Timing is everything, or so goes the old saying. And the timing couldn’t have been worse for BMW when it launched an all-new version of its flagship 7-Series, late last year.
Though the big sedan won praise from reviewers, sales fell way short of the luxury automaker’s expectations. It didn’t help that the big Beemer's debut coincided with the collapse of Lehman Brothers, and the sharp economic downturn that followed.
“Given we have an all-new 7-Series, it’s clearly not doing as well as we wanted,” said Jim O’Donnell,” CEO of BMW North America. “I think some people can still afford it, but when you’re a CEO of a company and you’re laying people off, do you want to be seen driving a new 7-Series?”
Luxury manufacturers have been unexpectedly hard-hit by the global economic downturn. BMW has seen its sales in the United States, the world’s largest market for premium automobiles, plunge more than 25 percent so far this year.
Other makers, such as Jaguar and Land Rover, have suffered even bigger declines. Notably, some of the sharpest losses have come at the top end of the luxury market, the rarified strata of the 7-Series and the Phantom, sold by the BMW’s British subsidiary, Rolls-Royce.
While it’s not the first time that luxury car sales have slipped, high-line manufacturers normally fare better than their mainstream counterparts. The unusually sharp decline seen during this recession has many observers wondering if there’s a more fundamental shift reshaping the luxury automotive market.
The word “value” is something one hears with uncommon frequency. Even the most prestigious marques are rejiggering their economic equations. In May, Mercedes-Benz announced an unexpected 10 percent cut in the price of its all-new, 2010 E-Class sedans, with the E350 falling to $48,600 from the ’09 model’s starting price of $53,200. Since then, Mercedes has cut prices another $5,000.
Mercedes is having a hard time “command(ing) the premium that consumers long were willing to pay,” contends Johan de Nysschen, CEO of Audi of America.
The luxury market is by no means going away, says analyst Dan Gorrell, of the consulting firm Autostrategem. There's growing interest in Ferraris, Porsches and Bentleys in emerging markets such as China and Russia. But luxury brands are facing an unprecedented assault, Gorrell adds.
For one thing, mainstream makers are fighting back. They’re loading up on traditional high-line features, such as leather and wood. And they’re also taking advantage of falling prices for the high-tech hardware that’s come to define a luxury car.
When the first anti-lock brake systems, or ABS, debuted in the mid-1980s on products like the BMW 7-Series and Mercedes S-Class, they were $2,000 options. Today, they’re all but standard on the most inexpensive vehicles. The new 2010 Ford Taurus, meanwhile, is offering the same cross-traffic monitoring system – which watches for passing traffic when you back out of a parking spot – that first debuted on the new 7-Series last autumn.
Compounding the problem, an array of new players are hoping to enter the luxury segment. The recession of the late 1980s provided a perfect opportunity for Toyota and Nissan to move up-market with their Lexus and Infiniti brands, which were priced thousands of dollars less than the traditional German offerings.
Now, Hyundai hopes to do much the same thing.
Best known for cheap-and-cheerful products such as the $10,000 Accent, the South Korean carmaker scored an unexpected success with its Genesis sedan. It was named North American Car of the Year by a panel of 50 U.S. and Canadian auto writers early this year.
Genesis took aim at the BMW 5-Series. Hyundai plans to aim even higher with Equus. Set for debut in 2010, it will target the 7-Series and Mercedes’ own flagship, the S-Class. But like the early Lexus LS400, Hyundai hopes a relatively low $60,000 price tag will grab the attention of today’s more cautious luxury buyer.
For his part, BMW’s O’Donnell downplays the challenge. He insists premium luxury buyers “want more than just product” and factors like heritage and the somewhat intangible head-turning power of a familiar logo also count.
Hyundai is betting heritage is mattering less and less. “Now, there are the diehards who just won’t look at us,” acknowledges Marketing Director Joel Ewanick. “But there are enough others who will (because we’re) offering a value that can’t be ignored.”
Even if the established order persists, the luxury market will face some significant challenges and changes, if for no other reason than tightening fuel economy and emissions regulations, experts say.
On Sept. 15, the Obama administration unveiled a plan to improve gas mileage for cars and trucks that call for new vehicles to average 35.5 miles per gallon by 2016.
Makers like Porsche, Mercedes and BMW are pushing their diesel products, and all are getting ready to launch new hybrid-electric vehicles in the coming year. Cadillac is seriously considering the Converj, a more lavishly-outfitted version of the Chevrolet Volt, a plug-in hybrid due to debut in late 2010.
Mercedes, among others, is also planning a pure electric vehicle. But the challenge is finding a way to differentiate itself from more pedestrian brands using essentially the same battery drivetrain.
That’s a similar challenge for luxury makers as they downsize with such pintsized models as the BMW 1-Series, Audi A3 and Cadillac’s planned ATS. Such offerings could become the norm, suggests one-time designer and now Cadillac General Manager Brian Nesbitt. But when you are “no longer measuring luxury by the foot or pound,” he asks, how do you justify a traditional luxury price?
From top to bottom, the luxury auto market is unlikely to ever look the same again.