Mercedes-Benz and BMW Need Mass Market Partners – Time to Start Sniffing Around

It’s not just the faltering U.S. carmakers and their various affiliates that need to seek partners nowadays. Even the reigning kings of German automotive arrogance, Mercedes-Benz and BMW, are finding it tough to go it alone.

Compared with rivals like Audi, which is part of the six-million-unit-per-year Volkswagen Group, and Lexus, an arm of the Toyota juggernaut, the two German premium marques may be long on prestige but they’re short on volume, stuck below the two-million-unit waterline. And right now, both BMW and Mercedes-Benz are experiencing a troubling trend toward smaller, lower-profit models like the Mini and the 1-series, in BMW’s case, or Benz’s B-class and C-class. At the same time, there is a need to invest heavily in technologies such as higher-output batteries, hybrid powertrains, electric motors, dual-clutch transmissions, lighter architectures, and new safety concepts. In order to amortize those costs, the two German brands need to hook up with a high-volume, mass-market player to dramatically increase their economies of scale.

Both will have to get over recent bad experiences. The Bavarians got burned when they acquired, nurtured, and then disposed of Britain’s Rover Group. And Daimler is still suffering from its recently ended marriage to Chrysler, a toxic ex-spouse that is still inflicting financial pain. But even if those scars haven’t fully healed, both BMW and Daimler still need a volume partner to ensure long-term financial health.

What’s the urgency? Frankly, at BMW, the financial well is running dry. In the fourth quarter of 2008, the Bavarian carmaker put aside $2 billion to offset the drop in residual values of its aggressively marketed lease cars. In the first two months of 2009, BMW saw its global sales decline by 24 percent. Worse still, BMW has squeezed its most important new product launches into the narrow 2010-to-2012 time frame, when the next X3, the new 5- and 6-series, the 1-series replacement, and the follow-up to the 3-series are all scheduled. Also under development is the ultra-low-emissions, high-mileage Project i range, but no one can figure out how on earth this ambitious lineup of eco-friendly vehicles can make money at a total volume of only 300,000 units over its entire life cycle. Meanwhile, the Mini brand is doing OK, but it lacks the economies of scale that rival Audi will enjoy with its soon-to-debut, VW-based A1. Even Rolls-Royce is at risk now that the superluxury niche has been dented by the financial crisis.

As to potential partners, both Daimler and BMW have sniffed at and then rejected Fiat, checked out Hyundai/Kia, and looked at Opel before deciding that its 1.5 million units aren’t enough. BMW has had an engine project with PSA (Peugeot/Citroën) for several years, and a sequel is under way. At 3.3 million units, PSA is the right size to balance the scales against the VW Group, and as a family-run enterprise, it also has the sympathy of the Quandt clan, BMW’s controlling stakeholders. Another promising potential cooperation partner is Honda. The Japanese firm is a little bigger than PSA, emphatically engineering-driven, globally active, compatible in product terms – and also family-controlled. We know that Daimler was very interested in a liaison with Honda before it settled for its ill-fated tie-up with Mitsubishi. Honda is hot on Toyota‘s heels in terms of hybrid technology, has a strong presence in the States, and is a world leader in small cars. Honda may be more amenable now, as its V-8/V-10 efforts have stalled, its luxury brand (Acura) isn’t even sold in Europe, and the lead carved out by archrival Toyota has increased. The primary question remains: Have bad news and bad business results reached a point where BMW and Daimler will be forced to act? Perhaps not yet, but they will.

On Again, Off Again, On Again
Porsche‘s Bargain Sports Car Appears to be Back on Track

Will they or won’t they? In October we told you about a proposed mid-engine sports car for Volkswagen, Audi, and Porsche (which later debuted as the VW Bluesport concept). Over the winter, however, the prevailing winds at Porsche headquarters shifted against a Porsche version, which was a threat to the more profitable Boxster/Cayman. Then, at the Geneva auto show this past spring, a couple of Porsche managers were overheard late at night discussing the “fifth model range” – widely believed to be a new entry-level sports car.

This past winter, word from Zuffenhausen was negative:
“The [Audi] Q5 is killing the more expensive and much more profitable Q7. That strategy may work for Audi, but it certainly won’t work for us. That’s why we shall protect the Cayenne by not proceeding with the Q5-derived Roxster. For the same reason, we won’t do an entry-level 356-type sports car.”

This spring, fears of social acceptance problems for Porsche revive the idea:
“The brand is currently running the risk of becoming the new home for hooligans and energy wasters,” worries one corporate insider. “Can anyone think of a more convincing countermeasure than a credible, efficient, and not overly expensive sports car?”

To review, Porsche’s on-again entry-level sports car would be a mid-engine coupe and roadster based on a platform shared with Volkswagen and Audi. The Porsche version would feature a twin-turbocharged four-cylinder with between 280 and 300 hp moving about 2650 pounds. Because of Porsche’s busy new-model launch schedule, its version would arrive after the VW and Audi models, in late 2013 or early 2014. Price-wise, it slots midway between VW’s entry and the Boxster.

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