Less is more to Canadian car buyers

When Hyundai Motor Co. brought a little-known vehicle called the Pony to Canadian showrooms in 1984, executives with rival car companies expected the Korean automaker to fall flat on its face with the $5,000 car.

Hyundai officials themselves weren't much more optimistic, forecasting sales of 5,000 for the first year.

In the end, the Pony sold 10 times that amount by the time the 12 months were up, making the small automobile the top-selling vehicle on the Canadian market at one point and teaching industry players a valuable lesson: Never underestimate the Canadian car buyer's appetite for cheap transportation. As analyst Dennis DesRosiers recently put it: "Americans, from an attitudinal point of view, believe it's their God-given right to own as much vehicle as they possibly can. Canadians very much view their vehicles as a necessary evil."
Tom LaSorda, the Canadian-born chief executive of Chrysler Group, is familiar with Canuck taste. He can see that the current crop of Toyota Yaris, Honda Fit and Nissan Versa small cars are scoring with budget-conscious buyers. Cheap sells in Canada. And so does small.

Thing is, making big trucks and SUVs was always more profitable than cranking out budget cars in Detroit. Chrysler says it has been unable in recent years to figure out how to build the smallest cars and make money. Until now.

This week Chrysler completed a long-anticipated agreement with Chery Automobile Co., the most successful homegrown Chinese automaker, that will see Chery build small cars for Chrysler, beginning with the Chery A1 hatchback. It will be rolled out in different markets progressively starting next year and is expected to land in Canada and the United States sometime in the next 30 months. The initial car will be sold under the Dodge brand. Chrysler will become the first American automaker to import cars from China.

The deal has major implications for the entire industry. It opens the door for Chinese carmakers into the United States, the world's biggest auto market. It could eventually lead to other deals for bigger cars, shifting manufacturing output to lower-cost factories in China and away from unionized plants in North America. Most immediately, it is a shadow that will hang over contract talks between the Detroit automakers and the United Auto Workers that are to begin this month.

"Building a high-quality vehicle is within the grasp of the Chinese now and Chrysler will prove that," says Harley Shaiken, a labour specialist at the University of California in Berkeley. "The question is where that leaves North America's manufacturing base."

Canadians have certainly seen budget-priced foreign cars before and accepted them more than their American neighbours. Perhaps it began with Volkswagen AG's Beetle in the 1950s. There was Renault's Le Car. There was Lada, built by Russian manufacturer AvtoVAZ, whose 4X4 Nivas are still being driven in pockets of Canada. And there was Skoda, whose Czech-made Rapid was named one of the "10 Best Cars from Backward Nations" by Michigan-based Car and Driver magazine in 1985.

When it arrives in Canada, the Chery A1 may be the cheapest new vehicle on the market. Those bragging rights now belong to General Motors of Canada's $12,995 Chevy Aveo and Pontiac Wave.

But unlike years past, when price alone guaranteed a certain level of volume for cars like the Pony, it takes more to generate a small-car hit today, analysts argue.

"There's been a history that sees Canadians really attracted to a very low price," says Richard Cooper, executive director of the Canadian arm of J.D. Power & Associates. "But I think what's happened in Canada over the last few years is the quality and the nature of the offerings in the [subcompact car] segment has increased so rapidly that people's expectations have risen. So this vehicle is going to have to deliver pretty well against people's expectations. The game has changed in that segment. It's not quite so focused on cost anymore."

Korean, Central and Eastern European, and even Japanese vehicles marketed in the West have all suffered hits to their reputations because of their perceived shoddy construction and durability. The Yugo, for example, "barely qualified as a car," a 1987 Consumer Reports review concluded.

Chinese-made vehicles will have to prove themselves too, analysts say. In fact, they may be the most scrutinized products from that country imported to North America and Western Europe.

Douglas Leighton, an auto historian at Huron College, University of Western Ontario, says the international attention over potentially toxic Chinese-made products, including pet food and cough syrup, may linger and spread. China faces a backlash from the United States over quality worries and that may generate questions about the safety of cars made by Chery and other Chinese automakers, he says.

Chrysler's Chery car may face another problem when it comes to North America, says Bill Porter, vice-president of sales at Suzuki Canada, who worked for Hyundai in the Pony's early glory days: commitment to the product by those who sell it.

"You've got a Chrysler dealer that would rather sell a $45,000 pickup truck than he would a $10,000 compact car," Mr. Porter says. "Making the assumption that they make a gross profit of 8% to 9% on both of them, they're not going to focus on the small cars. With Hyundai, you had one brand and the only way you could survive is to push the living daylights out of that one car. It makes a big difference."

There is widespread acknowledgement, however, that the Chrysler deal with Chery is more significant than the sales numbers of just one vehicle. It has the potential to change industry dynamics.

"This is a pretty big thing," says George Magliano, director of auto research for consultancy Global Insight in New York. "This is going to turn over to them, Chery, the expertise to build American-quality, North American-developed market types of cars. And once it starts, the question is where does it end up?"

General Motors Corp. has tapped Korea's Daewoo and its European Opel unit to make its small cars. Ford Motor Co. is eyeing Brazil as a low-cost manufacturing site for subcompacts it is planning to import. But it's China that has auto-union leaders worried. China is the country that has a raft of home-grown domestic automakers hungry to break into Western markets. China is the place where low-cost manufacturing has already changed industries like textiles and furniture. Auto-making is next.