How The Small Car Died In America - The Autopian (2024)

My 1972 AMC Ambassador is supposedly a ‘big car.’ It hails from the era of great American land yachts, and on the rare occasion that strangers stop me to talk, they usually comment on its size and say, “They don’t make ‘em like that anymore!” Except, the Ambassador doesn’t feel that big today. In the average parking lot, it’s dwarfed by scores of trucks and SUVs. It seems like almost all the small cars are gone, and even compact SUVs aren’t so compact anymore.

FCA (now Stellantis) canceled its compact Dodge Dart in 2016, followed by the midsize Chrysler 200 in 2017. Ford started killing off all its cars except the Mustang in 2018. Both claimed their resources were better spent on trucks and SUVs. Aside from Tesla and Lucid, GM is the only American manufacturer to sell traditional cars. It currently offers four, and none of them compact: the Chevy Malibu, Chevy Corvette, Cadillac CT4, and Cadillac CT5.

Although Japanese and Korean brands still offer small sedans and hatchbacks here, they’ve been trimming their offerings in favor of SUVs. 2020 was America’s last year for the Toyota Yaris and beloved Honda Fit. The Kia Rio and Hyundai Accent bowed out in 2023, and the Mitsubishi Mirage is slated for discontinuation here after 2025. Kia is replacing its small Forte sedan with the K4, which is notable for being a compact car that’s actually quite large.

What is happening to all the small cars?

The finger has been pointed at everything from gas prices to identity politics to the “SUV loophole,” to crash safety, to our insatiable demand for SUVs and trucks, but I think there are two major forces here that most overlook: inflation and interest rates.

Conventional wisdom usually links the rise (and fall) of small cars to the price of gasoline, which makes sense. With less weight to carry, less surface area to force through the wind, and smaller engines, small cars usually get better gas mileage than large cars. But to attribute our nation’s automotive buying habits solely to cheap gas is an oversimplification. Inflation and interest rates have a much larger impact on our car buying habits than often get credit.

The First Modern Compact Car

The first successful compact car sold in America was the 1950 Nash Rambler, which eventually grew from a model into a whole brand, after Nash and Hudson merged to form American Motors. Ramblers struck a chord with buyers because they offered almost the same room as a full-size car, but in a smaller, more maneuverable, and more efficient package. AMC president and CEO George Romney even coined the term “compact car” to separate them from the stigma of being “small,” which to Americans at the time equated to “cheap.”

“George wanted to make sure there was, in the buyer’s mind, a realization that there is a difference between a compact car and a small car,” explained my colleague Pat Foster during an interview for our documentary on AMC. “At the time, a Fiat was a small car. A Rambler was a compact car.”

Early Ramblers were loaded with generous standard features, ones that imports didn’t have and even Ford and Chevrolet charged extra for. By contrast, other small cars were sad, bare bones vehicles. The Kaiser Henry J, Willys Aero, and Hudson Jet all failed in part because they didn’t navigate the market as well as the Rambler.

“When the Henry J came out in ‘51, that car was stripped down so much. I mean, you’d find more features in an empty beer can,” chuckled Foster. “And it became known as a cheap car with a cheap price for poor people. Now who wants to be known for, ‘Oh yeah, you drive that poor person’s car!’”

[Editor’s Note: Interestingly, this is the same basic mentality that doomed the cheapest new car in the world, India’s $2500 Tata Nano – JT]

When the so-called “Eisenhower recession” hit in 1958, Rambler sales shot up as budget-minded Americans turned to lower-priced cars. Throughout this time, gasoline remained plentiful and affordable. Advertisem*nts rarely mentioned gas mileage, and if they did, it was part of a laundry list of other benefits, not the focus of the ad. Ramblers (and later the Studebaker Lark) succeeded through their uniqueness because GM, Ford, and Chrysler had ignored this market niche and didn’t field their own compact cars until the early 1960s.

In the 1960s, Volkswagen proved that you could sell bare-bones small cars to Americans if they were reliable and well-built. VWs were low priced, high quality, fuel-efficient, and dirt-cheap to maintain, in addition to later becoming counter-cultural icons against overconsumption.

