Luxury car glut?

[bigpoppanils]

08:30 June 16, 2004)

Automakers may be creating a glut for tiny ultraluxury segment

http://www.autoweek.com/cat_content.mv?port_code=autoweek&cat_code=carnews&loc_code=index&content_code=00635453

By MARK RECHTIN | Automotive News

The CFO of 20th Century Fox Television is an admittedly impulsive spender on big-ticket items. When he realized his Lexus had 90,000 miles, he traded it that day for a new LS 430. While on vacation he enjoyed driving a Ford Mustang convertible, so he bought a $70,000 Mercedes CLK 500 cabriolet the day he returned.

Barron is a member of the hottest demographic segment in America - wealthy households. Last year, U.S. consumers purchased 16,000 vehicles priced more than $100,000, a 43 percent increase over 2002.

But if one adds up sales forecasts for luxury vehicles entering the United States in the next two years, affluent Americans would have to buy an additional 7,000 units a year. That would require 40 percent sales growth in a segment that was flat the year before sales spiked.

Automakers such as Lexus, Audi and Cadillac are planning to enter the $100,000-plus luxury segment. It's unclear if consumers like Barron are ready to spend so freely.

Says Barron: "I'm not one to take a chance on a limited-edition type car, where I need to worry how I'll get it serviced. I associate that with complex, expensive, hard-to-repair cars."

The industry's expectations of growth in the ultraluxury segment have some trend-watchers nervous. Said Susan Jacobs, who tracks the luxury automobile sector from Rutherford, N.J.: "There are a lot of affluent buyers looking for exclusive models. But are there enough to absorb all the targeted volume? Not really. I don't think everyone will meet their volume targets. Not everyone will sell out."

According to the U.S. Census Bureau, nearly 1.5 million households reported income of $250,000 or more in 2002, the most recent year for which statistics are available. Conventional wisdom suggests that's a big enough group to buy all luxury cars.

But Barron isn't so easy to pin down. Ask him to discuss his impulse purchases, and he talks as if he were buying his first Toyota Camry.

Words like "value" and "reliability" frequently crop up in conversation. Asked whether he considered a more expensive vehicle such as a $100,000 Maserati Quattroporte or a $160,000 Bentley Continental GT, Barron says no.

"A tuneup can't cost me $1,000," he said. "I don't need $500 tires. Plus, the flashier the car, the more people are going to want it and not necessarily in a good way. I don't need that."

Barron's attitude may be indicative of a trend. Wealthy consumers tend to be pragmatic about their vehicles, according to a survey by Unity Marketing, a market research firm in Stevens, Pa.

Unity Marketing interviewed individuals with an average income of $150,000, and found that they are leery of buying a product that costs more than some people's houses. They were especially leery of driving such vehicles among the uninsured masses and parking them at the supermarket.

Wealthy consumers also become price resistant when a vehicle's sticker price tops $150,000, says Eric Noble, president of The Car Lab consultancy in Orange, Calif. Noble has done marketability studies for several luxury carmakers.

His conclusion: The key price point seems to be $150,000. Below that price, there are plenty of potential buyers, Noble says. But significant sales volume beyond $150,000 is illusory.

"Rich buyers didn't get rich by being stupid," Noble says. "The truly rich don't want to look like it. And the wanna-look-rich people don't have that kind of coin."

Worse yet, makers of vehicles priced more than $150,000 are approaching the same list of potential buyers, down to the same names and addresses. "You live and die by unit counts in the tens or hundreds a month," Noble says. "The margin for error is very small."

Noble believes the $100,000 to $150,000 segment can accommodate more products. But he believes that growth prospects are limited; a flood of new nameplates could saturate the market.

Such skepticism doesn't seem to deter the luxury brands. Adrian Hallmark, Bentley Motors' director of global sales and marketing, predicts that growing numbers of wealthy households will buy ultraluxury cars.

But he acknowledges that 80 percent of those who will buy the Continental GT will be conquests from Porsche, Mercedes-Benz, Aston Martin and Ferrari. That doesn't indicate a lot of new sales volume.

The industry's prime marketing weapon for luxury cars - an attractive lease - may not work as well for vehicles costing more than $100,000.

Last year, 43 percent of Mercedes S-class cars were leased, and 69 percent of BMW 7-series sedans were leased. Attractive lease terms are a key sales tool for those vehicles.

Customers can lease a $60,000 car for less than $1,000 a month, says Andrew Shaffer, marketing product manager for Ferrari Maserati North America. "But there's no way you can do that with a $100,000 car, unless you put a ton of money down."

Shaffer is more conservative than Noble, who draws the line at $150,000. Shaffer believes that a $100,000 price can be a psychological barrier for wealthy customers.

What about other mainstream entrants that could clog the $100,000-plus category - Lexus and Cadillac?

Cadillac General Manager Mark LaNeve said his brand "has to be in the game" in competing for the customer "who can buy pretty much what he wants."

LaNeve tested consumer reaction to an ultraluxury flagship during the 2002 Detroit auto show, when General Motors unveiled the Cadillac Sixteen concept. Company executives have hinted that Cadillac might produce a downsized version of that vehicle.

Meanwhile, Lexus General Manager Denny Clements has said a $100,000-plus sedan or sports coupe would make a perfect extension for the brand. But he is realistic about its prospects.

"There isn't enough room for everybody," Clements said. "The depreciation of those cars is horrendous. You can't really make a business case for it."

Many executives and analysts aren't willing to believe the segment has unlimited potential; many predict a shakeout.

Most automakers require a five- to seven-year product cycle to adequately amortize development costs.

Low-volume assembly plants can require as many as 20 years to amortize the cost of construction and tooling. That's asking a lot from a low-volume car.

Some executives worry about what will happen late in a luxury vehicle's cycle. Len Hunt, vice president of Volkswagen of America Inc., warns against automakers wanting a quick return on investment. In VW's case, Hunt argues that it is almost more important to elevate the brand than to ensure that the Phaeton is profitable.

"Automakers have to take a long-term perspective. This is not a three-year look," Hunt says. "They have to look out three generations. A car like this can become successful really only after its third generation."

So who will be successful when the segment shakes out?

David Martin, president of the InterBrand consultancy in New York, believes performance is a bigger draw than lavish luxury features.

"The value proposition is that the car will deliver an experience superior to anything else I can get. What they'll be looking for is an experience that's going to rock their socks, the best thing they've ever driven," Martin said.

That sentiment is echoed by Jay Leno, an aficionado whose collection of more than 100 vehicles includes a McLaren F1, several Lamborghinis and some Bugattis. He agrees that there is room for new entries in the $100,000 to $150,000 category, but not for me-too luxury cars.

"If a vehicle does one thing specifically well, it will sell," Leno said in an interview. "But if it's just a luxury car, then it's seen as wasteful."