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BMW, Mercedes look to grow by shrinking

BMW gave U.S. buyers a first taste of the X1 at April's New York Auto Show, but only last week revealed the crossover-utility vehicle's $31,545 base price.
BMW gave U.S. buyers a first taste of the X1 at April's New York Auto Show, but only last week revealed the crossover-utility vehicle's $31,545 base price.Photo courtesy of BMW

Sometimes you have to think small to grow bigger. Hoping to lock down its position as the U.S. luxury market leader, BMW is getting ready to introduce some of the smallest products it has ever sold here, including a new version of its little 1-Series and the all-new BMW Vehicle.

The Bavarian maker isn’t alone. The compact and even subcompact luxury classes, which barely existed just a few years ago, are suddenly being flooded with new product and may be critical in an increasingly competitive market where a new generation of buyers is proving unexpectedly resistant to the siren call of luxury automobiles.

“You can no longer assume Gen-Y buyers necessarily want a luxury vehicle anymore,” cautions Rebecca Lindland, senior analyst with IHS Automotive, “and even if they do aspire to luxury, they may not have the money.”

But even older buyers are rethinking their options in the wake of both a deep recession and rising fuel prices, industry observers say.

BMW gave U.S. buyers a first taste of the X1 at April’s New York Auto Show, but only last week revealed the crossover-utility vehicle’s $31,545 base price.  The compact crossover was offered in a number of countries in its earlier form, undergoing some extensive updates before the maker felt it could launch in the U.S. 

The market has changed significantly since the X1’s global introduction in 2008. Fuel prices have repeatedly surged to record or near-record levels.  Younger buyers have shown a growing preference for downsized offerings, matching trends in other parts of the world.  Of course, that may also reflect the realities of a generation that, according to the pundits, could be the first to see their standard of living dip below that of their parents.

Whatever the reason, BMW won’t be alone.  Mercedes-Benz is also downsizing, with a totally redesigned A-Class coming to the U.S.  In fact, company officials hint they may offer as many as four different versions of their smallest-ever model in the U.S.  And the German maker will share the underlying platform developed for the A-Class with its Japanese alliance partner, Nissan using it for the planned Etherea model now under development.

The global downsizing trend has swept through the luxury side of the industry.  Even Aston Martin has responded with the Cygnet, a two-seat microcar based on a Toyota platform that recently appeared in the U.S. as the Scion iQ.  Loaded with leather and other high-end details, Aston currently has no plans to bring the Cygnet to the U.S., but that strategy could shift.

Analyst Jim Hall, of 2953 Analytics, remains skeptical about just how much demand there will be for the smallest of new luxury models, but agrees makers are likely to give it a try – if for no other reason than “as a CAFE play.”  Facing a Corporate Average Fuel Economy standard that will nearly double by 2025 BMW, for one, will have to offset low-mileage models like the big 7-Series and the X5 Sport-Activity Vehicle with models like the 1-Series and X1.

The luxury market as a whole is expected to be a bit smaller than many had once anticipated, contends Lindland. While luxury demand has been recovering along with the rest of the U.S. new car market, IHS now forecasts that high-line models will account for, at most, 13 percent of overall sales by decade’s end, compared with the 14 percent or more the consulting firm projected prior to the start of the 2008 recession.

And considering that the firm anticipates the overall auto market will fall short of earlier expectations that could mean a real dogfight in the luxury end.

In recent years, it has been a three-way battle for supremacy, pitting last year’s winner, Mercedes-Benz, against BMW and Lexus, which had been the U.S. luxury leader for more than a decade. 

Whether the new small cars, such as the BMW 1-Series, Audi A3 and Mercedes A-Class will make a significant difference remains to be seen. So far, the few entries in the segment have generated relatively modest sales. But the smaller among the brands’ more traditional offerings, such as the Audi A4 and Mercedes C-Class, have continued gaining traction.  The 3-Series has long been the dominant model in BMW’s line-up.

But just making a model small won’t necessarily be enough, cautions Jack Hollis, a vice president with Lexus parent Toyota, especially in appealing to Gen-Y.

“Young buyers don’t look at needing a car as much today to have a social life. Their world of community is so much larger and (they) don’t need a car to take them there,” he contends, arguing that it will also require exciting products that also incorporate the sort of connected technologies that have become an essential part of Millennial life.

The brand that can find the right balance between size, style, performance and connectivity should win the shoot-out.