Two Fuel Crises Kickstarted The Small Car Revolution, But They Didn’t Kill Big Cars

The Beetle’s continued popularity, along with other European and Japanese imports in the late 1960s, led Detroit to enter the subcompact market next. The early ’70s brought us Gremlins, Pintos, and Vegas. But if you look at the graph, gas prices then were still low, even technically falling when you took inflation into account.

But inflation is the key word here. While gas remained cheap until 1973, inflation was squeezing the American economy. Material costs were going up, which meant car prices were going up. Troubled by increased traffic accidents, insurance prices were going up, too. All this bolstered the sale of compact and subcompact cars, which used less material and were more affordable to buy, drive, and insure. Then the first oil crisis hit.

The 1973 OPEC oil embargo over the U.S.’s support for Israel caused gas supplies to dwindle and prices to spike. In response, Americans bought small, fuel-efficient cars in record numbers. A lot of these were first-time buyers who, especially with Japanese cars, became repeat customers after experiencing the imports’ superior economy and reliability.

But while the ‘73 oil crisis boosted small car sales and helped the imports gain a foothold, it didn’t kill big cars. Instead, it caused the Big Three to develop “downsized” versions of their largest models. Their work accelerated in 1975, when in response to the oil crisis, congress passed Corporate Average Fuel Economy rules, requiring automakers to meet a “fleet average” of 18 mpg by 1978. (Which would increase each year.)

Automakers balked that this “unAmerican” attempt to regulate the market wouldn’t work, because people still wanted big cars, and forcing them to build smaller cars to meet fuel economy rules would be an economic disaster. However, when GM’s first downsized fullsizers hit dealers in 1977, they became a huge success. It seemed the old models contained so much bulk that it was possible to build a lighter, more efficient car without major sacrifices. The downsizing wave spread across GM and eventually to Ford and Chrysler.

By the late ‘70s, full-size and intermediate car sales were actually on the upswing (due in part to the enthusiastic consumer response to downsizing), a fact lamented by AMC management during the development of Eagle. With the end of Matador production, American Motors no longer had any large cars, although the new Wagoneer Limited proved an increasingly popular alternative.

Regardless of fuel prices, CAFE spelled the end for the largest of the land yachts, and buyers rushed to snap up personal luxury cars like the Lincoln Mark V before their downsized replacements arrived.

Then a second oil crisis hit in 1979, triggered by revolution in Iran and exacerbated by the greed of corporate oil producers. Gas prices shot up and fuel economy once again became the #1 priority for car shoppers. Small car sales predictably surged. A downsized Chevy Caprice was nice, but a 43 mpg Toyota Corolla was even better.

Fuel Prices Aggravated Inflation, The Cure Was High Interest Rates

But again, gas prices weren’t the only factor at work here. Throughout the ‘70s, the United States suffered from rampant, almost double-digit inflation, and the second oil crisis severely aggravated it. Increased energy costs translated into increased material and manufacturing costs, which translated into increased car prices. Automakers found themselves making quarterly adjustments to their MSRPs. Before he became an automotive historian, Pat Foster was an AMC/Jeep/Renault salesman, and he said it was brutal back then.

“People would walk into the showroom and they would see a Concord, and they’d remember, “Oh I saw that car two or three years ago… it was $5,000. And they’d come over and say, ‘My goodness, it’s $8,500 now for the same car?!”

To combat out-of-control prices plaguing everything from gasoline to groceries, Federal Reserve chairman Paul Volcker raised interest rates to unprecedented levels in 1980, then drove them up further in ‘81. Car loans peaked at 17.36%! Mortgages hit 18%!! Volcker was determined to bring down inflation by making money more painful to borrow, thus driving the economy into a recession and reducing spending. Unemployment surged as businesses laid off millions of Americans. (When people reminisce about how cheap houses were in the ’80s, it’s because nobody could afford a loan.) Unless you lived through it, it’s hard to understand just how brutal it was.

