LONDON -- Volume manufacturers are facing increased competition from German premium brands in the lower-medium segment.
Luxury brands such as BMW and Mercedes are introducing models that challenge Ford, Volkswagen and PSA/Peugeot-Citroen at the top end of Europe's largest segment.
Analysts believe the result could hit the volume carmakers hard.
"They might lose half of the top end of that market," says Nigel Griffiths, analyst for Global Insight Automotive "The whole economics of the segment might change as they lose the top end of the market. That could erode the profitability of the entire range."
Sales of top-end volume models such as the high-performance VW Golf GTi and Ford Focus ST170 could be threatened as premium entries such as the BMW 1 series, Mercedes-Benz A class and planned B class, and Audi A3 win customers in the segment.
BMW plans a major portion of its 1 series sales to be conquests from other brands.
To get those buyers, the premium manufacturers are pricing their new products to take market share from the high end of the volume market.
In the UK, a new Golf 2.0 GT TDI sells for £18,530 (currently about E27,400). The standard version of the 1 series, the 120d, lists for £18,850 while the SE and Sport versions go for £20,700.
Torsten Mueller-Oetvoes, BMW brand management director, said the 1 series marked the BMW group's expansion into new market segments to attract new, primarily younger customers.
"It is the first and only premium car in the growing compact class," he says.
BMW uses the term compact class to describe the lower-medium segment.
But Ford believes there's enough room in the lower-medium segment for new arrivals.
"We don't see BMW as a major threat in the segment," says Ford spokesman Ian Slater. "We've carefully positioned the new Focus not to be in that part of the market."
Numbers from Global Insight Automotive show that the premium share of the lower-medium market grew to 13.3 percent last year from 3.5 percent in 1994. The premium share will grow to 18 percent by 2008, according to the forecast.
The figures include only the traditional portions of the lower-medium segment including three-door and five-door hatchbacks, sedans and wagons.
They do not include compact minivans such the Opel Zafira and Renault Scenic, which have further fragmented the segment.
John Lawson, an analyst with Smith Barney in London, says premium manufacturers such as Mercedes and Audi are expanding the variations they offer on their second-generation models to win more sales from volume carmakers.
Says Lawson: "There's quite a lot of demand in this segment for prestige."