Analysis: Three Shifts, Four Models A Profitable Formula For Daimler's Front Drivers

Strong sales of the Mercedes-Benz CLA have led Daimler to add a third shift at the Hungarian factory that produces the compact front-drive sedan, as well as the B-Class hatchback.

According to Bloomberg, Mercedes can’t get enough capacity for the new small cars based on their front-drive architecture. Even though parent company Daimler also builds the smaller A-Class, the B-Class and GLA compact crossover at a factory in Germany, they also had to contract out production of 100,000 units of the A-Class hatchback to Finland’s Valmet Automotive. In the United States, sales of the CLA have been strong, with over 14,000 units sold in 2013, despite being on sale for a mere four months. Although sales were weaker at the start of 2014, sources report that inventories are tight in many key markets, with most cars being pre-sold.

In our market, the CLA is a strong proposition for many buyers, offering an entry point into the Mercedes brand below the larger, rear-drive C-Class, at prices more in line with a well-equipped Honda Accord (the CLA starts at just under $30,000). But in world markets, specifically Europe, the CLA is crucial for Mercedes-Benz. A weak economy has hit young Europeans the hardest, leaving older buyers best positioned to buy new cars. Despite their affluence, they are, literally, a dying demographic.

On the other hand if there is indeed a “lost generation” of consumers, continuing to sell expensive vehicles on a volume basis is not necessarily sustainable over the long run. The CLA allows Mercedes to capture both older buyers looking to downsize, and appeal to younger buyers with less money, but premium aspirations, both in Europe and other markets worldwide. The latter demographic may not be conventionally wealthy, but they are used to brands and products that are considered to be luxury products, even if they don’t necessarily have the exorbitant price-tag of exclusive brands – think Starbucks, J.Crew and Apple.

This is the kind of car buyer that will gravitate to the CLA, and you can bet that the GLA will be also a smash hit in the nascent small-crossover segment. Like the CLA, it has the right badge and the right price tag, but with the added bonus of having the right form factor to sell not just in Europe and North America, but emerging markets with a whole new class of affluent customers, willing to pay a significant premium for a slightly higher ride, a two-box body and perhaps some faux-rugged cladding.

The target buyer for the CLA and GLA often comes up for criticism on TTAC, as well as the vehicles themselves: a small Mercedes with a transverse engine layout and a four-cylinder engine is anathema to most car enthusiasts, and a crossover doubly so. But in this kind of analysis, it’s important to suspend value judgements and look at it from a business perspective.

The business case for the cars is stellar. Four models spawned from one architecture, with the CLA and GLA able to serve as the high-margin variants. Combine that with the low assembly costs presented by building the cars in Eastern Europe, and you have a textbook example of how a car company can leverage economies of scale while also bringing to market a series of enticing products that are able to penetrate emerging markets and untapped demographics. Even BMW is looking to get in on the action, with their new front-drive 2-Series Active Tourer minivan.

The idea may not be terribly enticing to some – as an enthusiast, I’m certainly not thrilled about this direction – but this is where the market is going.