“I just heard a realtor on the news saying the reason why house sales are starting to slow down is, ‘Well mortgages are 8%. How does anybody afford 8%?’” Pat Foster said, shaking his head.

“Back in 1980, 1981, and 1982, mortgages were 18.5%! New car loans were 18.5%! It was very difficult to sell anything. That’s why car sales in the United States fell to their worst level since the Great Depression. It was a bloodbath… People could not afford it, and no one saw that coming.”

When money costs that much to borrow, people want to borrow as little as possible. Banks tried to ease payments by extending loan terms, but this only prolonged the agony of paying off the car. Sales tumbled, and those who were buying were very concerned about price and gas mileage. Jeep sales, which had been on fire, evaporated overnight.

How Inflation Impacts Pricing

To put this in perspective, let’s compare financing costs for a 1979 Chevrolet Chevette and Jeep Wagoner to their 1981 counterparts, during a period of massive inflation and rate increases.

In two years, the monthly payment for the same base Chevette increased by $40. That’s $130 in 2024 dollars! It’s interesting to see that Jeep actually raised the price of the Wagoneer less than Chevy raised the price of the Chevette, but since the Wagoneer was already so expensive, the effects of the rate increase are even more pronounced. The total cost of financing the Wagoneer jumped $2,570 in two years, or almost $8,500 in today’s money. But interest rates affected more than just the end customer.

“Most dealers finance their inventory; it’s called floorplan,” explained Michael Porter, who worked on the corporate side of AMC sales and marketing. “So every time the prime rate moves, the dealer’s carrying costs for those vehicles go up. So for interest rates to go up means you’re paying more every single day for that vehicle to sit there, and if sales slow down at the same time, the dealer is in a really really tough position.”

Focusing on small cars was one way to reduce floorplanning costs and lure in customers with low advertised prices. Unfortunately for Foster, AMC and Renault wouldn’t have a modern front-wheel-drive subcompact until the 1983 Alliance came along, meaning he was stuck selling the odd Renault LeCar and the more expensive AMC Spirit and Concord.

“We had a lot of pushback on pricing,” he told me. “So my boss, along with a lot of other dealers, both AMC and otherwise, tried to go light on content to keep the price down.”

His boss would order stripped cars without A/C, radios, wheel covers, whitewall tires (a big deal then), power steering, and even power brakes. It helped reduce sticker shock, but it also made the cars harder to sell.

“He would not order a car with a rear window defogger, even though we’re in New England, and everybody wanted a rear window defogger,” Foster said, rolling his eyes.

Automakers Push Lower Financing, Making Cars Affordable Again

Volker’s brutal rate hikes worked, and inflation finally cooled down by 1983, along with gas prices. Interest rates slowly receded, but even after the worst of it passed, customers remained hyper-sensitive. Around Labor Day of 1986, GM launched an aggressive program of deeply discounted 2.9% financing. Ford and Chrysler responded with 2.9% and 2.4%, respectively. Numbers like that seem common today, but back then that was about half the going rate. Desperate to move stagnant Renault inventory, AMC jumped in.

“We had 10,000 cars ‘against the fence,’ which means they were unsold to the dealer body.” remembered former AMC employee, Dean Greb.

“So it was up to the sales and marketing organization which I was part of at the time, to come up with incentive plans and promotional ideas. So we created this program called ‘0% financing.’ And that was the most amazing promotion that ever existed, not only for AMC but maybe for any manufacturer… It was just phenomenal.”

The fine print came with a lot of restrictions, but the headlines generated a sales bonanza . AMC CEO Joe Cappy got an hour on The Larry King Show just to talk about 0% financing.

“Customers were actually going to dealer showrooms, getting into cars and locking the doors, and saying, ‘I won’t get out of this car until you sell it to me,’” said Dean Greb with a smile. So that inventory disappeared within a couple of months. It was just unbelievable.”

A gasoline glut in the mid-80s caused the oversaturated subcompact market to tighten and big car popularity to rebound slightly, but by now, traditional V8, rear-wheel-drive sedans were becoming somewhat passe. Buyers were chasing after FWD cars like Ford’s mid-size Taurus and Chrysler’s exciting new minivans. As the ’80s transitioned into the ’90s, the Jeep XJ Cherokee and later the Ford Explorer kicked off America’s SUV obsession that lasts until today.

