful

Carmakers are beginning to recover from the blows dealt during the financial crisis, but they now face what is perhaps an even bigger problem: consumer preferences are changing--people don't want big cars anymore. On one hand, carmakers are feeling a sense of relief; huge production cutbacks are largely over, and volumes have started to rise. Credit is again flowing, and some carmakers may even turn a profit by the end of the year. But, while production cutbacks have occurred in the US, no car factories in Europe have closed, causing worry that the withdrawal of scrappage incentives like the "Cash for Clunkers" program that have propped up demand will cause another reduction in new car purchases. Other issues are an aging market, particularly in Europe, that likes smaller cars and increasingly stringent emissions requirements. Small cars are much more difficult to make a profit on than large cars and SUVs, but it looks like carmakers will have to find a way to do just that if they want to stay afloat.