Honey, I Shrunk The Car

When gas prices began to shoot up last summer, Millie Richardson became fed up with her minivan. So the Lawrenceville, N.J., mom traded in her Dodge Caravan for a $17,000 Nissan Versa, a subcompact that gets more than 30 miles per gallon. Richardson, 55, likes spending less at the pump, but she's most excited about how roomy her little car is. "My son is 6-foot-6, and he drove it," she marvels. "So it's small, but it's big—does that make sense?" What's even more appealing to Richardson, though, is a $2,500 car she's heard about that was introduced in India last month: the Tata Nano. Though there are no plans yet to bring it to America, Richardson is ready. "Oh, boy, would I ever love to drive one," she says. "I would look at it as a disposable car. It would be so cheap, you could always afford a new one."

Around the automotive world, small is the new big. Driven by earning power in emerging markets, along with rising gas prices and global-warming concerns in developed countries, small-car sales are soaring. By 2012, forecasters expect consumers to buy a record 38 million small cars annually, up 65 percent from a decade earlier. Even in the United States, land of the large, sales of small cars are expected to grow 25 percent by 2012 to a record 3.4 million while SUVs and pickup trucks continue to tank. Daimler had 30,000 orders in hand even before it launched its nine-foot-long Smart Fortwo model in the United States in January. "This is not a fad," says Smart USA president Dave Schembri. "It's a trend."

But the car generating the most buzz hasn't even hit the road: the $2,500 Nano. A car for the price of a laptop PC is transformational. Before it even goes on sale in India later this year, the Nano is changing the rules of the road for the auto industry and society itself. Millions of emerging-market commuters can now own four-wheel transportation, creating unheard-of mobility for the masses. But the Nano and its expected rivals will also lead to more traffic congestion, more global warming, more highway fatalities and more demand for oil. As the world approaches 1 billion vehicles, the Nano and its ilk raise a daunting prospect for society: global gridlock. If the rest of the world begins buying cars at the same rate as America, the global parking lot will swell to 5.6 billion vehicles, figures Sean McAlinden of the Center for Auto Research in Ann Arbor, Mich. "The Nano is the 21st-century equivalent of the Model T," says Global Insight analyst John Wolkonowicz. "The Nano will put the Third World on wheels, and that will have far-reaching implications."

It's already shaking up the industry. All the major car companies dispatched teams to the New Delhi Motor Show in January to snap photos and build a dossier on the new Nano. The little car from India could lead to an overhaul in the global auto industry, which was always geared to earn big profits from big cars. Now the car czars will have to learn to make a business out of selling lots of little cars that make less money. Detroit is going through a wrenching overhaul as it retools its product line to offer more small gas-sippers and fewer big guzzlers. General Motors, which lost $38.7 billion in 2007, doesn't make money at home, but turns a tidy profit in Asia selling smaller cars. "The whole story in the auto industry today is that the profits are shifting to the developing markets," says Renault-Nissan CEO Carlos Ghosn, who is working with the Indian motorcycle maker Bajaj to try to develop a $3,000 car to go against the Nano.

Meanwhile, a new generation of consumers, weaned on cell phones and iPods, equates small with high tech—not cheap. This is where the West parts company with the Nano. Today's car buyers in developed nations expect small cars to have all the accouterments they enjoyed in their XL rides. The hot-selling Mini Cooper is a prime example: sporty and stylish, it's loaded with luxurious items like a 10-speaker stereo. The new Mini Clubman S starts at $24,600—or roughly the price of 10 Nanos. "I don't think Americans are looking for a car with less safety features and fewer windshield wipers," says Mini U.S. chief Jim McDowell.

Indeed, the Nano, which has only one windshield wiper, is more akin to the econo-boxes like the Ford Pinto that boomers drove during the '70s energy crisis. "To Gen Y, something without power windows or door locks is not a real car," says Toyota U.S. chief Jim Lentz. "Most wouldn't know what this crank thing in the door does. It's like a rotary phone."

