They did not understand small! However, at that time VW Beetles were just starting to get popular over there so they soon realised the advantage of small: most US cars then were vast Detroit chrome mountains and needed lots of space between each other when parked so that they could manoeuvre, and there was often enough space for a cheeky VW to fit in.
Part of my Dad's job was to work with other government depratments to try to get British industry to export more cars to USA, and BMC were particularly bad at networking and making the effort.
Disney originally chose a Morrie thou for the Love Bug, but BMC were such bureaucratic dullards that they did not see the potential for marketing, PR and sales and tried to charge for the cars and refused to do any modifications.