Mercedes Benz: Smaller, Cheaper, Greener

Ever get the feeling that the car game is dealing with some malaise? Dieter Zetsche sure seems to. “The definition of luxury will be somewhat different,” Doctor Z tells the Wall Street Journal. “It will be fewer CO2 emissions and more modesty in appearance.” And this from the company that sells cars on the back of a brand dripping with immodesty and ostentation. But no matter, the decision has been made: Zetsche wants to chase what the WSJ terms “Americans’ growing interest in downsized models that offer upscale features and finishes.” Wait, growing interest? The MINI sells decently, but the A3 (fewer than 3k units sold year-to-date) and 1 Series (fewer than 10k units year-to-date) are hardly setting the luxury segment on fire. Damn the torpedoes, people want green modesty, and Zetsche’s going to give it to them with four compact models planned for the US sometime after 2011.

For sure, there will be another B-class, which will be pretty similar, address the same customer as the B-class today. The three other body styles clearly intend to target additional and different segments from the one that we can target today, including gender barriers.

Smaller, greener and more identity-politics-y. That sounds like just what the luxury market has been begging for! And we haven’t even started in on the cost-cutting yet.

Daimler is trying to cut $7.5b from its annual outlays, which includes cutting hours and freezing assembly worker pay as well as cutting back unneeded commercial truck capacity. But part of the cost-cutting includes the new compact architecture on which the four new US-bound premium compacts are based. Daimler admits that its a “low-cost” platform, and vehicles based on it will be largely produced in Hungary. Similarly, Mercedes is strongly considering bringing C-Class production to its Alabama plant. Zetsche tells Automotive News [sub] that currency exchange rates will make that decision for him. Exchange rates killed the last plan to bring Mercedes A and B Class compacts to the US, but Zetsche is confident that the underlying platforms and Hungarian production will be so cheap that the four compacts will still be profitable.

But profits aren’t everything to Mercedes-Benz. With Audi on a roll, and BMW expanding its lineup, Mercedes is playing catchup in a number of markets, including the US and China. Which, is where the four compacts of the Apocalypse fit in. “We certainly have a strong growth phase coming” Zetsche tells Bloomberg. The four compacts “would certainly give us faster growth than our direct competitors.” And its not just sales volume that is justifying this line of cheap (to build, not buy) compacts. Daimler has to reduce its average carbon emissions by 30 grams per kilometer by 2015, or face up to €3b in fines.

After a decade or so of stagnation, Mercedes is playing catchup. It can swaddle its ambitions in talk of redefining luxury and eco-consciousness all it wants, but the reality is is considerably more desperate. Volume must go up, costs must go down and emissions really have to go down: not the combination of dynamics that portends good things for a luxury brand. Though this will doubtless shake M-B out of its overly traditional brand image, it will be tough selling this transition as an organic expansion or redefinition of the brand. Execution of these four 2012 compacts will be crucial.