Image: 80th Geneva Motor Show
Miguel Villagran  /  Getty Images
The Aston Martin Cygnet is pictured during the  80th Geneva International Motor Show on March 3, 2010. Aston is betting there's a growing market for downsized luxury cars.
Image: Paul A. Eisenstein, msnbc.com contributor
By
msnbc.com contributor
updated 5/3/2010 7:38:39 AM ET 2010-05-03T11:38:39

The winged badge on the nose may be familiar to those who know the legendary British marque, but the new Aston Martin Cygnet is definitely not the sort of car you’d expect to see super-spy James Bond driving.

Measuring barely 10 feet from nose to tail, the three-door hatchback is the polar opposite of sleek Aston sports cars, such as the low-slung, 2-seat DBS, that you would normally see 007 piloting through his latest adventure. But the automaker, now owned by a Kuwaiti-led consortium, believes the Cygnet is more in tune with global realities.

Aston isn’t the only high-line maker betting there’s a growing market for downsized luxury products. And with regulators in Europe and North America clamping down on emissions and fuel economy, brands such as Mercedes-Benz, BMW, Audi and even Cadillac are weighing in with pint-size offerings of their own.

But while there are a few solid success stories, the industry’s history also provides cautionary tales suggesting that downsizing is a potentially costly risk for luxury automotive brands.

“Our past, our future and our backbone will always remain sports cars,” says Aston CEO Ulrich Bez. But, he adds, “Many of our customers have a need for a small car for urban and city driving.”

Aston, until three years ago a subsidiary of Ford Motor Co., would prefer to supply those customers with both a sports car and a commuter car. The strategy in some ways reflects the decision by luxury makers a few years back to expand into the sport-utility and crossover segments.

BMW, for one, has succeeded with moves in both directions. There are its big SUVs and there is its Mini brand, whose models could almost fit in the cargo compartment of the large X5 Sport-Activity Vehicle.

Mercedes, meanwhile, took aim at the commuter car market with the Smart brand. That nameplate currently offers the two-seat fortwo. At eight feet in length, it's the smallest mainstream model on the American market.

Like Aston, BMW and Mercedes are moving to put their own badges on downsized models. There’s the Bavarian maker’s 1-Series, while Mercedes is peddling the A-Class. Audi, in turn, has moved from A4 to 3 to 2, and at this year’s Geneva Motor Show pulled the wraps off the super-mini A1. Pitching the model as “the sportiest car in its class,” Audi is hoping the Mini-fighter will become one of its best-selling models ever.

The challenge, warns independent auto analyst Dan Gorrell, is that “it’s difficult for any automaker to earn a profit on a small car, especially for a luxury brand.”

In Europe, the A1 will go for well under $20,000, or barely half of what the more mainstream A4 goes for. (There are no plans to bring the A1 to the U.S.)

For Aston, the Cygnet will cost perhaps 10 percent of what some of its more traditional, largely handmade sports cars go for. To make that number work, the maker has teamed up with Toyota, and the little commuter car will borrow heavily from the Japanese maker’s iQ minicar.

After a decade, Mercedes is still struggling to come up with a profitable formula for Smart, and hasn’t done terribly well with the A-Class, either, analysts say. Those are key reasons for the maker’s new partnership with the Euro-Asian, Renault-Nissan Alliance.

A key lesson of the ongoing recession is that “you cannot do it alone,” says Dieter Zetsche, who serves as both head of the Mercedes brand and CEO of the maker’s parent, Daimler AG. Among the many projects the new allies have under way, Renault will provide the platform for the next Smart fortwo and a bigger four-seater; and the French company will also provide fuel-efficient engines for small Mercedes offerings, such as the A-Class.

BMW has ties to Renault it can tap as it looks at additional models, like a rumored 0-Series. And Audi has its parent, Volkswagen, well known for small cars like the Golf, Polo, and soon-to-come Up microcar.

Some industry executives say luxury makers are "cheating" by putting their premium marques on such derivative cars. Such alliances between luxury and mainstream brands appear to be a  future reality of the automotive market. They are fraught with peril, however.

Privately, Aston officials admit they’re concerned that potential buyers will just see the Cygnet as a gussied-up Toyota, not worth the moderate premium. Cadillac ran into that problem in the 1980s, when it tried to respond to the last big oil crisis with the downsized Cimarron. The vehicle was little more than a rebadged Chevrolet, and because of the extra weight for elements such as leather seats, it was actually slower.

Cimarron is now considered the biggest failure in Cadillac history. The maker didn’t fare all that much better with the BLS, which it recently pulled from production. That model was a rebadged Saab. Caddy is looking at yet another pint-sized product, currently codenamed ATS, which would be developed and produced entirely in-house.

Tough new regulations aren’t the only reason luxury brands are looking to downsize. There’s also the global trend toward urbanization — most obvious in emerging markets such as China.

Without luxury offerings of their own, the premium makers fear, they will cede these markets to mainstream competitors and become increasingly irrelevant. The challenge is finding a way to convince motorists that automotive prices should no longer be measured by the inch or the pound. Justifying a critical price premium will be essential for new offerings like Cygnet to succeed.

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