BMW breaks with traditional German luxury as models shrink

BMW's van-like Active Tourer compact, which goes on sale in September, is available with a three-cylinder engine and marks the first modern BMW with front-wheel drive.

MUNICH (Bloomberg) -- Chris Bangle, BMW AG's former design chief, once likened the German carmaker's lineup to a bratwurst in three different lengths. Now, there's a lot more on offer, including convenience sizes.

BMW, which previously relied on the 3-, 5- and 7-series sedans, has more than doubled its model offerings in the last 15 years to 26 variants by chiefly adding smaller vehicles.

Audi and Mercedes have followed a similar path, veering away from the refined, powerful cars for which they're best known.

Further challenging the notion of what the brands stand for, the world's top three luxury-car makers build more and more cars outside their homeland, thereby diluting the "Made in Germany" cachet.

These shifts ultimately may impact profitability, currently at the top of the industry, because their pricing power comes in part from selling customers a sporty, elegant image that they've spent decades crafting.

"Every diversion from the essence of a brand poses a danger, because you have to make compromises and every compromise softens the brand in the long run," said Klaus- Dieter Koch, managing partner of Nuremberg, Germany-based consultancy Brand Trust. "If you overstretch a brand, the ability to ask for a price premium vanishes."

The three German automakers are broadening their lineups and global scale out of necessity because being niche players selling only $40,000-plus sedans is not sustainable in the long term. The traditional draw of big engines is no longer enough on its own to lure wealthy customers, and higher sales volumes spread the billions in costs for developing cleaner cars to meet tighter emissions rules.

Active Tourer

The latest example of the redefining of the German luxury car is BMW's 2-Series Active Tourer. The van-like compact, which goes on sale in September, is available with a three-cylinder engine and marks the first modern BMW with front-wheel drive.

Every current model from the brand is either rear-wheel or all-wheel drive, which are deemed better for handling.

The German luxury brands "are willing to risk some exclusivity to bring in new customers," said Kevin Tynan, an analyst with Bloomberg Industries in Princeton, N.J.

"The idea is to let a customer buy a $30,000 vehicle in his 20s or 30s and move him up once he's paid for college and can afford a more expensive car."

So far, the plan's working. BMW, Audi and Mercedes posted their highest monthly deliveries ever in March on surging demand in China and the United States, the world's two largest auto markets.

BMW retained the overall lead with a 17 percent surge, outpacing Audi's 15 percent growth and Mercedes's 13 percent rise.

Mercedes expansion

"We are seeking to gain new customers by entering new segments for Mercedes-Benz," Dieter Zetsche, CEO of the luxury brand's parent Daimler AG, said last week at the company's annual shareholders meeting in Berlin. "Our compact offensive is exactly what it's supposed to be: a rejuvenation of our brand."

Mercedes went from 14 cars in 1999 to 26 now, according to the Center of Automotive Research at the University of Duisburg- Essen. During that time, the Stuttgart-based manufacturer added compacts like the B-Class hatchback, the GLA SUV and the CLA coupe. Another 12 all-new models are planned by 2020.

Audi, which like BMW has introduced a new model every two years on average since 1990, added a sedan variant of the A3 compact last year. The Ingolstadt-based manufacturer rolled out the small Q3 SUV in 2011, a year after adding the A1 subcompact.

Honolulu to Berlin

"Our compact models like the A3 and Q3 make it clear that premium isn't a matter of size," Luca de Meo, sales chief for the Volkswagen AG unit, said in a written response to Bloomberg questions. "Premium brands are by nature global with products and a market position that stand for the same values from Honolulu to Berlin."

That worldwide position is also increasingly true of the cars' origins. Audi predicts that this year it will produce more vehicles abroad than in its home country for the first time as it boosts production in China and Hungary.

The share of German- made Audis dropped to 53 percent last year from 75 percent in 2009 and will decline further as Audi plans to assemble cars in Mexico and Brazil in the coming years as well.

Mercedes opened a new factory in Hungary in 2012, while BMW is investing $1 billion to make a plant in South Carolina its biggest manufacturing facility worldwide.

The Munich-based company is also narrowing the list of locations for a second plant in North America, people familiar with the matter said this week. At least two sites in Mexico are being considered.

BMW engineering

The focus has shifted to "Engineered by BMW in Germany," said Milagros Caina-Andree, BMW's head of human resources.

"We are now an international company with Bavarian roots and many sites abroad where we build vehicles at the same high quality level as in Germany," Caina-Andree told Bloomberg. "To grow globally in the coming years, we need more production capacity abroad" to be closer to customers and avoid import tariffs and foreign-exchange risks.

BMW, the world's best-selling luxury-car brand, will start assembling vehicles in Brazil this year. Audi and Mercedes, which both aim to surpass BMW in sales by the end of the decade, will follow suit by 2016.

In addition to jockeying for growth, the German brands all face the challenge of getting customers to still pay a premium for cars as their engines get smaller to meet environmental regulations.

In the past, more cylinders and more horsepower meant a higher sticker price, and a shift to downsized engines threatens that traditional German model.

Three-cylinder supercar

"To reduce fuel consumption is still one of the biggest challenges for the car industry," said Thomas Weber, Daimler's development chief. "We have been working intensively from the very outset on how to improve fuel economy, while at the same time increasing performance."

BMW is rolling out the i8 this year, it says, to speak to a new kind of luxury buyer. At a starting price of $135,700, the sports car is BMW's most expensive model, even though it's equipped with just a three-cylinder engine.

Combined with electric motors, the plug-in hybrid boasts 362-horsepower and accelerates to 60 miles per hour in 4.4 seconds, while getting as much as 94 miles per gallon.

"A few years ago it was unthinkable to have three-cylinder engines in mid-size much less luxury vehicles," said Stefan Pischinger, head of the Institute for Combustion Engines at the RWTH University in Aachen, Germany. "Purists who crave a six-or 12-cylinder engine won't die out, but for the majority of the customers, this is not a decisive factor."

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