Even the Rich Suffer Sticker Shock : High Prices Cut U.S. Sales of European Luxury Cars
Porsche. Saab. BMW. Mercedes. Audi. Volvo. Jaguar. Peugeot.
Taken together, they would make up the ultimate yuppie motor pool.
But it is also a list of losers, companies that are finding it increasingly difficult to cut it in the fiercely competitive American car market.
Since their high watermark in 1986, sales of European luxury cars have all but collapsed in the United States. Every major European auto maker has suffered a severe sales decline here--their single biggest market--over the last three years.
“To say they have gone in the tank is to put it politely,” said William Pochiluk, founder of Autofacts, a Paoli, Pa., automotive market research firm.
Soaring sticker prices, brought on by the fall of the dollar versus most major European currencies, and a flood of new and less expensive luxury models from Japan have combined to erode the Europeans’ once solid hold on America’s most affluent and selective car buyers.
At the same time, many of their most loyal customers--young urban professionals--are now parents and are investing in expensive homes and private schools for their children, and so have less money or inclination to buy luxury cars that carry high price tags. As a result, the European auto makers have found to their dismay that sticker shock does indeed hit rich people and that the affluent will only pay so much for cachet.
“People who wanted a Porsche so that they could look good at a stoplight have decided that it’s not worth that much money to look good,” said Ed Fleming, a Porsche salesman at Howard Cooper Porsche in Ann Arbor, Mich.
Added Volvo spokesman Robert Austin: “Being showy with your car is no longer in.”
The sales collapse is leading to growing concerns about the European firms’ ability to remain independent, especially in a global industry that is undergoing rapid consolidation around much larger automotive giants based in Tokyo and Detroit.
“Some of the Europeans are getting squeezed tremendously,” warned Thomas O’Grady, president of Integrated Automotive Resources, a Wayne, Pa., automotive market research firm.
Auto Firms ‘Vulnerable’
“As individual companies and as a group, we think companies like Saab, Audi and Volvo are extremely vulnerable to the new high-end products from the Japanese,” Pochiluk added.
The latest sign of the troubles facing the Europeans came just this week, when Saab of Sweden acknowledged that it is holding talks with Ford Motor Co. about a merger or some other cooperative arrangement. Saab, once widely popular among young professionals because of its “correct” styling and reputation for durability, has seen its sales fall 12.1% so far this year, on the heels of a 20.3% plunge between 1986 and 1988.
Declining sales have led to mounting losses at Saab’s car division. The company reported this week that its automotive operations lost $120.5 million in the first six months of 1989, and analysts expect even larger losses in the second half.
“You’ve got to wonder why Ford would want into that,” said Maryanne Keller, automotive analyst at Furman Selz in New York. “I don’t know that any company could stem the losses at Saab.”
Plans for a Global Car
Some industry observers believe, however, that Ford may consider Saab a good fit for its plans to eventually develop a global car, applying design work done on one continent to cars produced elsewhere.
Meanwhile, Porsche, the West German maker of ultra-expensive sports cars, last week announced an extensive cost-cutting program to cope with the fact that its American market has all but disappeared. The firm, which has already slashed auto production in its German factories, said it is laying off 46 staff members from its small U.S. sales and distribution operations.
From a 1986 peak of over 30,000, Porsche sales had been halved to just over 15,000 by last year and are likely to be halved again this year. As a result, Porsche executives now say that they expect the company to remain a small, “exclusive” car producer.
“Porsche is downsizing,” Brian Bowler, president of Porsche’s U.S. operations, said. “We’ve been affected by the decline in the dollar, there’s no hiding that fact, and I don’t think the world is ready for a Porsche built in Korea. So you come to the inescapable conclusion that it is Porsche’s destiny to be exclusive in both price and volume.”
Lower Annual Sales
Indeed, Bowler now expects Porsche’s annual sales to stabilize at no more than 11,000 units.
But Saab and Porsche are hardly alone. Even tony BMW, the car that became synonymous with the yuppie phenomenon of the 1980s, has fallen on hard times. Sales of the West German performance luxury cars fell nearly 25% between 1986 and 1988 and have declined by an additional 4% so far this year.
Jaguar, meanwhile, the “hot” ultra-luxury import of the mid-1980s, suffered a 15% drop between 1986 and 1988, and its volume is off an additional 5% this year.
Many of those lost sales are going to the Japanese. Honda’s Acura line of upscale cars has brought in affluent buyers who previously did not purchase Japanese cars. Toyota, with its new Lexus line of luxury cars, and Nissan, with its similar Infiniti Division, hope to tap the same market this fall.
In fact, Toyota’s Lexus cars have become instant best-sellers in the few weeks since they were introduced.
Cheaper BMW on Way
Faced with the new Japanese competition, the Europeans are responding by showing greater restraint in their pricing. Porsche slashed prices last April, and BMW plans to introduce a new model next spring, the BMW 318is, that will be priced below anything now in its lineup--in the “low $20,000s,” spokesman Thomas McGurn said.
Some companies are even joining Detroit in the sales incentives game.
Saab now offers discount financing and more lenient lease agreements, along with factory rebates of up to $2,000 that its dealers can pass on to customers. Audi, still struggling to recover from the wave of negative publicity surrounding allegations of “sudden acceleration” by its cars, is offering lease customers free comprehensive maintenance for three years.
But, at best, such pricing moves are only likely to stave off further losses, analysts believe.
“One thing I think you will see happen is price reductions by some companies and a move to hold the line on prices by others,” Keller noted. “But I sure don’t think you are going to see any great sales turnaround.”
