The rise and fall of Small Cars

Back in 1980, small sedans and hatchbacks made up over 80% of the vehicles sold in North America. Today, that number is less than 17%. Neither Ford nor Chrysler make a small sedan anymore, and General Motors just killed the last one of theirs, the Malibu. What the hell happened to small cars? This is the story. By the way, I made this video in partnership with my company, Near. More on them later. Throughout the '50s and '60s, cars kept getting bigger and bigger. Eventually, we got to the land yacht era. And back in the 1970s, cars were gigantic. Chrome everywhere, enormous giant Lincolns. It was a crazy time in the car business. Cars were so big that by the 1970s, the average car was getting just 13.5 miles per gallon. Then something happened that would change everything. It was in October 1973, the very first of the OPEC oil embargoes, reducing oil supply into the United States. Oil prices went from $3 a barrel to nearly $12. Like, there was crazy stuff going on. Gas stations deploying flags on the front of them to let people know if there was gas or not available for sale. It was a crazy time. But it turns out people respond to incentives. At the time, there were some overseas manufacturers, one of them being Honda, selling small cars. And in the early 1970s, they were selling, say, 35,000, 40,000 cars a year. The Honda Civic at the time would get over 40 miles per gallon. By the late '70s, Honda was selling 10 times the number of vehicles in the United States, 353,000 by 1979. During the 1979 to 1982 recession, GM sales collapsed 34%. Toyota's, they were up 19%. By 1980, on the back of fuel-efficient cars, Japanese automakers had captured 21% of the North American market. The Big Three automakers, Ford, Chrysler, and GM, had been averaging $4.4 billion a year in profit through the 1970s. By 1980, they lost collectively $6.2 billion. The next thing to happen was in 1985, the US government passed something called the CAFE standard, C-A-F-E. Requiring automakers to average 27.5 miles per gallon across their entire offering. In the US, we like to feel like the free market controls stuff, but the reality is there's a bigger group that can impact all of that, and that's regulations. Companies can only do certain things. Well, they'll react, and that's what happened next. Between 1975 and 1985, the average miles per gallon in vehicles doubled from 13.5 to 27.5. And then you'd say, "Great, well, it would probably keep going up from there, right?" Well, it would actually stall for the next 25 years. Miles per gallon and fuel efficiency would stay about the same. Seeing the entire industry struggling with these new fuel standards and losing money like crazy, and there's a lot of voters in the Rust Belt of Michigan and surrounding states, President Reagan went in 1981 to the Japanese, and they agreed to a voluntary deal. They would cap the number of vehicles they would import into the United States at 1.68 million vehicles per year. So you can imagine what the Japanese did next. They started focusing on higher value cars, ones they could sell for more, because if you need to make more profit, you can only sell a limited number of vehicles, or you're going to try to sell more expensive, nicer cars at a higher profit. So the Japanese raised prices and they got into the luxury market as well. The late '80s were the era where we saw all these Japanese brands suddenly launch luxury brands. Toyota brought out Lexus, Nissan brought out Infiniti, Honda brought out Acura, and so on. This pushed the Japanese directly into where the American manufacturers were making most of their money, and rather than protect Detroit, it had created more competition for it. But before we get into that, let me give you a short pitch about a company that I co-founded called Near. It helps American businesses hire great talent in Latin America. If you're interested in hiring from places like Argentina, Colombia, Brazil, it's a great service for you. Besides the obvious savings where you can do 60 or 70% off US salaries, Latin America is the best experience of overseas hiring I've ever found. It's a great culture fit. There's no language barrier and they're in the same time zone, which matters way more than you think. They're just part of the team in the day to day and not second class talent. I've hired dozens of people through them and the talent is just awesome. Huge businesses have been outsourcing entire departments to Latin America for decades and Near lets you do the same no matter your size. They just placed an 18-person team of sales reps at a big company here in Texas, and that group of people added $20 million in annual recurring revenue quickly. Or they're happy to just fill a single seat if that's all you need. I've hired dozens of people through the company— accountants, sales reps, uh, everybody in between, engineers— and I encourage you to check them out. There's a link in the description. Now back to our story. By 1986, the average selling price of a Japanese car had risen over 40%, from about $6,500 to $9,500. And Detroit, well, they started to increase their prices too. Their average vehicle selling price went up by about 25%. And while Detroit got its breathing room to survive, instead