Mexican automotive workers bid a fond farewell to the VW Beetle. Picture: REUTERS
Mexican automotive workers bid a fond farewell to the VW Beetle. Picture: REUTERS

Car launches are 10-a-penny so it’s very rare that a particular model’s demise captures the world’s attention. The Volkswagen (VW) Beetle, the last of which rolled off the production line in Mexico this week, was no ordinary vehicle though.

The downfall of the “People’s Car”, an icon of post-war German prosperity as well as the 1960s counterculture, is all the more painful because of what’s replacing it. Bloomberg News reported this week that the Mexican plant is now gearing up to build — wait for it — a compact SUV.

With all due respect to VW’s new SUV, I doubt it’s going to capture hearts the way the “Love Bug” did, not to mention the original tiny Fiat 500 or Britain’s Mini for that matter.

Petite, fuel-efficient cars would seem to be an obvious solution for a warming planet and our increasingly crowded cities. Yet they’re fast becoming an endangered species in Western markets. Consumers have voted with their wallets by buying SUVs and because they carry fatter profit margins, car makers have been happy to oblige. VW’s famous entreaty to Beetle customers to “think small” hasn’t worked out.

But killing the affordable small car could yet have adverse consequences for the automotive industry — as well as the environment. At their best, they marry affordability and utilitarian styling and they can be outrageously good fun to drive. In a recent “research” video report for clients, the Bernstein analyst Max Warburton borrowed a vintage 1.9l Peugeot 205 GTI — a racy version of the French bestseller. His boyish delight at getting behind the wheel was palpable.

From a profit and regulatory compliance perspective, it’s certainly better for car makers to sell lots of hybrid SUVs and high-performance sports cars

Compact cars have always struggled to gain traction with Americans, though, and they’ve been overshadowed recently by the boom in trucks and SUVs, which account for almost 70% of the US market. Cheap credit and leasing have made larger vehicles more affordable; the average purchase price of a new car has risen to an eye-watering $37,000. And low petrol prices make these heavyweights less costly to run. In fairness, some compact SUVs are actually pretty fuel efficient, so even a big rise in pump prices might not reverse this trend.

Plus there’s the safety factor, which compels even people who don’t like SUVs to buy one in case they get into an accident with another giant vehicle. Pedestrians are more likely to be killed if they’re hit by a large SUV, but that’s apparently of little concern.

In Europe, where small cars still account for about one-third of the market, there’s another (counter-intuitive) factor working against compact models: tougher emissions standards. By 2021, car makers must achieve average fleet emissions of 95g of CO2/km. Targets for 2025 and 2030 are even more stringent.

The problem, car executives say, is that the high cost of electrification technology is difficult to combine with the economics of smaller, cheaper cars. Installing emissions-cutting kit in a compact car requires either a prohibitively high sticker price or the sacrifice of profit margins. Perversely, it can be cheaper for car makers not to bother and just pay the regulatory fine.

Hence several entry-level models might be facing the chop, at least until the cost of batteries falls. VW’s CEO Herbert Diess said recently that his company’s smallest vehicles, the Up! and Polo, are “really under threat”. Meanwhile, Peugeot’s Opel/Vauxhall has already announced that its Adam and Karl city cars face the axe.

From a profit and regulatory compliance perspective, it’s certainly better for car makers to sell lots of hybrid SUVs and high-performance sports cars. But is this better for the environment? That’s debatable.

Some hybrids still emit lots of CO2 when driven distances that exceed their very limited electric-only range, and that’s not their only drawback. “The problem with plug-in hybrids is that consumers don’t plug them in,” says Bernstein’s Warburton.

One sad consequence of these trends is that there will be fewer new vehicles on the market that poorer or younger customers can afford to buy and insure. While they’ll still be able to buy second-hand vehicles, a dearth of cheap models may turn even more people off the idea of car ownership.

Car-sharing, bike-sharing and electric scooters have already persuaded many young city dwellers that there are better alternatives; the average age of a new car buyer in Germany has risen to 53. SUVs have killed the small affordable vehicle. But big, self-owned cars face their own struggles.

Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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