Economic Perspective: What’s Behind the Death of Small Cars?

MARY WALDEN:

“Today’s program asks, ‘What behind the death of the small car?’ Mike, several auto companies have announced they’re phasing out small sedans and compact cars in favor of larger crossover vehicles, SUVs and trucks. This represents a major shift in the auto industry. Why is it happening?”

MIKE WALDEN:

“I find this very fascinating. I used to be a real true auto-enthusiast so I followed autos. I could tell you the make of an auto and the model if it went down the road. I don’t do so much anymore, but I find this very fascinating. If you read and talk to experts, they see a number of factors here that have really caused this.”

“Number one: Larger vehicles are simply more profitable for auto-makers to produce and sell than smaller ones. So if the economic factors are such that they can focus on larger vehicles they’re going to try to do that, and I think many of the economic factors are pushing in that direction.”

“For example, recently there have been changes in environmental regulations that are causing auto-makers not to have to increase their fuel efficiency as much. They don’t have to worry about that, and of course smaller vehicles are more fuel efficient so if they don’t have to boost their fuel efficiency numbers that’s going to move them away from small vehicles to large vehicles.”

“Then going along with that gas prices are lower. We saw gas prices really go down at the end of 2018. So drivers are not as focused on fuel efficiency as they used to be. And then lastly, more and more drivers simply like the versatility, the spaciousness and the safety of large vehicles.”

“So you’ve got a number of trends here, I think, moving in the same direction, and that direction is towards larger vehicles being manufactured and sold.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.