The Challenges Facing New Entrants In The Premium Auto Sector

We believe that there are a number of factors that could entice auto manufacturers to enter the premium segment. BMI has previously highlighted the strong global sales outlook amongst premium brands, particularly in high-growth emerging markets. In many such countries, low levels of consumer demand and economic development hinder sales growth for mass market companies; the premium segment is less constrained by these factors, as sales are usually restricted to the wealthy elite and government/corporate fleet purchases. Furthermore, a premium brand's sales growth in mature markets often outpaces the broader sector. This is true even when the wider passenger car market is declining; their wealthier client base is generally less affected by a slowdown in broader consumer sentiment. Another source of strength for the premium segment is the generally higher margins earned on sales compared with their mass market rivals. As cars in this segment often command a high price, profitability levels for premium cars are generally strong.

Barriers To Growth

Although there are significant rewards to be gained from this segment, we caution that there are a number of barriers for new entrants, and companies' strategies to expand into the high-end of the market could yield little in the way of returns, or even lead to potentially substantial losses.

Increasingly Crowded Segment

As autos companies increasingly seek to gain global market share and improve profitability, a number of manufacturers have announced that they will seek to enter the premium segment of the market. Brands traditionally associated with mass market cars, such as Ford Motor, Renault, and Peugeot, have recently announced forthcoming model releases at the top end of the market. Although some of these new models may be successful, the 'premium segment' is becoming increasingly over-crowded as new-entrants jostle for market share. Inevitably, some companies will experience sales far below targets, with heavy financial losses as a result.

As these new entrants attempt to gain a share of the premium segment, they also face competition from the established marques, such as the relatively high-volume manufacturers Mercedes-Benz, BMW, and Audi, as well as the smaller-volume 'ultra-premium' brands such as Bentley, Rolls Royce, and Ferrari.

These brands have an established market position, and are well known as premium autos manufacturers. Audi, BMW, and Daimler, which owns Mercedes-Benz, are all aiming to be the largest premium brand manufacturer by volume by 2020. This competition will see increasingly competitive pricing, new model releases, and attempts to better target key growth markets amongst these established brands, making the premium segment a very difficult one for potential new entrants.

Brand Recognition

Even as these new entrants introduce models that have the technological and performance features of a premium car, and the price tag to match, we believe that it may be difficult for such companies to establish themselves as truly 'premium' in the eyes of consumers. Indeed, many consumers attach a certain cache to the premium marques, and such companies often command strong levels of brand awareness and desirability, that may be difficult for other companies to replicate. Changing such perceptions could potentially take a long time.

Research And Development Costs

The need to develop cars with high-end specifications requires a substantial Research and Development (R&D) budget. Traditionally, premium segment cars have contained pioneering technology, or certainly technology hitherto unseen in the commercial autos sector. Such advances are expensive to develop, and can take a considerable amount of time. The established premium brands already have such facilities in place and have experience in this field. Most mass market manufacturers do not; although they certainly have large R&D budgets, it is generally aimed at less pioneering technology. Indeed, for these new entrants to gain a significant market share, they would need to offer comparable, if not superior, safety, performance, and entertainment technology compared with the established mass market brands. These features are less likely to appear in their other mass-market models, so such product development would be limited to use in the 'premium models', resulting in higher costs.

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This Week's Trivia Question

The previous week's question was as follows: Which currency [that] week marked the 30th anniversary of the adoption of its peg to the US dollar, with no change in sight? Hint: the currency peg in question has withstood extremely turbulent events, including financial crises, disease, and even a change in sovereignty.

The answer is... the Hong Kong dollar.

The theme of this week's question was inspired by the presidential election in Georgia over the weekend, and the question is as follows: What rare object was kept in ancient Georgia and was the subject of a sea quest by a figure from ancient Greek mythology? (Hint: the hero of the quest later died when part of his ship broke off and fell on him.)