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Is Germany Making Too Many Luxury Cars?

17 Avril 2015 - Automotive News

Is Germany Making Too Many Luxury Cars?

Chalk it up to cabin fever, a burgeoning economy or the dulcet drone of Mercedes pitch-man Jon Hamm. Sales of German luxury cars have never been better.

In the first three months of the year, Audi, BMW and Mercedes sold 1.3 million vehicles worldwide, 9 percent more than in the year-earlier period. The Teutonic bragging rights stayed with BMW. It sold almost 451,600 vehicles around the world in the first quarter, besting 438,200 at Audi and 429,600 for Daimler's Mercedes Benz brand. Records were broken all around.

Of course, the whole exercise is a bit silly. Talking about volume without strapping it to profit is like spouting off the specs of an engine without mentioning the size of the vehicle in which it sits. But this is the auto industry. Underneath every Hugo Boss suit in the C-suites of Munich and Stuttgart is a person who simply loves to go fast (preferably on the autobahn en route to a screening of Furious 7). Steering is crucial, but speed is king.

Despite a rising tide of buyers, BMW, Mercedes and Audi seldom talk about raising prices and any chatter about keeping costs in line is usually tacked onto the very end of any corporate communication. Usually, they simply crow about performance metrics and volume gains. And each of the German luxury players appears dead-set on being the luxury leader in terms of units.

Massive sales gains, however, present some tricky terrain for a luxury brand. In addition to the pitch-perfect engine, baby-soft seats and a fancy hood-badge, the appeal of a German-born luxury car, at least in part, is the prestige -- the air of exclusivity. After all, these things aren’t iPhones or even Apple Watches. It takes years of striving to get into one (or at least a catchy idea for a new app).

That little cocktail of pride and prestige loses some of its intoxication every time one of these cars rolls out of a dealership. “The issue in luxury is people don't always want the No. 1 selling vehicle," said Lara Koslow, head of the Consumer and Customer Insight Center at Boston Consulting Group. "They don't want to be one of many; they want to be one of few."

To get numbers up, Audi, BMW and Mercedes have steered toward slightly less tony parts of town. Each of the automakers now has an entry-level model priced around $30,000 in the U.S. (Daimler Chairman Dieter Zetsche calls them “conquest cars”). When one opts for a lease, instead of a purchase -- as slightly more than half of entry-level luxury buyers do in the U.S. -- the customer joins the swanky set for only a few thousand dollars.

So how do Germany’s car bosses deal with that potential stigma? Well lately, they've just made more varieties of car. In the past 10 years, the number of luxury model lines in the U.S. has surged 26 percent to 90 in total, according to TrueCar, an online car-shopping platform. That number doesn't account for further variations like different body styles or hybrid engines. (Though it's grown a bit dated, Car and Driver designed a fascinating family tree of luxury brands a couple years ago).

Sure, lots of people buy BMW’s 3 series, but how many have the bigger engine with the all-wheel-drive system? Or the wagon version? Or the Gran Turismo model? Indeed, BMW’s best-selling vehicle -- the standard by which all luxury cars are measured -- comes in 13 variations.

These cars are ubiquitous, but BMW has made sure each buyer still feels at least a little bit special. Meanwhile, it's providing a slew of new price points. There's no longer a $10,000 gap between models where a potential buyer is liable to either walk away or buy the cheaper vehicle.

BMW’s rivals take a similar tack. Those in the market for a Mercedes SUV now have seven classes of vehicles to choose from -- not just seven vehicles. (For the record: G class, GL lacss, GLA class, GLE class, GLK class, M lacss and the R class.) It’s as if the product team went to breakfast at a New Jersey diner, opened the omelet section of the menu and collectively had an “ah-ha” moment.

These companies are doing a really good job with this,” said Bloomberg Intelligence analyst Kevin Tynan. “The shared stuff is usually all things the customer doesn’t see.” By 2020, Mercedes will launch 30 models, including 11 all-new vehicles. It’s even promising a pickup. Audi, meanwhile, says it will expand its lineup from 52 models to 60 by 2020.

So far, the strategy is working. Operationally, it’s not a stretch. Like omelets, luxury cars share a lot of the same fixings. And the platform can be used across a wide range of models in a nifty bit of economic engineering. Larry Dominique, executive vice president of industry solutions at TrueCar and a former executive at Infiniti, said the extra costs, on a per-car basis, are reasonable. "Volumes have gotten so large at some of these companies that the denominator is a very big number," Dominique said. "They can make the math work."

Drivers, meanwhile, are doing their homework and snapping up even the most unique vehicles (see Audi's TT Roadster), as well as the kind of ridiculous ones shoehorned between the small SUV and large sedan segments (see BMW's X4).

German executives are playing a dangerous game though. There’s a burgeoning and by now pretty robust field of research that shows an expanding product range can have a chilling effect on business. Adding more options often wears down both a consumer's willingness to buy and even their well-being.

"There's absolutely diminishing returns at some point," Dominique said. "Especially if some of these entry-level vehicles don't stand up on quality."

In short, shoppers boggled by the SUV aisle at the Mercedes store may just Uber over to Cadillac where they will find utilities in just two sizes: regular and Escalade. Cadillac is counting on just that. The brand’s marketing chief Uwe Ellinghaus said its biggest opportunity is “the ubiquity of the Germans.” Last year, drivers bought almost seven BMWs for every Cadillac.

To be sure, there will be a winner in the luxury car race this year. But it won’t necessarily be the company that sold the most vehicles … or even the most kinds of vehicles. In the meantime, those wanting to keep up with the Joneses, should buy a/an ____.

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