A practical framework for making kei cars work in the United States

This week, the Trump Administration moved forward on rolling back fuel economy standards for new vehicles. Ford CEO Jim Farley and Stellantis CEO Antonio Filosa were both in attendance. GM sent someone in the place of Mary Barra (which was probably a good call). Because the EPA has been gutted of its enforcement abilities, the rules really don’t matter. But I digress.

Two items broke containment from the news conference yesterday. One was a gutter-racist-filled rant by the president while everyone was still standing behind him in the room. The other was that the president supported the idea of kei cars being a thing in the United States. Let’s talk about the latter.

Kei cars are a specific type of vehicle in Japan that is regulated based on engine size, power output, and vehicle size. They are taxed less. They are cheaper to insure. They can get around certain traffic and parking restrictions. In a country that is basically a giant island, they lend themselves to the limited available space. If you’ve played Gran Turismo at all, you’ve undoubtedly driven one.

Make no mistake, though. These things will not be coming to America.

Not that long ago, automakers tried the small car thing in the United States. Toyota had the Yaris. Ford had the Fiesta. Honda had the Fit. Mazda had the Mazda2. Chevrolet had the Aveo. Hyundai had the Accent. Nissan had the Versa. Mitsubishi had the Mirage. Smart had the ForTwo. Fiat had the gas-powered 500.

Of those cars, the Versa is the only one currently in active production, and the rumors of its death continue to circulate. These small cars — which are still bigger and more powerful than a kei car — weren’t purchased in super large quantities. Some fared better than others and still hold value well in the secondhand market, but at the end of the day, even if the cars were profitable for automakers, they weren’t profitable enough.

Why sell a car that only has a few hundred dollars of margin built into it when you can sell a car with $10,000 of margin built into it? Car companies are publicly held corporations, and they have a fiduciary duty to shareholders. That doesn’t justify killing inexpensive cars, but it explains part of the reason why they did so.

Even at that, most people didn’t want to drive a car that small. Some don’t think they’re safe — whether they are right or wrong isn’t my point, it’s the perception — while others need more space for kids and friends and so on and so forth.

If the profit motive didn’t matter and production was unlimited, the total addressable market (TAM) for a vehicle like this would be small.

I can appreciate that vehicles are getting too big, too difficult to see out of, and more dangerous as a result. I can also appreciate that cars are simply getting too expensive. But the kei car isn’t the solution to either of these problems.

With all of that being said, let’s say that they are the solution to all of our problems. What would the framework look like to get them on sale and in consumer hands?

For there to be any hope of profitability, the cars would have to be manufactured in the United States. Direct importing from Japan would incur a tariff cost that would likely sap any margin out of the equation. Plus, there’d be an extra cost in converting the vehicles to left-hand drive. A vehicle that would cost the equivalent of $10,000 in Japan, when federalized, sent here, taxed, and put on the road, it’d probably be close to $20,000 or more. At that point, you’re bumping up against already on-sale vehicles here that are bigger, more powerful, and more practical.

A new plant might not be necessary, but the retooling costs of a current one would cost the automaker a decent amount of money. Now, like the legal framework of Air Bud, there are no rules currently preventing an automaker from making a small car. But an automaker would still have to hope that there’d be demand in a few years when Trump is no longer in office.

The way to make these tiny cars work is to do what Japan does, and incentivize the small cars. They need to pay cheaper registration fees and taxes, or vehicles need to be taxed according to size or weight. They need to have exclusive perks, like being allowed into lower Manhattan without having to pay the congestion charge.

Automakers would likely need an incentive too, such as tax abatements on plants that build the cars, grants to help offset retooling costs, and cash incentives for dealerships to push the kei models as viable alternatives to the margin-filled pickup trucks currently on the road.

Sure, some people will see a kei car and want to buy one. Heck, I might even be one of those people. But even if they’re priced extremely well, the general buying public isn’t going to be drawn to them because of their limitations. Now, costing less money is certainly an incentive to get someone to switch, especially if they are fuel-efficient. But to make the endeavour actually worthwhile, there’ll need to be some regulation.

And you know how our current government feels about regulation and incentives. Even though EVs aren’t mandated, the Trump Administration has waged war against this “mandate” as government overreach and limiting consumer choice. While I could write a whole other post on how we incentivize the fossil fuel industry in ways that make the Trump Administration hypocritical, the point ultimately is that there’d be no help from the government to make these cars appealing to a buyer who is used to more space, more power, and more practicality.

As a car enthusiast, I think kei cars are cool, quirky, and fun. I want to go to Japan and drive one around the streets of Tokyo. There might even be certain places in the United States where they make some sense, including our own island state of Hawai’i. I just don’t see there being enough TAM for an automaker to make the effort, even if profits are low, without a change in the ways we incentivize and regulate automobiles.

Now, why are vehicles expensive? It’s not because of fuel economy rules or even safety features. But that’s for another post.