Detroit Markets Smaller Cars For High Gas Prices

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The price of gas is rising rapidly: The national average for a gallon of regular unleaded gasoline topped $3.55 this week, according to AAA.

Rising gas prices don't just affect how much Americans drive. As the cost to fill up rises, it could affect what vehicles Americans drive, which could have consequences for the recovering U.S. auto industry.

The industry is very different from the last time gas prices took a steep climb, in 2008. Now, there are more small and compact cars being produced by the Detroit Three.

Demand For Smaller Cars

The Ford Focus is the kind of car none of the U.S. automakers made very well — if at all — a few years ago. It comes with all of the bells and whistles, including a navigation system, sunroof, leather seats and 11 different sets of rims. The base model is about $16,500; a fully loaded version goes for about $23,000.

"What we're finding is customers are paying higher transaction prices for nicer cars," says Lewis Echlin, the group marketing manager at Ford Motor Co.

So, customers want smaller cars and they're willing to pay more for them.

To meet that demand, Ford has the Focus and Fiesta. General Motors has the Aveo and the Chevy Cruze, and Chrysler will soon get the Fiat 500. All are small cars with high fuel economy. And each of them can be tricked out. They are not like the old econo-boxes such as the Chevy Nova or the Ford Escort.

Slowly but surely Detroit is shifting its attention from SUVs to cars. For instance, in 2004, 65 percent of the vehicles Ford sold were trucks and SUVs. In 2011, that number dropped to 40 percent.

So, as gas prices go up and people begin to look for more efficient cars, Echlin says, Ford and other automakers are prepared for it.

"Not to toot everybody's horn, but corporate fuel economy has gotten generally better," he says.

The Economy's Impact

Michelle Krebs, an analyst for Edmunds.com, says small cars were the soft spot for the Detroit Three before the recent bankruptcies and restructuring. That's because with high fixed costs, such as pensions and retiree health care, automakers couldn't make real profits on anything but big cars and SUVs.

"The American car industry is in far better shape than when gas prices spiked in 2008," she says.

All automakers "pushed their break-even points way down," she adds. "So they're much more able to weather downturns, whatever they're caused by — gas prices — than they were before, because they cut costs so dramatically."

Nigel Gault, an economist with IHS Global Insight, says while Detroit may be poised to handle a gas price increase, there's still the overall economy to think about, which has a definite impact on car sales.

Gault says the big question is whether people who have jobs "start to fear that maybe even though they survived so far, they might be at risk of losing their own job."

He says we're not at that point yet. But he says when consumers feel that gas prices could stall the economy, the first place they'll cut back is big-ticket purchase such as cars.

If it happens this time, Gault says it very likely won't be a fatal blow. But it will still hurt.