Throughout the ’90s and early 2000s, vehicles slowly but steadily grew, as each new generation added more room, more safety features, and more power. Even small cars were not immune to adding on bulk. Aware of the segment’s dwindling popularity and razor-thin profit margins, Ford and Chrysler slowly abandoned the tiniest, cheapest parts of the subcompact market to focus on more profitable pickup trucks and SUVs. Only GM remained, fielding the Chevy Aveo against cars like the Toyota Yaris, Honda Fit, Nissan Versa, and Kia Rio.

The Big Recession And The Lowering Of Interest Rates

The Big Three still maintained at least some economy cars in an attempt to offer a well-rounded lineup. But the Ford Focus, Chevy Cobalt, and Dodge Caliber wouldn’t be enough to save them during the 2007-08 Financial Crisis, which brought soaring gasoline prices with a simultaneous credit crunch. Unlike the early ’80s, car loans weren’t expensive; they were just impossible to get.

As the national economy imploded, so did truck and SUVs sales, taking the American auto industry with it. Like the 1970s all over again, the Big Three’s lack of fuel-efficient options led the public into the arms of small imported cars. I interviewed Derek Stone, a longtime Toyota and Mercedes sales consultant from Akron, Ohio.

“I sold cars during $4.30 a gallon gas in the summer of 2007,” he said. “You couldn’t give away a Tundra, Sequoia, or 4Runner. We were selling Corollas, Yaris, and Priuses at full MSRP.”

Desperate for help, GM, Ford, and Chrysler’s CEOs brought their dog-and-pony show to Washington, promising new gas-sipping hybrids and economy cars if the government would bail them out. Ford escaped bankruptcy by the skin of its teeth, but GM and Chrysler both went through Chapter 11 with heavy government involvement. In return for their investment, taxpayers got the 2011 Chevy Volt and 2013 Dodge Dart.

In the wake of the crisis, American automakers gathered up small cars from their foreign divisions and brought them here. The Ford Fiesta returned, the Chevy Aveo was upgraded to the Chevy Sonic, we got the itty-bitty Chevy Spark, and Chrysler helped Fiat re-enter the U.S. It seemed like the automakers had learned a valuable lesson and the consumers benefited with a small car renaissance.

But this time, buyers weren’t dealing with double-digit interest rates. In an effort to restart the economy and spur business spending, the Federal Reserve lowered rates and kept on lowering them.

By the late mid-2010s, the national economy was strong and gas prices were falling to record lows as new fracking technology led to a boom in domestic oil production. With cheap gas and cheaper loans, U.S. consumers now shifted en masse to pickups and SUVs.

Pickup trucks offered increasing luxury and passenger-focused interiors. Sedan sales gave way to crossovers, with America’s perennial best-selling car, the Toyota Camry, being usurped by the RAV4 in 2017. One huge factor in the transition was the exploding popularity of crossover SUVs, which provided improved comfort and (moderately) better gas mileage over their body-on-frame predecessors.

“A Highlander was getting 17 city to 24 highway,” said Derek, referring to selling cars in 2008. “Today a Highlander does 21 city and 28 highway. It’s made small cars less desirable, because you’re getting numbers with crossovers that you were getting with cars a few years ago.”

Average transaction prices for new vehicles kept climbing to eye-watering new highs, but the Fed hesitated to raise rates, because overall the economy was healthy; inflation on other consumer goods seemed under control. Crazy car and truck prices weren’t scaring away buyers because low rates meant buyers could just get longer loans.

Low Interest Rates Make Big Vehicles More Affordable

From 2015 to 2019, the price of a Ford F-150 Lariat Supercab V8 increased $6,500. But if you go from a 60-month loan to a 72 month loan, the monthly payment difference is just $5. Unlike the 1980s, lower rates meant that buyers could hide the pain of rising prices by just stretching their loan terms. (Instead, the pain came at the end when you still owed money on a 7-year-old vehicle.)

