Death of the Small Car in North America

Exploring the economic and cultural forces which sidelined the compact car

Remember the post-grad ritual? You’d walk across the stage, grab your diploma, and head straight to a dealership to sign for your first brand-new car. For decades, this was a rite of passage. You’d start with the most humble, reliable, easy to maintain Honda Fit, and as your career (and family grew) you’d climb the ladder to an Accord or a Pilot, or perhaps an Acura TLX. Does it feel like the automotive ladder is missing its bottom rungs? Now, a stroll through a modern dealership lot feels different. A row of sleek, affordable hatchbacks is now replaced with a sea of SUVs and a handful of sedans.

Figure1. The Graduation Dream | AI generated image

The SUV-fication of North America

The automakers claim that the SUV-fication of North America is simply a response to what the people want. Well, that’s not quite right. There are buyers: students, working-class families, and fixed-income retirees who would prefer a car under $20,000. 2025 became the graveyard for several budget-friendly cars such as the Mitsubishi Mirage, Kia Rio, Nissan Versa, etc.

One might assume that a small hatchback costs a fraction of what it takes to build an SUV. In reality, the retail price gap is massive. In recent years, the cost of simply putting a car on the road has skyrocketed. Auto manufacturers are squeezed by rising labor costs, global chip shortages, and persistent supply chain disruptions. Modern consumers are addicted to high-end tech; they no longer want a basic steering wheel and radio. They want massive touchscreens, ADAS, and top-tier safety systems, along with the option to customize. As profit margins on tiny cars evaporate, the manufacturers are embracing “premiumization” — phasing out the budget car and funneling the buyers towards base model SUVs.

In addition to premiumization, regulations play an important role. North American fuel economy standards are based on a vehicle’s footprint, meaning that larger vehicles have lenient standards. Thus, over-engineering a tiny car to meet impossible standards became impractical. The battery technology currently favors larger vehicles. Batteries are heavy and expensive. Putting them in larger cars offsets the price. On a side note, the tiny car market is booming in Europe and Chinese markets due to rapid urbanization, making the bulky SUV impractical.

Kia’s Soul Story — Passing the Torch

Born as a “Boar with a Backpack” design experiment in Kia’s Design studio and immortalized by the legendary “Ham-star” marketing campaign, the Soul successfully bridged the gap between efficiency of a compact and utility of an SUV, tripling Kia’s U.S. sales over its 16-year life span. The Soul served as a bold, creative lab for Kia. Using ‘Halo’ concepts like Souls’ter, Track’ster, Trail’ster, they mapped out the brand’s boundaries without compromising the Soul’s unique DNA — launching Seltos to own that higher margin segment.

Figure 2. Kia Evolution

Corporate Average Fuel Economy (CAFE) Standards calculate targets based on the area defined by the wheelbase and track width of each vehicle. As a vehicle’s footprint increases, its fuel economy target decreases, which has incentivized manufacturers to increase vehicle size. The Kia Soul has a small footprint (~40 sq ft), which carries a stricter MPG target compared to the Seltos (~44 sq ft), which is classified as a light truck. By moving the product mix toward the Seltos, Kia avoided “compliance costs” in R&D for extreme light-weighting or electrification simply by placing the vehicle in a less stringent regulatory category.

In 2023–2024, Kia had to offer higher rebates to move a Soul unit, “the Push Strategy”, whereas Seltos maintained high sales with minimal discounting, “the Pull Strategy”. Kia’s 2023 sales indicated an 11.6% operating profit margin, driven by a largely improved product mix. Kia America sold 61,263 Kia Soul units in 2023, compared to its historic peak of 147,133 units in 2015 indicating a sharp decline.

A key profitability driver for the Seltos was the ‘AWD Factor’ — All Wheel Drive, which typically adds $2000 to the sticker price with low incremental manufacturing costs, boosting price margins. The Soul’ster 2009 taught Kia that the public loved the ‘fun’ but hated the ‘impractical’. The open-bed Soul had high likes but zero intent to purchase. The Trail’ster 2015 was the turning point which featured the e-AWD, an electric motor on the rear axle. Kia learned that the missing AWD feature was preventing the Kia Soul from being a lifestyle vehicle in the winters.

Kia Soul successfully elevated the brand to a point where the market was willing to pay for its more expensive, higher-margin successor. Its discontinuation represents a textbook example of an automaker prioritizing Return on Invested Capital over legacy brand volume.

Figure 3. The Tiny Cars Graveyard | Image using GEMINI

A brand’s future isn’t built on the flagship SUV sold today; it’s built on the entry-level car that earned a driver’s trust a decade ago. Without the ‘starter car,’ the ladder to the luxury tier has no bottom rung. If ‘SUV-fication’ is the only path forward, we have to ask: Are we buying what we want, or simply buying what’s left?

References:

Kia Media’s Official Press Release: https://www.kiamedia.com/us/en/media/pressreleases/23773/a-new-way-to-roll-kicking-off-a-celebration-of-the-kia-soul

Proposed CAFE Standards for MYs 2022–2031 Passenger Cars and Light Trucks: https://www.nhtsa.gov/laws-regulations/corporate-average-fuel-economy

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