Luxury cars means profits for manufacturers

European car makers are struggling – at least the ones that are selling lower priced cars. To make a cheap car you need cheap components and cheap labour, so many manufacturers are building in Eastern Europe or Asia to reduce costs, however the price pressure in the market especially from even cheaper cars built in the Far East isn’t helping.

So what to do? Follow the example of VW! They sell cheapish cars under the VW, Skoda and SEAT brands and then sell a range of ever luxurious models through Audi, Porsche, Bentley, Lamborghini and Bugatti. As you can imagine, some parts will be shared across all brands thus making the cost per unit more effective and profits higher as you go up the luxury scale.

FIAT are doing the same with FIAT at the bottom, followed by Lancia, Alfa Romeo, Maserati and Ferrari on the European side and sharing technology with their US cousins at Chrysler, Dodge and Jeep. Some years ago Alfa Romeo even rebranded Nissans in Italy to keep costs down through a short-lived venture.

Mercedes and BMW are just producing an ever expandable range to share costs and components – I’ve lost count of the number of models they make each!

Many manufacturers are promoting luxury brands or model ranges. Why? Simply because margins are higher and therefore profits are better which covers the losses on the lower specced models. Clearly the German brands have shown that many buyers want a small car with a higher quality of finish and function and (importantly) they are willing to pay more for them.

This is an interesting strategy as the capacity of Europe’s factories is estimated to be at 65% of capacity, however on the flip side, if you can build and sell more upmarket models to fill that capacity and make more profit on each, then you save the company. With many countries having problems with manufacturing, this can only be a good thing as the knock on effect of a car plant closing can be disastrous for the local economy around it.

It looks like we will start to see a definite tiering of global cars – very cheap cars from India and China, cheap cars from manufacturing plants in Thailand, Brazil and other countries and then more luxurious and higher priced models from Europe, Japan and the U.S.