Europe’s premium puzzle

EUROPE’S PREMIUM

PUZZLE Europe’s mainstream auto manufacturers are being squeezed between premium and ‘value’ brands. Tony Lewin reports.

Range Rover Evoque – high-fashion style sets a new premium trend Skoda Fabia – unpretentious quality is a winning recipe in tough times

IT does not take a trained statistician to spot a pretty dramatic trend in the make-up of European car sales, be they the returns for individual months or for the whole of 2011. Paradoxically, despite the background of continuing economic stress, high-status premium brands are enjoying record profits and their best-ever sales; meanwhile their mainstream counterparts, lurching from one calamity to the next, are facing an existential crisis. At the same time, Asian-badged interlopers are snapping at their heels, stealing customers from those familiar mid-market brands and further undermining their viability.

Outwardly, car industry chiefs navigated the January results season with a sense of relief that, rather than crashing alarmingly, the overall sales total had slipped by little more than 1 per cent compared with the previous year – a year whose figures had been artificially flattered by the last of the scrappage incentives then in force in many countries. Inside, however, many CEOs knew how much they had had to spend to lure reluctant customers to their products; not only was such a level unsustainably high but, more importantly still, an attack was coming from below, too. This clear new trend may come to mark a historic turning point in the European car buying preferences.

A couple of starkly contrasting sets of results will make this clear. Despite the best efforts of costly promotion campaigns, sales of Renaults, Peugeots and Citroens fell by over 8 per cent in 2011, as did those of Toyota. Honda and Mazda plunged even more alarmingly, losing between a fifth and a quarter of their customers. For Fiat it was a giddy-making 17 per cent slide. Yet, over the same space of time, and with the same worrying messages coming from the European economy, sales of Audis and BMWs in Europe shot up by 9 and 5 per cent respectively. Mercedes grew, too, as did Toyota’s premium label Lexus.

Something is clearly happening here, yet the too-hasty and perhaps counter-intuitive conclusion that these results herald a shift from small cars into big and prestigious ones would also be wrong. Among the industry’s most spectacular gainers have been the Koreans, with their mainly low-cost focused Hyundai and Kia brands, both up almost 12 per cent; also up by a similar proportion were Volvo and Nissan. Mini, which makes no big cars at all, boosted its sales by nearly one fifth. Market leader Volkswagen, which makes cars of all sizes, was also able to increase its sales sharply – yet Ford and General Motors, in the shape of Opel Vauxhall, took knocks of 3 and 2 per cent respectively, despite introducing fresh models.

Two parallel phenomena appear to be in evidence here, and both are working to the detriment of the classic middle market volume sellers, as personified by models such as the Opel Astra, Renault Mégane and Peugeot 307.

On the one hand there is a distinct move away from the familiar big brands towards premium labels such as BMW and Audi; this shift is an entirely understandable one in troubled times as buyers seek the security and lasting appeal of a blue-chip marque in preference

to the more superficial showroom gloss of a mainstream label. What is more, the momentum of this shift is set to increase as premium makers such as BMW and Lexus downsize – but not necessarily down-price or simplify – their offerings to appeal to buyers seeking cars that combine compactness, sophistication and low fuel consumption. Audi has already proved this point with its compact A1, the size of a Polo but clearly seen as a premium product; BMW, already successful in this sphere with its Mini brand, will double its representation with new, smaller BMW-branded models overlapping with the top Minis in size. Even Jaguar is said to be toying with the idea of a car the size of a Golf.

New phenomenon

There is nothing new about the steady advance of the premium brands into the smaller segments of the market – it has been gaining pace for almost a decade. What is new, however, is the second clearly discernible trend – the advance of the ‘value’ brands, most notably Renault’s Dacia range and Kia and Hyundai from Korea. Though its performance in EU27 markets softened slightly in 2011, Dacia has been a big success in eastern Europe, Russia and other markets on the EU’s periphery. The brand’s unexpectedly high margins have surprised many in the industry and have been an important factor in supporting the core Renault operation as it faltered in the market.

Dacia’s temptingly low prices have generally been seen as drawing in buyers who would otherwise have bought a used car: the impact on sales of new models from mainstream brands has thus remained relatively limited. The same cannot be said for Hyundai and Kia, two of 2011’s most dramatic risers. The two brands have long since deserted their original cheap-and-cheerful identity: now, with decent European-focused engineering, attractive styling from designers lured from top German companies and with manufacturing sites in Slovakia and the Czech Republic, Kia and Hyundai models are appealing to buyers across the board, scoring well in comparison tests and reliability surveys.

What makes the difference?

