BMW Tosses Out Traditional German Luxury as Models Shrink – Bloomberg

Posted: Wednesday, April 09, 2014

Chris Bangle, Bayerische Motoren
Werke (BMW)
AG’s former design chief, once likened the German
carmaker’s lineup to a bratwurst in three different lengths.
Now, there’s a lot more on offer, including convenience sizes.

BMW, which previously relied on the 3-, 5- and 7-Series
sedans, has more than doubled its model offerings in the last 15
years to 26 variants by chiefly adding smaller vehicles. Audi
and Mercedes have followed a similar path, veering away from the
refined, powerful cars for which they’re best known.

Further challenging the notion of what the brands stand
for, the world’s top three luxury-car makers build more and more
cars outside their homeland, thereby diluting the “Made in
Germany” cachet. These shifts ultimately may impact
profitability, currently at the top of the industry, because
their pricing power comes in part from selling customers a
sporty, elegant image that they’ve spent decades crafting.

“Every diversion from the essence of a brand poses a
danger, because you have to make compromises and every
compromise softens the brand in the long run,” said Klaus-Dieter Koch, managing partner of Nuremberg, Germany-based
consultancy Brand Trust. “If you overstretch a brand, the
ability to ask for a price premium vanishes.”




Photographer: Patrick T. Fallon/Bloomberg

The Audi AG A3 e-tron on display at the LA Auto Show in Los Angeles. Close

The Audi AG A3 e-tron on display at the LA Auto Show in Los Angeles.

Open

Photographer: Patrick T. Fallon/Bloomberg

The Audi AG A3 e-tron on display at the LA Auto Show in Los Angeles.

The three German automakers are broadening their lineups
and global scale out of necessity because being niche players
selling only $40,000-plus sedans is not sustainable in the long
term. The traditional draw of big engines is no longer enough on
its own to lure wealthy customers, and higher sales volumes
spread the billions in costs for developing cleaner cars to meet
tighter emissions rules.

Active Tourer

The latest example of the redefining of the German luxury
car is BMW’s 2-Series Active Tourer. The van-like compact, which
starts deliveries in September, is available with a three-cylinder engine and marks the first modern BMW with front-wheel
drive. Every current model from the brand is either rear-wheel
or all-wheel drive, which are deemed better for handling.

The German luxury brands “are willing to risk some
exclusivity to bring in new customers,” said Kevin Tynan, an
analyst with Bloomberg Industries in Princeton, New Jersey.
“The idea is to let a customer buy a $30,000 vehicle in his 20s
or 30s and move him up once he’s paid for college and can afford
a more expensive car.”

So far, the plan’s working. BMW, Audi and Mercedes posted
their highest monthly deliveries ever in March on surging demand
in China and the U.S., the world’s two largest auto markets. BMW
retained the overall lead with a 17 percent surge, outpacing
Audi’s 15 percent growth and Mercedes’s 13 percent rise.

Mercedes Expansion

“We are seeking to gain new customers by entering new
segments for Mercedes-Benz,” Dieter Zetsche, chief executive
officer of the luxury brand’s parent Daimler AG (DAI), said today at
the company’s annual shareholders meeting in Berlin. “Our
compact offensive is exactly what it’s supposed to be: a
rejuvenation of our brand.”

Mercedes went from 14 cars in 1999 to 26 now, according to
the Center of Automotive Research at the University of Duisburg-Essen. During that time, the Stuttgart-based manufacturer added
compacts like the B-Class hatchback, the GLA sport-utility
vehicle and the CLA coupe. Another 12 all-new models, including
another small car as well as a sports car and a coupe-like SUV,
are planned by 2020.

Audi, which like BMW has introduced a new model every two
years on average since 1990, added a sedan variant of the A3
compact last year. The Ingolstadt-based manufacturer rolled out
the small Q3 SUV in 2011, a year after adding the A1 subcompact.

Honolulu to Berlin

“Our compact models like the A3 and Q3 make it clear that
premium isn’t a matter of size,” Luca de Meo, sales chief for
the Volkswagen AG (VOW) unit, said in a written response to Bloomberg
questions. “Premium brands are by nature global with products
and a market position that stand for the same values from
Honolulu to Berlin.”

That worldwide position is also increasingly true of the
cars’ origins. Audi predicts that this year it will produce more
vehicles abroad than in its home country for the first time as
it boosts production in China and Hungary. The share of German-made Audis dropped to 53 percent last year from 75 percent in
2009 and will decline further as Audi plans to assemble cars in
Mexico and Brazil in the coming years as well.

Mercedes opened a new factory in Hungary in 2012, while BMW
is investing $1 billion to make a plant in South Carolina its
biggest manufacturing facility worldwide. The Munich-based
company is also narrowing the list of locations for a second
plant in North America, people familiar with the matter said
this week. At least two sites in Mexico are being considered.

BMW Engineering

The focus has shifted to “Engineered by BMW in Germany,”
said Milagros Caina-Andree, BMW’s head of human resources.

“We are now an international company with Bavarian roots
and many sites abroad where we build vehicles at the same high
quality level as in Germany,” Caina-Andree told Bloomberg. “To
grow globally in the coming years, we need more production
capacity abroad” to be closer to customers and avoid import
tariffs and foreign-exchange risks.

BMW, the world’s best-selling luxury-car brand, will start
assembling vehicles in Brazil this year. Audi and Mercedes,
which both aim to surpass BMW in sales by the end of the decade,
will follow suit by 2016.

In addition to jockeying for growth, the German brands all
face the challenge of getting customers to still pay a premium
for cars as their engines get smaller to meet environmental
regulations. In the past, more cylinders and more horsepower
meant a higher sticker price, and a shift to downsized engines
threatens that traditional German model.

Three-Cylinder Supercar

“To reduce fuel consumption is still one of the biggest
challenges for the car industry,” Thomas Weber, Daimler’s
development chief, said in an e-mailed statement. “We have been
working intensively from the very outset on how to improve fuel
economy, while at the same time increasing performance.”

BMW is rolling out the i8 this year, it says, to speak to a
new kind of luxury buyer. At a starting price of $135,700, the
sports car is BMW’s most expensive model, even though it’s
equipped with just a three-cylinder engine. Combined with
electric motors, the plug-in hybrid boasts 362-horsepower and
accelerates to 60 miles per hour in 4.4 seconds, while getting
as much as 94 miles per gallon.

“A few years ago it was unthinkable to have three-cylinder
engines in mid-size much less luxury vehicles,” said Stefan Pischinger, head of the Institute for Combustion Engines at the
RWTH University in Aachen, Germany. “Purists who crave a six-or
12-cylinder engine won’t die out, but for the majority of the
customers, this is not a decisive factor.”

To contact the reporter on this story:
Dorothee Tschampa in Frankfurt at
dtschampa@bloomberg.net

To contact the editors responsible for this story:
Chad Thomas at
cthomas16@bloomberg.net
Chris Reiter

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