High-performance subbrands provide prestige, profit

At high end, Germans waging a war of roar

High-performance subbrands provide prestige, profit

The M6 coupe is one of BMW's entries in the high-horsepower derby. "BMW is a sporty brand, and M is the sporty edge of BMW," said Friedrich Nitschke of BMW.
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A battle is raging among Audi, BMW and Mercedes-Benz that goes beyond unit sales and global expansion. They're constantly trying to out-engineer one another with their high-performance subbrands.

The grand prize for horsepower supremacy, snappy acceleration and leading-edge technology is a small but affluent group of enthusiast car buyers who will pay a premium for the high-powered cars, many of which are variants of the brands' regular premium cars and SUVs.

This year Audi's RS, BMW's M and Mercedes' AMG models will account for about 70,000 sales globally. On average, buyers will pay the equivalent of about $136,000 to $204,000. Automakers and analysts say that margins earned on the models are high.

Ola Kaellenius of Mercedes: Hefty profits

"We want to overproportionally contribute to Mercedes' profitability. That means we have a higher return than normal Mercedes models," former AMG CEO Ola Kaellenius told Automotive News Europe prior to taking over as head of Mercedes' global sales and marketing on Oct. 1.

Said Tim Urquhart, a London-based senior analyst at IHS Automotive: "There are no specific figures for these subbrands, but given the models they make are high-value while still based on the OEMs' standard ranges, you can bet these models are highly profitable despite their high engineering and technology content."

Max Warburton, a Singapore-based analyst at Bernstein Research, said there is a financial risk associated with this high-stakes slugfest for global technological leadership.

"High performance variants of German premium cars are highly profitable vehicles, but their profitability has been volatile in the last 10 years, as there have been points when unit sales have been insufficient to recoup the development costs," Warburton said.

The subbrands have close links to the companies' racing units. For instance, BMW's M started life as a special motorsports division. The three brands also compete against each other in the German-centric DTM racing circuit. The intense competition pushes the automakers to develop cutting-edge technologies in electronics, advanced materials and powertrains. These advancements often move to the M, RS and AMG models and then filter into Audi's, BMW's and Mercedes' volume models.

Nitschke: Cut weight, add mpg

For more than a decade M models have had some body parts made of weight-saving carbon fiber, which is used for the entire body shell in the recently launched i3 electric car.

"BMW is a sporty brand, and M is the sporty edge of BMW," said Friedrich Nitschke, president of BMW M GmbH.

Nitschke said that M's main challenge is to reduce fuel consumption and carbon dioxide emissions by up to 30 percent with every new-generation model launch.

"We also want to reduce weight and bring to the market one to three special innovations in every new car we launch," he said.

The Mercedes-Benz SLS AMG GT3

AMG's anniversary

AMG, which was founded 46 years ago, is the oldest of these three high-performance subbrands. Mercedes acquired a 51 percent stake in AMG in 1999 and took full ownership in 2005.

Kaellenius said the dream for AMG is simple: "We want to be the most desirable performance brand in the world."

And AMG also wants to gain an even more prominent position within the Mercedes family.

"We want to be the driving force in the performance segment," he said. "We want to be innovators. And that is our role in terms of the technical relationship with Mercedes."

AMG, which accounts for about 2 percent of Mercedes' and Smart's global sales, aims to grow. During the subbrand's 45th anniversary celebration last year, the company laid out an ambitious strategy for the next five years: Increase unit sales to 30,000 by 2017, from about 20,000 last year. To meet the goal AMG will expand to 30 models by its 50th anniversary, from 22 last year.

"These eight additional models did not have an AMG predecessor," Kaellenius said.

Of the three subbrands, AMG's range is the widest. Only Mercedes' B class and GLK lack AMG derivatives. AMG also has the largest staff of the three, but the 1,200-person work force includes independent design and r&d departments.

"We can act as an entrepreneurial, fast-moving small company, but at the same time we have all the technology and the support [from Daimler] that we need to be successful," Kaellenius said.

The United States is AMG's biggest market, followed by Western Europe and Japan, but relatively new markets such as China have grown fast in the last 10 years.

"China grew from nothing and is already in our top five markets," Kaellenius said. "Russia is seeing a true explosion, driven by the SUVs."

This is Audi's Nanuk Quattro. "Our biggest challenge is overseas expansion, with a big growth potential in the U.S. and in China, as well as in the Middle East and Russia," said Quattro Managing Director Franciscus van Meel.

Quattro to grow

Quattro, which was founded 30 years ago, is the youngest and the least known of the subbrands. In most cases the Quattro name is not used because Audi uses the RS badge on high-performance variants.

Like its rivals, Audi counts on the Quattro division to equip RS models with the latest technology ahead of its launch in higher-volume Audis. Unlike its rivals, RS models have a limited presence outside of Europe. Audi only started selling the variants in the United States and Chinese markets within the last two years.

"We are well known and pretty famous in Germany and in the rest of Europe, so our biggest challenge is overseas expansion, with a big growth potential in the U.S. and in China, as well as in the Middle East and Russia," said Quattro Managing Director Franciscus van Meel.

He said he is counting on models such as the new RS7 large car to be a hit in Europe, China and the United States. Audi is also using racing events in China, Korea and Taiwan to boost Quattro's global brand recognition.

Audi, BMW and Mercedes have ambitious growth plans for their super-powered subbrands, and analysts believe those goals will be met.

"Demand has been on a growth path," Bernstein's Warburton said. IHS's Urquhart said that AMG, M and Quattro are prestigious stand-alone brands that offer vehicles with a combination of quality, style, utility and performance.

"These cars perfectly appeal to young, dynamic and affluent buyers and Audi, BMW and Mercedes are just starting to expand these subbrands in emerging markets," he said. "Their potential is truly enormous.

You can reach Luca Ciferri at lciferri@crain.com.

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