The stark contrasts in the fates of superficially comparable products prompt the obvious question: what are the differences that determine whether a brand – or a model – is a success or a failure?

Most automakers know the answer, but few are capable of coming up with the goods. To succeed, it helps to be premium, in other words to appeal to customers in search of quality and easily recognisable status: here, Audi and BMW are masterful, but in the past

Nissan’s Qashqai

Nissan Juke – funky urban crossover that's a big hit in Europe Mini – premium flavour is a hit with buyers – despite downturn

others such as Jaguar and Cadillac have come unstuck by trying to apply token premium touches to modest products.

It helps, too, to offer the consumer a product with a clear proposition, something he or she can believe in. Volkswagen is a case in point: it enjoys the unrivalled respect – and thus healthy margins – as a big-numbers producer of quality cars that stand above the petty squabbles between other brands. That’s also why Skoda, with its solid, unpretentious family cars built from VW group components, has been such a brilliant success: these models appeal to buyers’ senses of quality and integrity, eschewing passing fashion. The same does not always apply to Skoda’s Spanish sister brand SEAT, even though its models mix the same ingredients and, in principle at least, are built to the same standard of quality.

It is tempting to attribute the success of Kia and Hyundai to a parallel but equally powerful motivation – the belief that consumers feel they are beating the system and getting better value by turning their backs on the mainstream brands. It will be interesting to see how this thinking evolves as the Korean brands become more firmly established in Europe.

The third and perhaps most easily understood differentiator is innovation – either in engineering or, more frequently, in style. Why are the UK factories of Nissan working round the clock to satisfy consumer demand while other carmakers’ plants are laying off staff? Because Nissan’s Qashqai, a family car with the high-riding poise of a stylish sportutility vehicle, caught the European zeitgeist perfectly, and its even more extreme Juke, a fashionably tough-looking urban runabout, is drawing in younger buyers. Significantly, one of the briefs given to the Juke’s design team was for the car to be noticed even by people who weren’t looking. The new Range Rover Evoque is arguably another style phenomenon, though at a much more premium position in the market, and BMW’s Mini brand has successfully exploited its stand-out looks for more than a decade.

The track record of technical innovation in promoting consumer demand is less clear; engineering cleverness per se is not much of a draw unless it is linked to a real-life customer benefit such as the fuel economy of Toyota’s hybrid Prius. Citroen, for most of its history a prolific though financially shaky technical innovator, has recently found it more beneficial to invest in style than science: its DS line of high-fashion derivatives of standard models have been successful in commanding a semi-premium image and the healthier transaction prices that follow.

Peugeot 208 – the small car whose success is vital for PSA Buy, hold or sell?

So, where does all this leave the so-called squeezed middle, the familiar brand names trapped between the rise of the new value brands and the downward march of the premium makers? A favourite game played by big-name financial analysts at automotive conferences is a quick-fire ‘buy, hold, sell’ assessment of key auto industry players. Extending the focus to a global one, and with Volkswagen, Toyota and General Motors all locking horns as they vie for the title of world sales leader, it is clear that the second division players could be caught in the crossfire and that accurate predictions are tricky.

The list of obvious ‘buy’ stocks is fast contracting. Already, Saab has become a casualty, profit is still eluding Ford and GM’s European operations, and hard-pressed Peugeot, having cancelled its programme for a low-cost car, badly needs its new 208 hatchback to succeed in order to stem the decline in the group’s sales. Renault, likewise, is betting heavily on its upcoming fourth generation Clio to bring showroom traffic, and its big gamble on electric cars risks wobbling as consumer interest fails to ignite. The gamble taken by Fiat with its virtual takeover of Detroit’s Chrysler is bigger still: opinion is evenly divided on whether this will be the making or the breaking of the oftentroubled Italian carmaker, now heavily dependent on its fashionable 500 city car.

Against this background, and with the honourable exception of Nissan, the brands based in Japan are missing a major opportunity by going largely unnoticed; a senior Honda Europe executive recently admitted the company had made a serious mistake in delaying investment in new models.

It would be a brave individual indeed who elected to invest in a business facing such an uncertain future. Nevertheless, it is still the German producers that stand out as the least risky propositions. The VW family of brands is on a seemingly unstoppable growth path, Mercedes is vowing to regain its habitual leadership of the premium segment and BMW is investing heavily in an entirely new process of lightweight construction that could be the key to the future viability of electric cars. And, finally, there is the mighty Toyota, now wiser and better organised after its well publicised recall campaigns of 2010: this is a huge company, traditionally cautious and slow to react but always willing to listen. It would be unwise to bet against it. n

Audi A1 – VW Polo underpinnings, premium prices Kia Sportage – stylish design succeeds in a slowing market