Chart Of The Day: The Hollowing Out Of Europe's Middle Class Car Market
One of the frequent themes discussed on TTAC is the rising inequality of the mainstream car market in Europe. Since the Great Financial Crisis, Europe’s auto market has not only undergone a severe contraction in terms of volume, but also a radical shift in its composition.
Prior to the Great Financial Crisis, the “mainstream” brands (think Ford, Opel/Vauxhall, Renault, Peugeot, Citroen) had a firm grip on the majority of the market. Budget brands were not yet established – only Skoda had any real legitimacy, Dacia was still a punchline and GM’s Korean offerings were more like the Nexia than the Cruze. Premium brands like Mercedes-Benz, Audi and BMW were offering smaller, more affordable nameplates (like the A-Class, A3 and 1-Series), but they were still confined to the upper echelons of the segment.
What a difference a decade makes. Budget offerings have grown increased their market share by 37 percent, while premium cars have grown another 28 percent. And it’s all coming out of the mainstream segments. And that situation is only going continue over the next 5 years.
From a product perspective, it’s easy to understand just why this happened. At the bottom end, brands like Dacia have been aggressively expanding in European markets, as well as rolling out new models. While nobody would try to pass them off as any sort of premium transportation, they are gaining a certain sort of “cheap chic” cachet as basic, unpretentious transportation. The fact that they’re winning critical acclaim doesn’t hurt either.
The premium end of the market is a bit more complex. On the one hand, the luxury auto makers have been chipping away at the traditional territory of the mainstream auto makers. Mercedes, Audi and BMW still offer the A-Class, A3 and 1-Series, but there are more lower-end nameplates too: the Audi A1 and Q3, the Mercedes B-Class, CLA and GLA and the BMW X1. Pricing for most of these models is within the upper-end of a well-equipped conventional car. Given the choice between a very well-equipped Ford Focus and a more modestly equipped German luxury car, a good number of consumers will opt for the latter – even if the premium car might be qualitatively inferior.
The other, more politically dicey argument to be made, relates to income inequality. Car ownership in Europe has always been a more expensive and difficult proposition than in North America. Middle class consumers who can afford a car in Europe’s current economic climate might be more inclined to go with a low-cost car like a Dacia, rather than spend the extra money on the Renault equivalent. Meanwhile, increasing inequality means that there is more demand for premium cars of all stripes. Luxury brands offer more performance car and SUV nameplates in 2014 than they did in 2004, and the demand has to be coming from somewhere. Not all of it can be in the lower tiers of the segment.
So what’s the solution if you’re a mainstream brand, and your customer base is as weary of ever buying a new car? Simple. Make a cool product that’s easy to afford.
Thanks to Fiat Chrysler for the chart, which was shown in their latest Five Year Plan.
More by Derek Kreindler
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I do think Derek is on the correct path, but it's a little more complex than he is stating. I do have many relatives in the Euro region. The first one is the 'down marketing' of the more prestigious European marques and why this has occurred. The overall quality of your everday 'sh!tter' or high volume vehicle from GM (all), Ford, Fiat, VW, Renault, Toyota, Nissan, etc have been improving in quality. Now the advantage or perception of quality between a MB or BMW, etc and a high volume vehicle has been reduced significantly. Why would you buy a BMW when you can get a vehicle with nearly as good quality for much less cost? So, the prestige marques had to enter into the mainstream market. Prestige vehicles had a better ratio of value adding than the high volume vehicles. They had to to cover costs of less production, higher design/development costs. Prestige manufacturers need volume as well to maintain the necessary cash. Like Derek pointed out the cost of vehicle ownership in the EU is higher than the US. This also places pressure on the volume manufacturers, along with the 'prestige' manufacturers vying for market share. Now, a void is required to be filled. So, those Eastern European vehicles that are cheap come into play. They are reliable enough offer enough quality and most importantly it gives you the freedom to travel. The US and even Australia have similar vehicles, they come from Korea. The US with its highly subsidised vehicle manufacturing does entice manufacturers into the US as well. Even the Korean manufacturers have become mainstream volume sellers of quality vehicles. As the Eastern Euro countries become more affluent the cost of the Dacia's, etc will rise. So, what are the companies like the Nissan/Renault Alliance doing, starting the manufacture in Northern Africa. I bet within a decade or two, the EU will have vehicles manufactured in Africa in their market. We along with the US will have vehicles from Asia (read China and India).
As someone living in Western Europe (Germany), I was particularly struck by this comment in the analysis: "Given the choice between a very well-equipped Ford Focus and a more modestly equipped German luxury car, a good number of consumers will opt for the latter – even if the premium car might be qualitatively inferior." I think this is very true and I am struck by how extremely status-conscious the Germans are with their cars. At the top are clearly Audi, BMW and Mercedes-Benz (probably in that order)with VW behind. However, cars designed, engineered and built in Germany by Ford and Opel have nowhere near the cachet as they are somehow non-German. These cars tended to occupy the middle ranges and so when Mercedes brings its new A-Class to the market Ford/GM lose more market share. The new A-Class is a good example as every German car magazine I have read deems it inferior in almost every way to that most beloved of German cars, the VW Golf, but is selling very well because of the three-pointed star. This is almost certainly also the case for the 1-series BMW. Surprisingly, I seldom see the smallest Audi model on the road.