Small isn't beautiful

Since last year, car industry has been struggling because of the great recession and low demand for new cars because of consumers are reluctant to pay a big amount of money these days. I knew people prefer small cars because of tight credits these days. However, I did not know exactly what is going on with car market and the economic theory behind this situation. This article is not only explaining current trends in car market, but also containing rich economics perspective which enable to analyze the future of car industry as well. Please check out the article if you are interested in car industry.

Contents:

The article mentions about the recent trends in car industry and acknowledges U.S. government policies which actually enabled GM and Chrysler to survive. It is also amazing that not a single factory in Europe has closed so far for GM and Chrysler. When GM stock price falls below $2, there was a fear that GM bankrupts and great recession becomes even worse.

Also, the article mentions current car trends of consumers. People prefer small cars these days and it suffers producers since small cars don't make a lot of profits. (e.g., Compare between a small car such as Fiat 500 and with a sport-utility vehicle such as the Audi Q7. Fixed costs are the same and variable costs of making Audi Q7 is only $14,700 higher than Fiat 500. However, Fiat sells around $15,000 compared with at least $58,800 for Audi Q7.)

The trend comes from several reasons. First, author states that the very cheap lease finance which can boost demand for more costly cars does not exist anymore in American, Germany, and Britain. Also, second hand values of cars also decreased these days. Moreover, demographic change is a big factor. Credit Suisse says that by 2020, 40% of new car buyers in developes countries will be over 60, compared with less than 30% in 2009. Elderly people tend to choose a small, cheap car and over-65s drive 45% fewer miles than average. Furthermore, many imoprtant car markets' governments are struggling against carbon-reduction targets and big cars are generally not favorable for the environment. Then, the article mentions how the industry can tackle with the problem of overcapacity in mature markets.