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BMW - Bayerische Motoren Werke AG, known for the $70,000 7-Series sedan, and Ford Motor Co., maker of the F150 pickup truck, are staking their European profit on compact hatchbacks at the heart of the continent's biggest car segment.
To make money in Europe, carmakers need to sell hundreds of thousands of compact models. Volkswagen AG, Europe's biggest carmaker, on July 23 cut its earnings forecast as the new Golf hatchback generated less interest than planned, while Renault SA on July 28 raised its profit outlook because of stronger-than-expected demand for the Megane line of cars.
``The volume model must be successful if you want to be successful as a company,'' said Stephan Thomas, a fund manager at Frankfurt Trust, which oversees about $16 billion in equities, including BMW and Volkswagen shares.
While Europeans are moving to compact cars, which make up a third of the regional market, the U.S. is dominated by larger vehicles. Through August, 55 percent of sales in the U.S. were sport-utility vehicles, pickup trucks and minivans, meaning carmakers like Ford, General Motors Corp. and Toyota Motor Corp. must design and sell different models for the two regions.
On stands at the Paris International Motor Show, BMW will show the 1-Series model, which starts at 19,800 euros ($23,900). It will be joined by DaimlerChrysler AG's new Mercedes-Benz A-Class, at 17,600 euros, the Audi A3, which costs 18,850 euros as well as the Ford Focus at 14,375 euros. Japanese additions include Honda Motor Co.'s FR-V and Toyota's Corolla Verso compact van which starts at 19,600 euros. The show opens Thursday.
Luxury Losses
Ford, which had projected a pretax profit from its luxury division that includes Jaguar, Volvo and Land Rover, instead reported a $362 million second-quarter loss, and now expects a full- year loss. Ford on Friday said it would end unprofitable Jaguar car production at a plant in Coventry, England.
The Ford brand's European unit, which relies on the Focus for most of its sales, had a pretax profit of $211 million in the quarter.
Wolfsburg, Germany-based Volkswagen, which has had to offer free air conditioning on the Golf to spur demand, lowering the model's margin, says operating profit before one-time items should fall to 1.9 billion euros this year, a 24 percent drop from 2003.
Boulogne-Billancourt, France-based Renault, by contrast, raised its operating profit estimate for this year to 5.5 percent of sales from 4.5 percent, ascribing that entirely to the Megane compact line, which includes the Scenic van. In the first half, Megane and Scenic sales rose by a quarter to 468,000 units.
Increased Sales
BMW and Mercedes are aiming to boost vehicle sales by hundreds of thousands of units by the end of the decade with these smaller models, which will compete against the Golf and General Motors Corp.'s Opel Astra. Overall, the compact car segment represents 34 percent of the total, according to the European Automobile Manufacturers Association.
BMW, based in Munich, is counting on customers adding expensive options such as sunroofs, instruments and seat covers to boost profit margins on the 1-Series, said Michael Ganal, management board member responsible for sales.
``We feel customers will use the 1-Series to enter the premium market,'' he said during a presentation of the car in Munich in June. ``The car has been priced correctly and will be more profitable than other cars in the segment.''
Ganal is aiming to sell about 100,000 units of the car annually, out of about 5 million compact cars and vans each year in Europe, according to sales figures from the Brussels-based European Automobile Manufacturers' Association, or ACEA.
A-Class Parts
``The 1-Series is not so different from the closest model, the 3-Series, and shares a lot of components,'' said Henning Gephardt, who helps manage the equivalent of $130 billion at DWS Investment in Frankfurt, including DaimlerChrysler shares. ``DaimlerChrysler's problem is that the A-Class is totally different from the C- Class,'' Mercedes-Benz's entry-level sedan.
Mercedes is planning to sell 180,000 units of the new A-Class next year, its first full year of production. The company has capacity to build 300,000 A-Class models and derivatives, Juergen Hubbert, who heads the Mercedes Car Group, said in June.
Coming from the less expensive side of the segment, Ford's new Focus model sports improved reliability and plush materials in the interior, Ford executives say.
``I'm more confident about this car than I was 6 years ago with the first Focus,'' said Richard Parry-Jones, 53, Ford's chief technical officer who oversaw the Focus' development. ``This car does everything, and at a very affordable price.''
The company plans to sell at least as many of the new Focus each year as the current model, of which 3.25 million have been sold in Europe since the model was introduced in 1998. The Focus represents a third of Ford's European sales.
Toyota Sales
Toyota, the world's third-biggest carmaker, is increasing sales in the compact segment with new Corolla Verso van. Production began in Turkey in April and Toyota expects to sell 140,000 units this year in Europe.
``This is the biggest segment in Europe, so everyone wants to be there,'' Renault Chief Executive Louis Schweitzer, 62, said after a test drive of the Modus subcompact van in Portugal this month.
PSA Peugeot Citroen, Renault's French rival and the second- biggest carmaker in Europe, will present the Citroen C4 compact hatchback at the show, and will begin selling the model at the end of the year. The carmaker also sells more than 600,000 307 compact models each year.
``This is the only major segment in Europe that is growing,'' Peugeot Chief Executive Jean-Martin Folz, 57, said in an interview in Paris this month.
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