Rather than field uncompetitive entries in dwindling market segments, automakers began to abandon sedans for good. Station wagons and hatchbacks were hastily lifted, covered with body cladding, and marketed as SUVs. Entry-level economy cars were displaced by cheap, cynical subcompact crossovers brought from international markets, which lacked the refinement, fuel efficiency, and lower prices of the cars they replaced.

The Covid-19 pandemic supercharged this, as the Fed panicked and dropped rates while bored Americans flush with government stimulus checks all decided to buy new vehicles at the same time. Faced with a global supply chain crisis, automakers strategically focused resources on building their most-profitable products: trucks and large SUVs. As mentioned earlier, even the Japanese and Koreans thinned their small car offerings. The average new vehicle transaction price soared, fueled in part by ridiculous dealer markups. Despite falling volume, discontinued models, and factory closures, automakers reported record profits.

But, every party has to end. After years of avoiding it, the U.S. was wracked by record-breaking inflation in 2022, which seemed to ignite a vicious cycle of corporations raising their prices simply because “people will pay it.” In response, current Fed chairman Jerome Powell raised rates 11 times to cool the economy.

Returning to our math one last time, let’s hold price constant, and compare when rates were at their lowest in Nov. 2020, vs their current peak in January of 2024.

You can always stretch the loan term to reduce your monthly payment, but it results in a higher total cost and a lot of wasted money on interest. Higher rates cause the total cost of the loan to balloon, greatly increasing the buyer’s chances of ending up “underwater” with an old car that’s worth less money than they owe on it. The effect was less pronounced in 2020, but by 2024, a vehicle financed over 84 months costs $4,500 more than one financed for 60 months.

Where We Are Today

When I asked Derek Stone how interest rates have affected sales, he told me buyers are adjusting, but it’s not like the doom and gloom of the 1980s.

“As a generality, your average car buyer lives and dies by monthly payment. You really haven’t seen as much of a reduction in demand as people thought, because the car market was so screwed up by lack of volume, and people put off purchases,” he said.

“But what you do see is, if people had leased before, and leases are now $200 more a month, they’re looking at buying out their old lease or buying a pre-owned car. Or they look at purchasing a less expensive car; they’re looking at a Highlander instead of a Sequoia… It’s a behavior switch. It does make things more challenging. And you’re seeing more manufacturers come out with incentives for interest rates.”

So far Powell has managed to raise rates without triggering a bloodbath of a recession like Volker’s, and thankfully, it didn’t require paying 15% interest on a Renault LeCar. It seems Americans are finally getting the message that our Age of Easy Money is over. Bargain incentives are returning, dealer markups are disappearing, and the average vehicle transaction price actually fell slightly. With supply chains smoothing out, sales of small cars like the Honda Civic are actually on the rise.

But the timing has proved pernicious for the automakers, who are now in the thick of an expensive transition from internal combustion to electric vehicles. At present, EVs still cost more than their gasoline counterparts. To counter this, most automaker’s EV efforts started with low-volume, high-priced luxury vehicles that could absorb development and manufacturing costs. However, these high-priced EVs are now being launched into a very different market than when they were conceived five years ago. Sales have been disappointing. Toward the end of 2023, there was a lot of hullabaloo that the “EV transition had stalled” and dealers were pushing back against manufacturers.

But the real story is less about resistance to electric cars and more about resistance to high prices. Sure, plenty of buyers will never buy an electric vehicle and that’s fine; internal combustion will be sticking around for a long time. But there are many buyers who would like to buy an EV today; they just don’t want to finance a $75,000 Cadillac Lyric at 8.5%.

Could High Interest Rates And Electrification Bring Small Cars Back?

On the subject of EVs, Stone said that Mercedes customers typically are less price-sensitive than most, but when an EQB costs $10,000 more than an equivalent gasoline GLB, it can push a monthly payment out of reach.

“I can’t speak for other brands,” he mused. “But EVs from what I can tell are primarily lease driven. I think that manufacturers are subventing (subsidizing) leases like crazy on these things.”

