As head of Mercedes-Benz USA in the late 1990s, Mike Jacksonwas determined to keep the ungainly, expensive A-class small car out of theUnited States.
"The original A class, you would say, 'Oh, my God. Iwill never be able to sell that to anybody. What can I do to keep it out of theU.S. so I don't have to deal with it?'" Jackson recalls.
Americans were unwilling to pay premium prices for smallcars then, even if the cars wore luxury nameplates. And sales of such carsremain low.
But European luxury brands aim to change that dramaticallyin the next few years. Eager to increase sales and meet strict government fueleconomy standards, they plan to roll out new small cars with premium prices andluxury content.
Find the right car for you
Now Jackson's on board. Mercedes-Benz unveiled a conceptversion of the redesigned A-class coupe in April at the New York auto show.Jackson, on the other side of the fence as CEO of AutoNation, thecountry's biggest automotive retailer, calls it "absolutelybeautiful."
"That's the car I want tomorrow," Jackson says.
Although other luxury brands, such as Lexus and Cadillac,are making similar moves, Europeans are leading the charge. The A class,expected in 2013 in the United States, is the first of a new generation ofsub-$30,000 small cars that European automakers are convinced will sell in theUnited States.
Today, three European small luxury cars are on the market:the Audi A3 hatchback, the BMW 1-series coupe/convertible, and the Volvo C30three-door hatchback. They're low-volume vehicles, with combined U.S. sales of23,596 units last year.
A conservative tally of carmaker estimates shows U.S. salesof small European luxury cars at least doubling in the next few years. But someobservers question whether the segment will ever be strong here.
"Even at 50,000 units, it is an insignificantnumber," says Jesse Toprak, vice president of industry trends atTrueCar.com. "The potential growth for compact crossovers is much greaterbecause of their utility."
Mercedes-Benz and BMW will lead the effort to expand thesegment. The route to success will be keeping the vehicles premium in contentand performance, brand executives say.
The new cars are different from the halfhearted attempts inthe late 1990s and early 2000s. At that time, BMW offered the 318ti--a 3series with a lopped-off rear end--and Mercedes-Benz in 2002-05 sold itsodd-looking C230 and C320 hatchbacks. Those cars failed after a short run.
Jeff Schuster, executive director of global forecasting atJ.D. Power and Associates, says the recession and fuel prices have changed whatbuyers consider important.
"They tend to look at it as 'What do I need versus whatam I trying to show here?'" Schuster says. "Do I need a largervehicle, or can I get away with a smaller vehicle and still have that contentand desire?"
Michael Cantanucci, whose New Country Motor Car Group ownsthree Mercedes-Benz, two BMW, and Audi and Mini stores in New York, Connecticut,and Florida, has seen prototypes of many of the new smaller vehicles.
Cantanucci says he doesn't believe they will dilute luxurybrands' images: "They have the DNA in terms of product quality, styling,features and technology."
That won't be a problem with the four new small luxuryvehicles coming to Mercedes-Benz in the next three to four years, says ErnstLieb, CEO of Mercedes-Benz USA. Safety features such as adaptive cruise controland traction control will come standard.
Mercedes: A, B, CLC, GLC
In addition to the A-class coupe, Mercedes-Benz plans toimport the B-class small van, probably with an electric powertrain, a smallsedan it will call the CLC, and a small crossover that will be called the GLC.
Mercedes-Benz decided only recently to bring the smaller Aclass to the United States. Initially, executives wanted only the larger Bclass. But that decision was reversed several months ago after Steve Cannon,vice president of marketing, and a product committee including dealers, sawearly versions of the new small vehicles, Lieb says. The car wowed them, as ithas other dealers who saw the range last month during a trip to Mercedes-Benzheadquarters in Stuttgart, Germany.
Lieb says Mercedes needs to use these cars in part toprotect its E class and S class: "From a strategic point, if we leave thatsegment for our competitors, they become stronger and branch out and give usresistance in those segments. The time is overdue."