of building more smaller, cheaper cars, they followed suit with the Japanese and started to build more expensive, bigger cars. And pushing them to do this was a loophole in the CAFE standards. Turned out when it was written, there was the idea that they would have one set of parameters for light and small cars and another one for trucks. And at the time, trucks were considered work vehicles. That's what they intended when they wrote the regulation. But it turned out the way they wrote it was so broad that you could start to claim well, almost any vehicle that could go off-road or haul stuff could be considered a truck. And this is kind of the second kind of takeaway from the story so far. If people have the opportunity to seize a loophole and make money off of it, they definitely will. And in this case, Detroit saw the opportunity to take these light truck chassis, put a comfortable passenger car body on top of it, call it an SUV, and not have to comply with any of those crazy pesky miles per gallon regulations. The first of these to come out was the 1984 Jeep Cherokee, kind of the mass market SUV, the other manufacturers followed in their footsteps. Ford launched the Explorer and then eventually launching the Expedition, which is basically a Ford F-150 with a passenger body on top of it. And yeah, it was big. And I remember we owned a Chevy Suburban at the time. Big boy cars. And the best thing, if you were Detroit, these were big expensive cars that people would pay more money for. And like an Expedition would have $12,000 in profit per car sold. Big time money at the time. But that wasn't the only problem with the CAFE rules. There was another loophole. And when they had written the regulation, it was intended to basically allow bigger vehicles to be slightly less fuel efficient. It made sense, right? Like, why hold an Expedition to the same rules as an Explorer? So rather than make them more efficient, well, they could just make bigger vehicles. And that's what auto manufacturers did. Over the next 30 years, starting in the late 1980s until now, the average vehicle got about 8 inches wider, 10 inches taller, and 4 inches longer. Oh, and it weighed 1,000 pounds more than kind of the equivalent used-type car. From the 1980s. But you could say, well, this is an isolated incident in this whole story. Well, it turns out there was another set of regulations that had an even greater impact on the American vehicle industry. And the explanation for this one goes back to the time after World War II when Europe was still basically devastated, right? It had been bombed and industrial production and farm production for that matter was basically nothing. And because the United States had built up so much supply during World War II, we were suddenly flooding the world with our markets, goods, and especially a lot of the food. And at the time, America was flooding the world with cheap chickens because we could make them so efficiently, and it was stifling European industry. By the 1960s, it was becoming so bad for France and Germany that they imposed tariffs on American chickens. A trade war happened, and at the time, President Johnson decided to retaliate. And besides protecting his farming voters, Johnson also had another problem, which was Detroit autoworkers at this time were really pissed off that Volkswagen was stealing their sales. And he wanted those United Auto Workers votes. And the last thing he wanted before the 1964 election was a bunch of autoworkers striking on his watch. So in January 1964, Johnson signed an executive order assigning tariffs on a lot of the products coming out of France and Germany, things like brandy, Dextrin, all that kind of stuff. But they also threw in something else to placate the United Auto Workers: light trucks. Eventually, the tariffs on potatoes and brandy and stuff like that, those went away. But the 25% tariff on light trucks, well, the lobbyists for the United Auto Workers and politicians from Michigan, they made sure that one has stuck around even up till today. So while foreign cars only face a 2.5% tariff, foreign light trucks face a 25% tariff. And if you look around and you're like, huh, well, like here in San Antonio, there is a huge Tundra manufacturing plant, a big Toyota plant, and it's like, well, why is it here? Well, the reason is this thing. The chicken tax. So this meant as the 1980s and 1990s happened, the SUVs, a.k.a. light trucks, people building trucks in the United States and SUVs in the United States, well, they had the market to themselves, whereas with sedans they faced brutal competition from overseas manufacturers. This is classic kind of protectionism in markets. And protectionism is good and bad, right? You could protect your markets and save some jobs now. But the problem is in the long term, it sets your industry up to be incredibly fragile because you're not facing real competition and having to win in a fair market. And if you look at the automobile industry, Like, it struggled in crises in the '80s and then again in the 2008 recession. And even since then to stay competitive. Well, some extent it's because they're not allowed to face reality. And so while you and I might want to buy really small cars, they're not on the market. In 1985, compact mini trucks, the really small ones, were 25% of all trucks sold. By 2010, they had effectively disappeared. You can't blame the automakers much. Full-size pickups, let's say if they ran on average $50,000 apiece, would run at 25% margins. $35,000 sedan might run at 10% margins. That's over $11,000 profit on a truck versus a couple thousand dollars on a sedan. It's a big difference. And if you look at the American automakers, it shows in their profit margins. 