Sedan Opportunity Rises With Gas Prices, But Makers Can’t Capitalize

When he was asked a while ago what Americans should do to combat rising gasoline prices, U.S. Transportation Secretary Pete Buttigieg might have saved himself some embarrassment by coming up with an answer other than that all Americans “can all benefit from the gas savings of driving an EV.”

Buttegieg could have said, “Buy a fuel-efficient sedan.” Because that’s what more Americans are doing now anyway. And in a manner that was unforeseen last year and certainly right up until the breakout of war in Ukraine, the return to favor of the common sedan now has the potential to unsettle the U.S. car market.

The reason this renaissance might not go too far is the microchip-supply crisis means sedan makers are constrained in being able to meet greater demand that might arise. More Americans are considering the relative fuel consumption of their trucks and SUVs versus sedans at a time when $4-a-gallon gasoline has returned from its decade-long absence, but chip-short carmakers can’t put more cars together.

“We definitely are seeing higher shopping of small conventional cars as well as EVs and hybrids but they just aren’t widely available to buy,” said Michelle Krebs, senior analyst for Cox Automotive. “Normally, high gas prices represent a golden opportunity for small cars, but companies can’t take advantage of the opportunity.”

And namely, the companies that could take advantage of the current circumstances are the Japan-, Korea- and Germany-based automakers that have persisted in selling sedans in the U.S. market even though the Detroit Three automakers largely have abandoned that traditional form of the automobile.

Toyota, Honda and Nissan made their first inroads in the United States selling Japan-made “econoboxes” a half-century ago and soon were assembling them in America with non-union labor and advanced manufacturing philosophies and methods. But the most fuel-efficient sedans with conventional, internal-combustion powertrains are the smallest and generally least profitable vehicles on the road, and General Motors, Ford and Stellantis never could figure out how to make money with them, only to finally give up altogether few years ago.

Energy economics and consumer trends have favored the Detroit Three’s recent strategy until now. The fall of gasoline prices and their steadiness at lower levels over the last several years, along with a decade-long strong economy, made American consumers relax and open up their wallets for roomy, capable — and expensive — SUVs and pickup trucks and increasingly disfavor sedans. Several years ago, the ratio of sedan-to-SUV/truck sales was about 3:7, and now it’s nearly the opposite.

But companies including the Japanese as well as Hyundai, Kia and Volkswagen have continued to make, sell, and — crucially — upgrade their sedan offerings in the U.S. market anyway.

For one thing, many of their models have loyal consumer bases that want to keep buying new versions of the same nameplate. That’s why Hyundai and Kia have kept selling sedans even in the process of flipping the ballast of their product lines toward SUVs during the last several years.

What’s more, “sedans are still the point of entry into car brands,” noted a chief strategist for a carmaker based abroad.

Now, it would seem the foreign carmakers could really make hay from the sedan strategy in which they have persisted. Production at many of their U.S. plants could be tilted toward sedans and away from SUVs if high gasoline prices persist, especially given that today’s popular crossover utility vehicles often share mechanical platforms with sedan counterparts.

But what the globalization of the economy may have given these carmakers in higher gasoline prices because of what’s happening in Ukraine, the globalization of the economy has taken away because of persistent shortages of microchips from factories in Asia.