The global automotive industry is undergoing a transformation from combustion to electric power, which is causing significant changes in all aspects of cars, from design and development to how customers drive and interact with them.

However, not all countries and manufacturers are equally prepared for this change, and different vehicle segments face different challenges. While SUVs and premium cars are more adaptable to new powertrains, smaller subcompact cars face more difficulties. The main issue comes down to the cost, as batteries still contribute significantly to the production costs of electric vehicles. This cost remains the same regardless of whether it’s a high-end luxury vehicle or a small city car.

Due to this cost factor, European and American automakers have primarily focused on expanding their electric vehicle offerings in the luxury and premium segments. Buyers in these segments are already willing to pay higher prices, but those seeking affordable subcompacts and city cars are not as willing or able to do so. As a result, there are fewer options for small electric vehicles in the market. The question is whether this will change in the future.

The Future Is Dim

In the first half of 2023, Europe had only 18 different small electric vehicle options for the A and B segments, while China had nearly double that with 34 models. In contrast, the United States only had two small electric cars available: the Chevrolet Bolt EV and the Mini Electric. This is in stark contrast to the wide range of small combustion engine cars available to buyers.

The future of small cars in Europe is uncertain and depends on whether manufacturers can bring down battery costs. Europe has high production costs, making any increase in costs detrimental to the viability of less profitable segments. Additionally, government pressure to promote electric vehicles is already forcing manufacturers to either stop producing small cars or move production outside of Europe.

On the other hand, Chinese manufacturers have an advantage in producing cheaper electric cars due to the strong commitment of the Chinese government and a more competitive workforce. Chinese subcompact cars cost on average 58% less than non-Chinese subcompacts, which could potentially disrupt overseas markets. This presents an opportunity for the Chinese industry to fill the gap left by European manufacturers.

European-produced small and city cars are at risk unless manufacturing costs decrease or regulations are implemented to limit the influx of Chinese cars into the region.

Are Small Cars And City Cars Really A Key Segment?

This raises an interesting question about the interest of US and European automakers in producing small cars, which are generally less profitable than larger segments. Will these companies abandon the segment entirely and leave it to Chinese manufacturers, or will there be a collaboration in production? Some Western brands are already investing in plants and manufacturing cars in China for both the Chinese market and export.

Despite the challenges, small A and B segment cars still account for a significant portion of passenger car sales in various regions, such as 23% in Europe, 51% in India, 28% in Southeast Asia-Pacific, and 38% in Africa. They maintain an important position in terms of volume. The question remains whether Western manufacturers will cede the segment to Chinese manufacturers, even if they don’t generate the same profits as higher segments.

The author of the article, Felipe Munoz, is an Automotive Industry Specialist at JATO Dynamics.