Europe's Appetite for Smaller Cars

Built in Brazil, Volkswagen's Fox has been selling well in South America since 2003. The car's just been introduced to Europe, where it seems to hit a nerve with customers.

"People have less money to spend because of the economic downturn that's taken place over the last couple of years," said Ferdinand Dudenhöffer, the director of the Center for Automotive Research in Gelsenkirchen, adding that high gas prices and an uncertain future also put people off from buying bigger cars.

It's a situation that hasn't gone unnoticed by the car industry, Dudenhöffer said, adding that many companies have realized that they have to come up with new, cheaper models to find buyers.

"In absolute terms, car prices have been climbing as a result of better equipment and technical gadgets, which has led people to turn away from buying new cars," said Marc-Rene Tonn, a car industry analyst with M.M. Warburg, a private bank in Hamburg.

VW not alone

The price threshold of 9,000 euros, what VW charges for its Fox model, has been adopted by others as well. Peugeot's 107, Citroen's C1 and Toyota's Aygo models are all looking for buyers that are only willing to spend a limited amount.

But high car prices and high gas prices aren't the only reasons why people are turning to smaller vehicles.

"People prefer to fly or use trains for larger distances these days," Dudenhöffer said. "Cars, on the other hand, are for everyday use, to get to work or drive around in the city."

Small cars fulfil those needs, especially as parking spots are rare in Europe's urban areas. While tiny cars such as Smart or Mini models have been on the market for a while, they're quite expensive: A Mini, for example, costs about 20,000 euros.

Cannibalization effect

But there's a drawback to the smaller price tag. Carmakers will take away their own customers when they offer cheaper cars.

"Surely they'll compete with themselves," Dudenhöffer said, adding that this kind of "cannibalization" is a normal effect. "But in the long term it's better to do that than lose customers to others that offer cheaper cars."

Tonn agreed with Dudenhöffer's assessment.

"You can't prevent that some people will by a Fox instead of a Polo," he said, adding that only a limited number of people will do so. VW is also trying to use design elements to keep customers loyal to their models by, for example, changing the appearance of the new Polo.

Other carmakers are likely to follow suit, according to the experts.

"I'm expecting all mass-market producers, including (GM subsidiary) Opel, Ford and the Italian, French and Korean brands to introduce similar concepts in the next two to three years," Dudenhöffer said, adding that the share of cars under 10,000 euros will increase.

"People have an appetite for small cars," he said.

What about China?

Whether these models will also become export items for the Asian markets is questionable, however.

"The Fox has already become a global car," Dudenhöffer said. "But we'll have to see how things develop in China. The Polo doesn't sell there at all."

In the long term, it will be important to produce an entry-level car for the Chinese market, he added. But it probably won't be the Fox or comparable models, according to the experts.

"Plus, I don't expect this two happen in the next couple of years," Dudenhöffer said.