What this new generation does get is small as a way to reduce its carbon car-print. The irony is that as millions of small cars clog the planet, they'll only add to global warming. GM chairman Rick Wagoner recently warned that the world is already consuming 1,000 barrels of oil per second, and demand is on track to rise 70 percent more by 2030. By 2015, 100 million households in the developing world will be able to afford cars priced between the Nano and the $6,000 Renault Logan, predicts the Boston Consulting Group. "Even if they are very clean cars, collectively it will lead to emissions that will only add to local pollution," says Indian climatologist Rajendra K. Pachauri. He's chairman of the Intergovernmental Panel on Climate Change—which shared the Nobel Peace Prize with Al Gore last year—and he's critical of the climate consequences of the Nano. "Before we unleash this kind of animal on the streets of India, we ought to explore the public-transportation options." Others hope the rise of the small car in emerging economies will accelerate alternative-fuel vehicles elsewhere. "We'll be driving $40,000 electric vehicles or hydrogen-powered cars while people in India and China are using the remaining gasoline," says Wolkonowicz.

Until Tata chairman Ratan Tata rolled out his "people's car" in New Delhi on Jan. 10, nobody believed anyone could produce a $2,500 car. At first glance, the Nano doesn't look like much: no radio or AC, a top speed of about 60 miles per hour and a motorcycle-like engine. But its spartan simplicity has captured the world's attention. To save weight and money, there are no tubes in the tires. To ease assembly, body panels are glued instead of welded. "We look closely at anything we regard as a breakthrough," says GM product-planning VP John Smith, with diagrams of the Nano spread out in his Detroit office.

Now the race is on. Chrysler is looking at developing a sporty sprite called the Dodge Hornet with China's Chery Automobile. GM vice chairman Bob Lutz says his company could engineer a Nano competitor with its Chinese partner Wuling. And GM is working on a new car that would rival Renault's $6,000 Logan, says Smith. GM recently canceled plans for a new line of big V-8 engines and is pouring that money into developing small cars.

One key country hasn't bought into small-is-cool: China. SUV sales there rose 51 percent last year, big Buicks are all the rage, and small cars go begging. Tata predicted a Chinese automaker would be first to match the Nano's price, but analysts doubt it. "In China, image is more important than function," says analyst Michael Dunne of J.D. Power. "Nobody wants to be seen on the bottom of the totem pole."

The biggest roadblock facing small cars is fear about safety. U.S. statistics on highway fatalities show the smallest cars have death rates 2.5 times higher than the biggest. In Europe, small cars, which are driven mostly at slower speeds in cities, have lower death rates, but are in more crashes than big cars. "It comes down to physics," says Adrian Lund, president of the Insurance Institute for Highway Safety. "If you're in a smaller vehicle out there, you're at greater risk." To overcome small-car phobia, automakers are working to burnish their safety bona fides. In every U.S. showroom for the Smart car, for example, you'll find the car's protective steel skeleton on display.

The more features automakers can stuff into small cars—safety, style or stereos—the better for the bottom line. This is the formula Japan and Europe have used to develop a lucrative small-car market. Typically, an automaker earns about a 5 percent profit on a car. That comes to about $125 on a Nano or $1,250 on a Mini Cooper. The problem comes in convincing drivers in America that they should pay more for less. "Space and weight equal value for most buyers," says McAlinden. "It's a dollar-per-pound concept."

We may like to think that the recent spike in small-car sales is driven by altruism. But auto executives say it's a pocketbook issue: U.S. gas prices have doubled this decade. "The worst thing that could happen to us now is if gas prices fell back, because that would take the pressure off," says Ford executive chairman Bill Ford Jr. "We've all started down this path now." And there's no turning back. Forecasters predict oil prices, global warming and emerging-market desire for cars will continue to rise. As long as those factors drive demand, small cars will rule the road.