BUSINESSWEEK - News & Features July 18, 2008, 2:39PM EST

Sales of small cars have surged as gas has risen. That’s good news for carmakers, but there’s a problem: They don’t have enough of them

by Jim Henry

Contrary to what we’ve been hearing, not all auto sales this year have been in the wood chipper. Even more surprisingly, especially for those used to reading about the dominance of imports, many of these best sellers have even come out of Detroit.

In stark contrast to recent years, this year’s big volume gainers have four-cylinder engines that get 30 mpg or more on the highway. That trend favors import brands, but the increased demand has also prompted Ford Motor (F) and General Motors (GM) to increase production of some of its newly popular smaller models, including the Ford Focus and the Chevrolet Cobalt.

But Chrysler, which is still stuck with a raft of muscle cars and large trucks, is left out in the cold.

Battery Demand

It’s not just fuel-efficient cars that are in short supply. The surge in demand has also created a shortage of batteries used to power gasoline-electric hybrid vehicles including the Toyota (TM) Prius. The Prius runs on battery power at start-up and when cruising or coasting at lower speeds. Toyota Motor Sales U.S.A. said it was essentially sold out of Prius models, with only a one-day supply as of July 1 and growing waiting lists at some U.S. dealerships. Despite the high demand, Prius sales in the first half of 2008 were down 3.2% from the year-ago period, to 91,440.

“The problem is that we’re pretty much at maximum performance in terms of our ability to supply the battery packages for these vehicles,” said Toyota spokesman Irv Miller in a written statement. He said Toyota and its supplier, Matsushita Electric Industrial (MC), are investing a total of $192 million to more than double capacity at their Panasonic EV Energy joint venture in Japan, from the present 450,000 battery packs annually.

Inspired by the success of the Prius, many more manufacturers are adding hybrid models, including some big hybrids from GM, such as the GMC Yukon Hybrid SUV. That increases the scarcity of batteries, from a limited number of suppliers. GM has a similar battery shortage, says Mark LaNeve, GM’s vice-president for North America vehicle sales, service, and marketing. “We have a long way to go, in terms of an adequate battery supply,” he says.

GM In Overtime

Meanwhile, four-cylinder gasoline engines are the mass-market fuel-saving method of choice, far outselling the more expensive hybrids.

GM said four-cylinder models accounted for 40% of its total retail sales in June. That’s nearly double a 22% four-cylinder mix in the year-ago month, and despite the fact that most GM trucks are six or eight cylinders. “We have dramatically shifted our mix as quickly as we can,” says LaNeve. For instance, GM is making more four-cylinder engines, and building more vehicles in growing car and crossover segments, even as it cuts production of trucks and SUVs.

GM announced on July 1 it was increasing overtime or adding Saturday shifts at the plants that build the Chevrolet Malibu, Saturn Aura, and Pontiac G6 cars, which share a common architecture; plus the closely related Buick Enclave, Saturn Outlook, and GMC Acadia crossovers.

“We ran out of some car lines,” in June, LaNeve says. Specifically, he says dealers were low on the Enclave, Acadia, Cobalt, and Malibu.
source: BusinessWeek

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