2023 was actually a record year for EV sales, but the biggest growth came from affordable models. Tesla slashed prices and set records, with the Model Y becoming America’s 5th most popular vehicle. In a classic “GM Move,” Chevrolet temporarily canceled its popular Bolt EV in favor of more expensive models, just as the little hatchback started to outsell the competition.GM probably hopes buyers will up to a Chevy Blazer EV, but that’s a $20,000 jump over the Bolt!

While the rest of the world struggles to build low-priced EVs, one country is already doing it: China. After decades of government subsidies and investment, Chinese automakers have become world leaders at making fun, affordable, small EVs, and they are salivating at the prospect of breaking into the American market. Even Tesla CEO Elon Musk is scared of them.

At present, a 25% tariff keeps most Chinese-built automobiles away from our shores, although some sneak through disguised as Volvos, Polestars, and Buicks. To circumnavigate this obstacle, Chinese carmakers are already planning factories in Mexico with intentions to ship cars north. And if you think fickle American consumers won’t flock to cheap Chinese imports the same way they did to Korean cars in the 2000s, Japanese cars in the 80s, and Volkswagens in the ’60s, I’ve got a beach house in Arizona for you.

And so history has come to repeat itself yet again. Automakers that abandoned small cars (or refused to take them seriously) have found themselves dangerously exposed. As Stone explained, many customers are loyal to a type of vehicle rather than a brand, and they will shop elsewhere.

“When you look at companies like Ford, GM, and Chrysler, these manufacturers aren’t offering the cars that people bought in the past, and that affects things. 15-20 years ago when GM was getting rid of their traditional cars at Oldsmobile, I sold a ton of Camry XLEs and Avalons in the years after Oldsmobile was gone. Those people didn’t know what to buy. You’re going to see that now, too.”

This time at least, the tariff has given automakers a few years to correct course. Just the other week, Ford CEO Jim Farley announced a skunkworks team is developing cheap EVs to compete with China and Tesla. GM CEO Mary Barra said the Bolt is coming back. And with the Cybertruck finally here, Tesla is again talking about the affordable EV for the masses it’s been promising since 2006. Meanwhile, Hyundai and Kia have been quietly building some interesting, affordable, award-winning EVs, and there are at least a few interesting designs brewing with the German and Japanese. Perhaps we can expect another small car revival.

The Federal Reserve has stopped its rate hikes for now, and economists are optimistic that they may even lower rates this summer if inflation doesn’t heat up. But during his recent 60 Minutes interview, Jerome Powell hinted that the basem*nt bottom rates of the 2010s aren’t coming back. He wants to leave a little wiggle room to juice the economy if a future recession does hit.

What’s Next?

What this means long-term for the auto industry is difficult to predict. Big trucks and SUVs remain by far the most popular and profitable segments in America, and it seems those are the segments automakers are most eager to convert to EVs. Again, the wider margins there make it easier to absorb the high development and manufacturing costs. Plus, the U.S. government has again put its finger on the scale in favor of large vehicles by placing an MSPR cap on the new EV tax credits of just $55,000 for cars but $80,000 for SUVs, trucks, and vans. Whether traditional automakers in America will hold their own against Chinese companies or capitulate and retreat upmarket remains to be seen.

Internationally, the fate of small cars looks in question too, as SUV popularity has spread around the world. The one dissenting voice is Citroën’s CEO, who said that the EV transition means “the world of SUVs is done,” because their weight and aerodynamics will always make them less efficient than passenger cars, meaning EV cars can use smaller batteries than SUVs and thus have significantly lower prices, which could tip sales in their favor.

Ultimately, the history and future of small cars in America is very, very complicated. I like to think of the U.S. car market like a forest; it’s healthiest when it’s filled with a wide variety of different creatures, and any time one goes extinct, it’s a loss for all of us. I hope the automakers learn that there is still a market for affordable small cars in the U.S., regardless of gas prices or fickle consumers. Perhaps the events of recent years will remind them of that lesson before it’s too late. Personally, I look forward to the day my Ambassador is no longer the smallest car in the parking lot.