90% of the profits for Ford comes from Ford F-150 sales. It's been the top-selling vehicle in the United States for 42 years. It's a truck company that just happens to make some other stuff along the way. The same thing goes for General Motors. 10 vehicles of theirs, plus or minus, comprise about 45% of their total revenue, and probably 100% of their profits. The other 70 vehicles that they make, well, they don't make any money from that stuff. If you're sitting in the boardrooms of these companies, it totally makes sense, man. If we're only making money on a certain type of car, why do we keep selling the other ones? And I kind of can't blame them. Their job is to make money for shareholders. But it turns out regulations weren't the only reason vehicles kept getting bigger. Turns out you and me were the problem too. In 2000, crossovers composed just over 4% of the market. By 2018, that number would be over 40%. See, the original first generation of SUVs had been built on truck frames with kind of standard car bodies on top of them. Made it great for towing stuff but terrible for ride quality. The crossover used a sedan-style unibody, which gave you basically the best of both worlds. You could get all the efficiencies and lax regulations and big size allowed by the CAFE standards, but at a much better ride. So while A Ford Focus might give you 13 square feet of carrying capacity inside the vehicle. A Ford Escape might give you 68 square feet. Just for $6,000 more, you get 5 times more carrying capacity to put groceries, kids, dogs, everything else that Americans were buying at the time. And the Escape, well, it just got 1 mile per gallon less in efficiency than the Fusion did for all that extra space you got. By 2017, the Toyota RAV4, a compact SUV, it outsold the sedan Camry for the first time. Even inside of, you know, kind of storied brands like Toyota, consumers were making their choices and we wanted SUVs. It's one of the crazy things about the car market. I talked about it in my Cybertruck video. People buy cars for what they think they might possibly want to use the car for, not what they use it for every day. You and I might need a car to drop little Timmy off at the bus stop each morning, but instead we want to make sure for that one time in our life that we're going to go off-road that we got the right vehicle for it. And that's what people do. And it turned out you also looked a lot cooler and you also felt a lot safer inside of an SUV than you did in a sedan. I mean, have you ever been at a traffic stop and you look up and there's a giant 18-wheeler next to you and you feel like you're going to get rolled over? So people wanted bigger cars so they didn't feel like they were, well, going to be a victim on the highway. And the data back this up. Insurance Institute reports showed that people who were in small sedans were most likely to die in car crashes. The people least likely to die? Those driving big luxury SUVs. But look, all of this kind of us feeling safer in our giant cars didn't come for free. If you look recently, the stats on bicycle deaths are way, way up. And also you're 45% more likely to die from a pedestrian incident with a car than you are, say, a couple of decades ago. Pedestrian deaths have risen over 80% since 2009, about the same time SUVs took over the roads. So what also happened as the carmakers were making sedans and people didn't want to buy them? Well, there was somebody who did want to buy them, and those were rental car fleets. It didn't help that a Chevy Cruze or a Nissan Maxima— well, most of us associate that with a budget rental. You get it at Dollar or Hertz or something like that. Not a way to look cool to your neighbors. Oh, you got a new Maxima? Congratulations. Yeah, nice. But the one thing that smaller cars had going on them, and especially sedans, was gas still was expensive leading into the 2000s and the early 2010s. And then a new technology would come along that would change everything again. You see, this technology was called fracking, and fracking had created basically a glut in oil starting in 2008. And into 2014, American oil production basically flip-flopped. We used to be a huge oil importer, and suddenly we were producing more oil than we could consume. While United States oil production had doubled from 2008 to 2014, the Saudi Arabian government decided they were going to start a price war. Oil went from over $100 a barrel in 2014 down to $30 a barrel in 2016. And you know what's made from oil? Gasoline. And gasoline prices went down in parallel from $3.50 a gallon to on average about $2.50 a gallon. And while people had had an argument to keep smaller cars and small sedans with high gas prices, well, the era of high gas prices was over, at least for the time being. Consumers