The Future Of Small Cars Around The World

The transition from combustion to electric power is certainly reshaping the global automotive industry. Most everything relating to cars is changing– from the concept of what it is and the way in which manufacturers design and develop it, to the way in which customers drive and interact with it.

Some countries and manufacturers are more prepared for this change than others, and the same can be said for individual vehicle segments. While SUVs and premium cars are usually more adaptable to new powertrains, other segments such as subcompacts face more challenges. At the end of the day, it’s a question of price. Despite efforts, batteries are still a significant factor in the production costs of an electric vehicle. And that cost doesn’t really change, be it a high-end luxury vehicle or a small city runabout.

This is why European and American automakers started growing their EV portfolios with luxury and premium vehicles. Those buyers are already primed to foot a higher bill, but shoppers seeking affordable subcompacts and city cars aren’t willing or able to step up. That’s why we have far fewer small EVs to choose from. Will that change going forward?

The Future Is Dim

In the first half of 2023, only 18 different small EVs for A and B segments were available in Europe. In China, however, there were nearly double the choices with 34 different models. The United States sold just two: the Chevrolet Bolt EV and the Mini Electric. These numbers contrast with the large amount of small combustion engine cars available to buyers.

The future of small cars therefore has two faces. On the one hand, there are those produced in Europe, which will survive depending on whether or not manufacturers manage to bring down battery costs. Europe is a region where car production is very expensive, so any increase in costs will continue to damage the financial viability of less profitable segments. Furthermore, the strong pressure exerted by governments in favor of electric vehicles is already forcing manufacturers to stop producing small cars or to move production outside of Europe.

On the other hand, while this pressure grows on European manufacturers, it becomes the perfect opportunity for the Chinese industry to fill this gap. China, in fact, can produce cheaper electric cars thanks to the strong commitment of the central government and a more competitive workforce. A Chinese subcompact costs on average 58 percent less than non-Chinese subcompacts, meaning it has the potential to shake up overseas markets.

European-produced city cars and small cars are therefore doomed unless manufacturing costs are reduced, or regulations are implemented that limit the influx of Chinese cars to the region.

Are Small Cars And City Cars Really A Key Segment?

This brings us to an interesting quandary. Will US or European automakers be interested in producing small cars, which generally aren’t as profitable as larger segments? Or will these companies abandon the segment entirely, leaving small cars to Chinese companies? Or could there be a melting pot of production? Already we are seeing some Western brands investing in plants and manufacturing cars in China, both for the Chinese market and abroad.

And people are still buying them. The small A and B automotive segments accounted for 23 percent of passenger car sales in Europe in 2022, 51 percent in India, 28 percent in Southeast Asia-Pacific, and 38 percent in Africa. As a result, they are still an important segment in terms of volume. Will the West give in to Chinese manufacturers even if they don’t generate the same profits as higher segments do?

The author of the article, Felipe Munoz, is an Automotive Industry Specialist at JATO Dynamics.

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