Audi will discontinue the A1 entry model as concern rises that tougher emissions standards will make small vehicles economically unviable to produce.
"We won't have a successor to the A1," Audi CEO Markus Duesmann told Automotive News Europe. "We know that offering combustion engines in the smaller segments in the future will be pretty difficult because the costs will go up. Therefore, we will leave the segment."
Duesmann's acknowledgement comes as automakers start to question small-car strategies in response to more stringent European Union regulations on tailpipe emissions, in particular the output of CO2.
This year the industry must reduce fleet CO2 averages to 95 grams per kilometer, down from 106.7 g/km last year, according to JATO Dynamics.
Automakers struggle to get CO2 levels in minicars and small cars below the 95 g/km average without including some form of electrification, which adds costs in segments where profit margins are thin.
Daimler, meanwhile, has begun the process of shifting production and development of the Smart brand to China, where the small cars will be built exclusively starting in 2022 as part of a joint venture with Zhejiang Geely Holding.
In an interview with Automotive News Europe in June, Daimler CEO Ola Kallenius denied reports that the automaker would exit the compact segment completely, noting there are many models in the company's compact portfolio that generate healthy profits.
"We will continue to compete in the upper end of the compact segments that we are in. We are not exiting those segments," he said. "What we will not do is go down and start competing with the volume automakers."