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 "This car is hip," said Franz, 52, at the city's biggest Jaguar Land
Rover showroom, while eyeing up a British-built Evoque SUV that he
fully intended to purchase.
Decked out in bright red blazer and canary yellow trousers, Franz
might not be the typical customer in Germany's conservative premium
market. But his shifting taste in cars foreshadows less comfortable
times ahead for global leader BMW, as well as Audi and
Mercedes-Benz.
The German premiums have long been on a roll, producing an
export-driven sales explosion and huge returns while mass carmakers
struggled through Europe's crisis.
But in a headlong sales race, second-placed Audi and runner-up
Mercedes have both vowed to depose BMW, giving rise to heavy
discounting, which sullies luxury brands and creates opportunities
for the growing competition, observers say.
Now a host of younger or revived premium marques are poised to
follow JLR by pitching dozens of new models against the big three,
whose very ubiquity is taking the shine off their prestige.
"The German premiums have sacrificed some of their exclusivity by
entering smaller, volume segments like compacts," said Bernd
Hoennighausen, an automotive consultant.
"They've pushed volume with fleet discounts of around 20 percent,"
said Hoennighausen, who previously managed corporate fleets for
Deutsche Bank and BNP Paribas.
"This may open the door to newer players like Jaguar, who are
starting to offer fleet-relevant products."
Among others waging or planning new offensives are Fiat-owned
Maserati and Alfa Romeo, Nissan's Infiniti, and Volvo, a unit of
China-based Geely.
"Our theory is that there's room for something visibly different
that is styled in a more provocative manner," said Andy Palmer, the
senior Nissan executive charged with achieving a breakthrough for
the 25-year-old Infiniti brand.
"It's particularly true for China," Palmer told Reuters. "Chinese
consumers will cross-shop - and Audi only has the market to lose
because they've been so dominant."
For now, the Germans remain firmly on top. Their combined sales
amounted to 4.7 million vehicles last year, almost 60 percent of the
global luxury car market, according to consulting firm IHS
Automotive.
That represents a 38 percent gain since 2007, the eve of the
financial crisis, when the big three claimed just over half of the
market. Global car sales grew 21 percent overall, while European
demand shrank by a quarter over the period.
TURNING TIDE
Superior scale also brings cost advantages - from research to
production and marketing - that are not going away. BMW has led the
charge into new niches, launching dozens of models including SUVs in
every size category, with Audi close behind.
Nonetheless, some analysts believe the tide is beginning to turn
against the Germans.
UBS expects the same group of challengers, plus Tesla's zippy
electric cars and DS models from PSA Peugeot-Citroen, to grab 30
percent of global premium sales growth in 2014-18, raising their
current 12.5 percent market share.
Pressured by the increasing competition, the Germans' return on
invested capital will continue falling away from historic peaks of
around 30 percent in 2010-2012, the bank predicts.
"There's also an inherent contradiction between premium and
concentration," UBS analyst Philippe Houchois said. "Buyers of
premium-branded cars are looking for some degree of exclusivity that
will set them apart from less fortunate car owners."
The resulting market fragmentation is "bringing the curtain down on
the unprecedented growth ... that enabled premium auto manufacturers
to generate outsized returns", he added.
BMW shares are up 5.4 percent this year, beating the wider European
auto sector's 0.4 percent slide <.SXAP>. But Daimler is 1.1 percent
lower and VW down 15 percent, hit by cost overruns.
A Maserati push is making headway, with first-half shipments
quadrupling on new models launched under Fiat Chrysler boss Sergio
Marchionne, who hopes a revived Alfa can also use its pedigree to
outrun upstarts such as Infiniti and DS.
"Unless you've got history, you're not going to create the brand,"
the chief executive told reporters recently.
Tata-owned Jaguar Land Rover recorded 19 percent sales growth last
year, thanks in large part to the compact Range Rover Evoque coveted
by Franz, and aims to follow up with the imminent Jaguar XE sports
sedan and a later SUV.
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Land Rover has proved that the Germans can be challenged, said Eric
Neubauer, joint-CEO of France's Neubauer Group, whose Paris-area
dealerships sell 19 car brands from Kia to Ferrari.
The Evoque poaches clients "from BMW, Mini and everywhere else in
the premium universe", Neubauer said. "The strength of Land Rover is
that we win new customers who then become loyal."
Luxury automakers must sell more smaller cars to meet
ever-tightening carbon-dioxide emissions targets and avoid fines.
Driven by this imperative and their bitter rivalry, BMW, Audi and
Mercedes have been discounting as hard as many mass-market
carmakers.
"No other group of manufacturers has increased incentives more than
the Germans," said Arndt Ellinghorst, a London-based analyst with
ISI Group.
BMW rebates have grown as big as 25 percent in the UK, according to
data compiled by the brokerage, and price-slashing has cost the big
three about 6 billion euros ($8 billion).
"Steep discounts and attractive financing show how non-exclusive
premium cars have become," Ellinghorst said. Left unchecked, "the
race to sell more vehicles will eventually damage brand equity and
profitability".
RIDING THE VOLUME TRAIN
Despite their investment clout and model proliferation, a slow start
in hybrids - which combine a combustion engine and electric motor -
has left a chink in the German armor, especially in markets where
gas guzzlers incur punitive taxes.
Failure to see the potential of electrification contributed to the
ouster of Audi's last research and development chief, and BMW is
only now rolling out its flagship i8 performance hybrid.
Louis Alexandre de Froissard, a Bordeaux-based private wealth
manager, gave up his Audi A8 for an Infiniti Q50 hybrid that
delivers 364 horsepower while emitting 144 grams of CO2 per
kilometer, comfortably below a 160 gram French tax threshold.
By comparison, BMW's 7-Series hybrid gets 320 horsepower for 158
grams of CO2. Froissard also ruled out the Audi A6 Avant, which
puffs a penalty-prone 190 grams for just 310 horsepower.
"It wasn't powerful enough," he explained, and besides, "everybody's
got an Audi or a BMW - so Infiniti was a much more original choice".
BMW's sleek i8 is among belated German steps to plug the hybrid gap
after a period of complacency. On the broader sales and pricing
rivalry there are also some signs of circumspection.
"We have to find the right balance between volume and pricing," CEO
Norbert Reithofer told analysts on Aug. 5.
"We (realised) in December that if you reduce your volume, you can
even have a better profit," the BMW boss said on a conference call,
adding that a "thinking process" was underway.
CFO Friedrich Eichiner even described the new stance as a "message
to the competition", but Audi and Mercedes may still be too intent
on overtaking to take the hint.
"Volume is indispensable," Audi boss Rupert Stadler told Reuters on
July 8. "Only when you grow you have a chance to make gains on
productivity."
With leadership successions due within two years at all three German
luxury carmakers, any deeper tactical change may have to wait, ISI
analyst Ellinghorst believes.
"It may be easier for those in charge today to continue to ride the
volume train," he said, "leaving the more difficult and political
task of improving pricing to new management teams."
($1 = 0.7541 euro)
(Additional reporting by Edward Taylor, Costas Pitas and Irene
Preisinger; Editing by Will Waterman)
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