New, smaller cars cost more

By Bill Visnic MOTOR MATTERS | Friday, September 12, 2008

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There's a fairly pronounced change happening in the U.S. auto market, and we already know what's driving it: high fuel prices.

You may, in fact, already be a part of the change if you've "downsized" to a more fuel-efficient - or smaller - set of wheels. But thanks to the cascade of consumer demand for vehicles with better fuel economy, combined with the ballooning cost of raw materials that go into making a new car, "smaller" no longer is necessarily going to mean "cheaper."

In short: look for the cost of small cars, and all new vehicles, really, to increase for several reasons. Here's why:

1. Increased demand.

It's not going to be just about people seeking better fuel economy. In the coming years, there's going to be a flood of so-called "Millennial" (people age 14-29) reaching driving age. Some 11,000 every day, according to research from Ford. These Millennials, many of them buying their first new car, account for 32 percent of the customers for subcompact cars.

Younger people, say Ford researchers, expect a lot of amenities and features that cost money - and aren't necessarily reluctant to go into debt to pay for what they want. So they'll pay more for a small car. That's what Ford's counting on for models like its all-new Fiesta, coming next year.

Much the same is the case for people downsizing from large pickups and SUVs. Those vehicles tend to have lots of premium equipment - all-wheel drive, leather seats, fancy entertainment systems - that downsizers won't want to give up, so they will demand the same kind of pricey features in their small cars. And because even loaded small cars will be considerably less-expensive than a premium truck or SUV, many won't blink at the sticker price.

2. Soaring materials costs.

The prices for steel, plastics (most are petroleum-based), aluminum and rubber have been rising at scary rates. Automakers had been absorbing most of the increase, but with overall new-vehicle sales slowing drastically this year, it's become impossible to avoid passing on some of the increase to buyers.

What's more, according to U.S. auto industry, expect that trend to reverse.

Honda - one of the most successful makers of small cars - bluntly told attendees at a large auto-industry conference last month that there's no doubt the price of new vehicles is going to go up.

3. Fuel-efficiency costs.

Ok, high-priced gasoline probably is here to stay, and so are concerns about global warming, so just about everybody's going to expect better fuel-efficiency from their new cars, trucks and SUVs.

That includes the U.S. government, by the way, which has set in stone a mandate that every automaker's fleet must average 35 miles per gallon by 2020, an increase of about 40 percent compared with today's average fuel economy.

Engineers say it can be done, of course, but vehicles likely will have to become smaller and lighter, essentially like they are in Europe. And getting there is going to require costly new technology like turbochargers and high-pressure fuel-injection for engines and more gears and sophisticated control systems for transmissions.

Increasing fuel efficiency means vehicles will have to get lighter.

And you already know what that means: lighter-weight materials such as advanced steels and composites, aluminum, titanium and magnesium all cost a lot more than conventional steel.

Americans have long been conditioned to think that small things should cost less. But as we strive for improved fuel economy and less impact on the environment that may no longer be the case for the vehicles we drive.

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