Over the next two years, Ford will have a whole lineup of new smaller cars coming the US market including the Fiesta and global Focus. At a Ford media event today, marketing VP Jim Farley talked to reporters about the plans for those cars. Traditionally, carmakers have had a hard time making money on small cars in the US because customers have expected prices in proportion to size. That perception is now changing as customers are moving down from trucks and SUVs to cars, particularly smaller cars. As drivers have become accustomed to the feature-rich environments of those larger vehicles, they are reluctant to give up all those goodies. As a result, customers are downsizing while optioning up those cars to a point where they are profitable. According to Farley, the average transaction price (the amount customers end up actually paying to drive off the lot) on the Focus has jumped from $14,000 in 2007 to $16,000 in 2008. That comes as a result of customers opting for features like better sound systems and the new SYNC system. Farley is confident that will continue with the Fiesta and the new Focus. When combined with the fact that both cars will be "identical" rather than just similar like past "world car" efforts, Farley expects the economies of scale to make these and other smaller cars profitable.

[Source: Ford]

Traditionally U.S. car buyers have had an aversion to paying more than minimal prices for small cars, essentially preferring to "pay by the pound." That has posed a problem for automakers trying to meet fleet average fuel economy standards. If they can't sell enough smaller cars to pull up their fleet average, they have to spend a lot more money to raise the efficiency of bigger vehicles to compensate. The only way they have been able to sell small cars to Americans has been at rock-bottom prices which means they lose money on every car. A large part of the cost of cars is tied up in areas like engineering, labor and tooling. Those costs are pretty much the same regardless of whether you're building a Toyota Yaris or a Lexus. The cost of extra materials has been less than the price differential that customers have been willing to pay.

In recent years though, Americans have started to show a willingness to pay more for a small car if it's equipped with the all features they expect, has high quality appointments and decent, if not outstanding, performance. The success of cars like the MINI and the Mazda3 looks like it might be an inspiration to Ford. The new Fiesta that's coming to the U.S. market is actually expected to be profitable from the start. Part of that is due to economies of scale from making a global small car. The stylish little car has drawn raves for its looks inside and out and Ford expects to be able to sell it for a price higher than they would if it was just a stripped down economy car. Ford design director Peter Horbury believes that selling the Fiesta at the same specification levels as the Euro model will allow the car to succeed both financially and from an efficiency standpoint.

[Source: Just-Auto, Sub. req'd]