BMW plans are not as solid
Insiders say BMW's development of smaller front-wheel-drivecars isn't as far along as Mercedes'. Jim O'Donnell, CEO of BMW of NorthAmerica, says a family of new small cars will go on sale in 2014, but thecompany hasn't decided which body styles to sell in the United States.
Last month, Ian Robertson, BMW AG board member for sales andmarketing, said BMW and Mini will expand their lineups and the two brandscombined will have six to nine new small cars. He did not give details on bodystyles.
The new BMW cars will be similar in size to Mini vehicles,O'Donnell says. Mini will be the first to use the new small platform known asUKL--an abbreviation for German for compact class cars--with its newgeneration Cooper hardtop due in late 2013 or early 2014.
O'Donnell says BMW is confident about small cars because ofthe success of Mini. BMW expected Mini sales to peak at 20,000 cars in theUnited States, he says. "We will do nearly 60,000 this year--Americansare ready for small cars," O'Donnell says.
The United States could take a small sedan from Germany butprobably not a hatchback because there's still doubt that the body style willsell in this market, O'Donnell says. He doesn't expect big sales from thesesmall cars. "They will be nichey, under 10,000 units," he says.
BMW is attacking the small car market on another front withits i sub-brand electric vehicles. First out will be the i3 electric in 2013,designed for urban drivers.
Audi: No smaller for now
Audi's A3 is as small as the brand will go in the UnitedStates for the next several years. Audi of America President Johan de Nysschensays Audi first needs to increase volume in the luxury high-end segments.
Once Audi has achieved that goal, it can turn its attentionto the less-profitable smaller cars, de Nysschen says.
For now, Audi's only offering is the A3 hatchback. Audishowed a concept A3 sedan in March at the Geneva auto show. The sedan wasdesigned with an eye to the United States and likely will be sold here in 2013.
Audi USA may import the A2, a car smaller than the A3, ifthe brand decides to bring back that model. The A2 was discontinued in 2005.Audi won't bring the current generation of the A1 small car to the UnitedStates, de Nysschen says, and "that is the final decision."
Volvo has other worries
With annual U.S. sales teetering at just more than 50,000vehicles, Volvo Cars of North America is focusing on its larger, moreprofitable vehicles, CEO Doug Speck says.
Volvo sells the C30 in the United States, but the C30 wasalways meant to be a niche car, Speck says. Volvo expects to sell only 4,000 to5,000 C30s this year because the three-door hatchback has "limitedappeal" in the United States and the car is pricey, Speck says. The C30has a base price of $25,575, including destination.
Speck acknowledges that Mercedes-Benz and BMW will heat upinterest in small luxury cars and says, "We need to have a plan to competein that segment."
He says he can't talk more about Volvo's product strategy,which has been fine-tuned since the brand's acquisition last August by China'sZhejiang Geely Holding Group.
Matching Ford, Chevy
Speck believes growth in small car sales and transactionprices for U.S. volume brands will drive more luxury brands into the segment.
"People are out there spending $23,000 and $24,000 fora Focus because they want all the bells and whistles," Speck says.
"People do not want to sacrifice. They may say 'I candeal with a smaller space but I still want navigation, Sirius satellite radioand leather."
Jackson agrees, saying there is a "risk for the luxurymanufacturers if they simply benchmark against themselves."
"The content certainly needs to match what you can getin a Ford or a Chevy with reasonable up-charges," Jackson says."There is a revolution going on in the volume segment as far as contentand innovation and the consumer's willingness to pay for that content andinnovation."
Tom Libby, an automotive analyst with R.L. Polk and Co.,says pricing small luxury cars is tricky -- if the cars are priced too close totheir larger siblings, luxury buyers are unlikely to downsize.
But Libby expects the Europeans to have at least a $10,000price premium over cars such as the Chevrolet Cruze and Ford Fiesta: "I donot think Mercedes-Benz and BMW will want to go into the market with a car thatis $19,000. They will start at the upper end."
(Source: Automotive News)