got the message with their neighbors driving huge cars, with the stigma around everything, with the gas prices going down, with the loopholes and costs from the chicken tax and all this kind of stuff, in 2015 SUVs overtook sedan car sales in America for the first time. By 2018, the automakers in the United States got the message. Remember, they weren't making money on a lot of their cars, so there's no reason to build them. So in 2018, Ford was one of the first ones to announce a change. They were killing basically all of their sedans. Only the Mustang would survive. Things like the Focus, the Fiesta, all that kind of stuff, they were gone for good. The Chevy Cruze had sold 475,000 units in 2013. By 2019, that was down nearly, well, 80% to 45,000 cars. Basically, it was just not being bought. GM killed the Cruze, the Sonic, the Impala, the Volt, and only the Malibu held on. And then it was just recently killed here in 2025. Chrysler's last sedan, the 300, that had followed in December 2023. The reality is, without the chicken tax, these American automakers can't compete with foreign vehicles, you know, in the sedan market. The only real manufacturers still making them are Toyota and Honda. Well, they still have the Civic and the Camry and the Corolla and etc., and they're picking up some of the market share for the people that are still actually buying sedans. But even still, those things are a drop in the bucket of the sedans coming from Toyota and Honda and others selling less than 300,000 units annually. But then something came in 2020 that would change the auto industry for good, and that was the COVID pandemic.

But before we get into that, I want to let you know that I put every single one of these video stories that I do into a one-page summary cheat sheet. It's a great way for you to remember the key beats of the story and take away all the great lessons that come from it. And maybe you could be the cool guy at the party who is telling interesting business nerd stories like I do. Join the club. Anyway, you can get all these cheat sheets totally for free at girdley.com/youtube. Just put your email in and you'll get this video's cheat sheet automatically, plus all the other ones I've done. Now let's get back to the video.

The first thing a lot of these Big Three automakers did was go and cancel their semiconductor orders when they thought that orders were about to collapse. I mean, remember back at that time we were worried that the entire the entire economy of the world was going to grind to a halt. And so they canceled a lot of those chip orders. This set them up that when demand came roaring back post-COVID, they were going to be in a position where those chips were going to be in a shortage. They'd already been allocated to laptops and game consoles and whatever. So suddenly we're in a situation post-COVID where the auto manufacturers are forced to— well, they can build a limited number of vehicles, so they're going to build the most profitable ones they can. Those are SUVs and full-size pickups. In 2021, the chip shortage would cost the industry 11 million new cars that they wanted to produce and over $200 billion in revenue. But with a limited supply, the automakers realized they could do something that, well, would make them happy, which is they could make fewer cars and make more money. And the way they did it was by charging higher prices. In 2019, vehicles under $30,000 made up 36% of North American sales. By 2023, that number was under 15%. Back in 2012, we had had 50 vehicles available for less than $20,000. Today we have one. The Nissan Versa, which is just under $20 grand. Today, the average car price is $46,000. The average car loan, 68 months, almost 6 years. An example of this in practice is Ford's lineup. Their cheapest vehicle in 2011 was the Ford Fiesta, which was around $14,000 sticker. Today, their cheapest vehicle is the Ford Maverick, which comes in at $28,000 base. And a crazy fact about the Maverick is Ford can't keep up with demand. People want them that much. It's a light crossover SUV that can be used as a work truck. And it's ironic that Ford's cheapest vehicle is one where they can't keep up with demand. It happens to be a light truck that's covered by all of these factors from a regulatory perspective, the consumer perspective, and then a global perspective, or why, well, in Ford's case, we don't see small cars anymore. In the end, government has an immense amount of power to shape how markets will shape up, and they do it through regulation, taxation, and those sort of things. And you can see how all of that happened for the SUV and automaker industry back in the '60s, '70s, and '80s and lead us to where we are today, driving around giant vehicles. Our job as business owners and entrepreneurs is recognize what shaping of the economy the government is trying to do and look for those opportunities. Or if we own a business, understand where the regulation is going and how it's gonna affect our ability to make money in the future. If you're interested in another video on how the government can impact a company, check out this one I did here on Juul. If you enjoyed this video, let me know in the comments below. That encourages me to make more. Catch you next time.