EVs, surging SUVs to hit Europe's biggest segment

The small-car sector experienced radical changes in 2020 as customers shifted toward electrified models such as the Renault Zoe and Toyota Yaris and away from more traditional offerings from Ford and Volkswagen.

Small cars remained Europe’s most popular body type through the market turmoil of 2020, increasing their share by one percentage point to 16 percent, according to data from JATO Dynamics.

However, the sector is forecast to lose its crown to compact SUVs this year as customer preferences change and automakers focus on more profitable model types in a bid to make the expensive shift to electrification less painful.

"Moving toward bigger cars seems to be a necessary strategy to increase profitability, though, for some, this will come at the cost of reduced volume and market share," LMC Automotive senior analyst Sammy Chan said.

LMC predicts small car sales will return to their 2019 level by 2024 after suffering a 22 percent drop last year but will lose sales after that.

LMC forecasts that after outselling small cars this year, compact SUVs will continue to lead the European market in the midterm.

Renault led the segment in 2020 with the Clio as it did in 2019, but saw its electric Zoe reach the top 10 for the first time with sales up 118 percent to almost 100,000, JATO figures show.

However Renault wants to shift its focus toward profitable compact cars.

"Over two-thirds of our sales are made in the B-segment [small] when the C-segment [compact] profit is always three times more and it brings an average of 30 percent additional operational margin per car," Renault CEO Luca de Meo said during his presentation of the automaker’s turnaround plan last month.

The only small cars Renault will launch between now and 2025 will be electric, de Meo said. This will include a revival of the Renault 5.

He did not say whether a replacement for the Clio, which was launched in 2019, falls within that time frame.

Renault finds itself in the same difficult position as other volume automakers when it comes to small cars.

The cars' size and price perfectly fit the lifestyles of many Europe buyers, but fierce competition over the years has raised standards to the point that those buyers now expect the technology and quality levels that are close to what is available in premium vehicles.

Add the increased cost automakers face to meet tougher safety and emissions regulations and margins on small cars have become razor thin.

Some automakers are willing to accept fewer sales if buyers chose higher margin versions. "We plan to do a bit less volume [in 2021]," Hyundai Europe product and pricing chief Raf Van Nuffel said when launching the new-generation i20 small car in November.

Hyundai instead will "really focus on the quality of sales," he said.

Hyundai's plan mirrors that of Ford, which redesigned the current Fiesta launched in 2017 to increase the popularity of the higher-price, higher-spec variants. At the same time it dropped the lowest-spec Fiesta versions and warned of lower overall sales.

The Fiesta is traditionally one of Europe's top three small cars, but last year it dropped to sixth from third in the ranking, with sales down 32 percent, a decline that was worse than overall market's drop of 24 percent.

The decline of the VW Polo (-34 percent) also outpaced the market's dip, pushing it to fourth in the ranking from No. 2 in 2019.

The current Polo, also launched in 2017, is one of the few models in the top 10 that lacks an electrified variant, which might have hurt demand given that electrified models (mild, full and plug-in hybrids as well as full-electric vehicles) accounted for a quarter of all sales in the segment, according to JATO's 11-month data for 2020.

The segment's biggest winner after the Zoe was the Toyota Yaris, which rose to No. 3 last year from eighth place in 2019 because of strong sales of the new car's hybrid version. Demand for the fourth-generation Yaris helped Toyota break its own sales record for a single model in September and November, when the automaker sold 33,000 units of the Yaris, making it Europe's No. 2- selling car for that month.

Yaris sales "dramatically swung to hybrid," Toyota's head sales and marketing Matt Harrison said in November. "We are about 80 percent [hybrid] on the new Yaris and we were around 50 to 55 percent on the previous generation, so it's a big increase," he said.

Toyota's figures show that the third- and fourth-generation Yaris hybrid accounted for 56 percent of the model line's total European sales in 2020.

Renault is the only other model offering full-hybrid technology on a small car, but delays in the rollout of its e-Tech Clio meant the version accounted for only 3.6 percent of sales by November, according to JATO data.

Cheaper mild-hybrid technology is becoming more popular in the sector. Mild hybrids accounted for almost four out of every five Suzuki Swifts sold through November and nearly half all Mazda2s in same period. Hyundai has rolled out the tech on its new i20, as has Kia for the Rio.

Ford, meanwhile, switched to mild-hybrid technology in place of diesel, with diesel production ending in September. Ford has offered diesel versions of the Fiesta since 1984, but popularity of the fuel sank below 10 percent for the sector last year, JATO data shows.

Only the French still sell diesel small cars in any quantity, with the fuel accounting for 23 percent of Clio sales, 17 percent of Peugeot 208 sales and 14 percent of Citroen C3 sales through November last year

Diesels still outsold full-electric small cars through 11 months, but only by a small margin. Diesel had an 9.3 percent share with EVs at 7.2 percent mainly because of strong sales of the Zoe.

Other EVs that made a notable contribution last year where the e-208, which accounted for 16 percent of the small Peugeot's sales, and the e-Corsa, which accounted for 8.1 percent of the sales for Opel/Vauxhall's best-seller.

The focus for manufacturers going forward will be how cut costs and electrify in an affordable manner.
Mazda said in December it would sell a version of the European-built Toyota Yaris, which could replace the Mazda2.

Nissan, meanwhile, said that alliance partner Renault would not just build its next Micra, as it does now, but also design it.
 
Dacia has said it will continue to offer its new Sandero small car at budget prices, but added that it will move the SUV-inspired Sandero Stepway further upmarket in a bid to raise prices.

The question is whether any automakers will abandon the sector altogether in their chase for better margins.

LMC does not expect this to happen, but it believes the rising popularity of the small SUV segment could cause automakers to restyle their future small cars, making them taller to capture the higher prices those variants currently command.

LMC forecasts Ford will drop the Fiesta in 2025 and replace it with a small SUV that will sit alongside it's popular Puma small crossover. LMC's Chan said: "Depending on the continued trajectory of small SUVs compared with their car equivalents, other manufacturers could follow suit."