Emissions and Top Hats: Why Car Companies Need to Believe that Small is Beautiful

Developing a profitable small car is one of the global auto industry's most elusive goals, especially in North America, where small cars historically haven't been big sellers.

The need for a small car that won't bankrupt the company is critical, because the clock is ticking on tougher rules for emissions and fuel economy in both Europe and the United States. Achieving better mileage for means achieving a higher mix of smaller, lighter cars.

Asian brands like Toyota and Hyundai and high-volume European brands like VW have their core expertise built around small, fuel-efficient cars. If the rest of the automotive world is going to keep up, it needs to get better at economically developing and building small cars.

The recently-announced alliance between Daimler (DAI) and Renault-Nissan alliance is largely aimed at sharing small-car content. Daimler wanted to hook up with Nissan (NSANF.PK) a decade ago, as part of a three-way alliance that also included Chrysler. But Nissan went with Renault and stayed aloof. Daimler had to settle for Mitsubishi as its Asian partner instead and ultimately ended up writing off its investment.

Meanwhile, what Daimler's ex-partner Chrysler gets out of being taken over by Fiat (FIATY.PK) - other than survival - is access to Fiat's small-car expertise. Profitable small cars are also a make-or-break aspect of global restructuring at Ford (F) and General Motors.

Unless you're in a niche like Porsche, small cars tend to have small profit margins, because it costs just about as much to develop a small car as it does to develop a big ca, but you can charge more for a big one. The way around this is to make it up on volume. Automakers must spread costs over the biggest possible number of units, by sharing development costs and parts content across models and across markets - the elusive "world car."

The original Volkswagen Beetle and before that the Ford Model T were examples of the same car conquering the world.

Instead of trying to get finicky shoppers the world over to choose carbon copies of the same car, the trick now is to put different bodies - "top hats" in auto industry slang - on the same platform. That way, customers with widely different tastes, needs, wants and budgets can all buy what is looks to an engineer like the same car, under the hood.

GM is using this approach with a new generation of small cars that were developed in South Korea, like the Chevy Beat.

Ford President and CEO Alan Mulally said at the 2010 New York auto show earlier this month that the new platform on which the redesigned Ford Focus is based will get 10 different "top hats," like a sedan, hatchback, and small SUV, and account for sales of about 2 million units annually. That replaces a platform exclusive to North America that accounted for only 220,000 a year.

"As we go to global platforms ... 75 to 85 percent of our vehicles will be all the same, but tailored to unique tastes," he said. "If you want to be in the automobile business, it's really cool to be Ford."

Chart: Daimler