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Mainstream cars closing gap on luxury counterparts

5:47 AM, Nov 26, 2012   |    comments
The Ford Explorer on display at the 2012 Washington Auto Show. (Courtesy: Getty Images)
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The day could be fast-arriving when a new breed of car buyer considers a new generation of cars, and wrestles with a choice something like: "Hmmm, $30,000. Should I get that loaded Ford Focus, or this new mini-size entry BMW?"

Absurd? Not necessarily.

Luxury auto brands already are making a living in the U.S. on their smaller models - BMW's 3-series is the best example. Now, they're easing more into the compact- and even subcompact-size market segments and have begun to show teaser versions of remarkably small cars on the auto show circuit.

At the same time, mainstream automakers - Ford Motor premier among them - are adding equipment to their smaller cars and trying to boost the prices. Detroit makers, especially, hope to increase small-car profits enough to make up for losing some of the huge earnings they've gained through the years from big trucks and SUVs, which are less popular now.

Thus, the luxury brands' move down in size and price is a direct threat.

Buyers more and more will decide whether they value a premium brand name enough to sacrifice size and possibly features they could get for the same price on a larger, well-equipped, non-luxury-nameplate car.

"It's a weird area. Absolutely it puts a ceiling on what mainstream brands can charge," says industry expert Jim Hall at 2953 Analytics. At the same time, it's treacherous ground for pure luxury brands. A very small car that's relatively inexpensive "may not work, and taint, or depreciate, the value of the luxury brand by making it less exclusive."

The Los Angeles Auto Show, which begins with press previews on Wednesday, will host debuts of several high-end and mainstream small cars, illustrating the industry's battle for dominance in the fuel-efficient segment.

Ford thinks that design and execution, rather than the status of a high-end badge on the hood, can carry the day.

The automaker says its redesigned, 2013 Fusion midsize sedan, for example, has been luring a notable number of trade-ins from Acura, BMW and Audi owners. Half of Fusion's early sales are to non-Ford owners, and most of those are former luxury brand customers, the automaker says.

Referring to the top version of the Fusion, the Titanium model, Frank Davis, executive director of Ford's North American product programs, says, "Our Titanium buyer is the luxury buyer - the Acura, the Audi, the BMW buyer."

The Fusion Titanium midsize starts at about $31,000 and can tickle $40,000 loaded with options and fitted with optional all-wheel drive. A size down, Ford's Focus compact has a Titanium model, too, for nearly $30,000 with all options.

BMW's 128 small coupe starts at about $32,000 by comparison. And a new line of smaller BMWs is in the wings, based on a front-drive chassis shared with the brand's Mini models. Those might be designated 1-series models, making the current 1, in effect, a 2-series.

Name aside, a front-drive BMW would be radical for the brand with rear-drive religion.

A bit embarrassing, too, as BMW a few years back made fun of front drive in ads. BMW, in fact, acquired the British-based Mini brand precisely to give the German maker entree into the front-drive subcompact segment without resorting to a front-drive BMW-branded car.

Such a switch would be a dramatic demonstration of how desperate the high-end makers are to play in the lower end. They'll need to in order to meet U.S. mileage rules that require a company's vehicles to average 54.5 mpg in 2025, about twice the current level. And it's a way - risky for the image, perhaps - to boost sales.

Mercedes-Benz' latest-generation A-class subcompacts rolling out in Europe are U.S.-bound and likely to spawn a variety of spinoffs as even the brand known for its big, stolid sedans shoulders into the mpg-oriented small-car segment.

Audi has a line of A1s, about Mini Cooper size, that it has said will include a U.S. version in the future, but timing's murky.

"The luxury market has become a blur," says Art Wheaton, auto expert and industry education specialist at Cornell University. Already, in his view, "There's small difference between Honda and Acura. Maybe nicer leather seats."

Honda bristles at such characterization, but it's undeniable at its Acura brand's lower reaches, where the ILX entry sedan is a jazzed-up Honda Civic. That's well known, and effectively ensures that Honda couldn't successfully field a high-end Civic.

Some elements that will affect how the battle plays out between low-luxury and high-mainstream models:

Regional preferences. "In areas such as L.A. and New York and big metropolitan areas, which are image-driven, the entry-luxury models do pretty well," says Jesse Toprak, industry analyst at TrueCar.com. Though it's less so in Middle America, the coastal ethic "puts a premium on the brand. People want to be seen in a BMW, in a Benz. Even though from a value perspective, you're better off getting a non-luxury vehicle."

That presages success for the new low-luxe entries because of the status badges they wear.

Toprak believes automakers are expecting regional strength rather than nationwide success and have factored that into their business plans.

"It's mainly to get people into the brands" in areas where they're likely to stick with those brands, he says.

Luxury backlash. "There are buyers who don't want premium cars because they come with premium maintenance, and a premium image that some people don't want," says Rebecca Lindland, director of research at consultant IHS Automotive.

Research by General Motors' Buick unit - which considers itself a luxury brand - found a deep pool of potential buyers who "were unpretentious. They were successful, could afford to buy any car they want, within reason. But they didn't want to make an overt statement," says Craig Bierley, Buick's marketing chief.

Buick hopes to be a home for those people it sees as luxury buyers in disguise, but others, such as Lindland, see them as more likely to opt for well-equipped mainstream models.

Premium purgatory. Lower-end models from luxury brands risk being considered not-quite-real-luxury; more like "premium." And that, at least according to Bierley, is "where brands go to die."

"You're either a luxury brand and appeal to those customers on the level of features and treatment they want. Or you don't. There's nothing in the middle," he says. That's why Buick decided to define itself as a luxury brand and match the way those brands operate - emphasizing leasing, for instance.

On the other hand, he sees no contradiction between small size and big image. "Luxury doesn't have to be big. Luxury is really a personal thing, how a customer defines it," Bierley says. If they are done right, the new small low-luxe models can upset entirely "the perception that if it's small, it can't be luxury."

Will size actually matter?

In the end, whether the small, high-mileage, highbrow, low-luxe cars have a future in the U.S., and whether they threaten some mainstream brands' plans to get rich on high-end models, might depend on history more than anything.

Americans' historical preference has been and continues to be for bigger cars, for their greater comfort and ability to swallow the country's vastness in relative ease.

"No American is asking for a smaller car," says Hall, whether it's a silk-stocking brand or not.

"Americans want better fuel economy" and car companies that confuse the two - mileage and size - do so at their peril, he says.

The first manufacturer, luxury or otherwise, "that can make a midsize sedan, or one perceived as midsize, that gets 40 real-world miles per gallon on the highway, without being a hybrid, that's probably the guy who'll own the market."

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