The news that Daimler has contracted Valmet to build the Mercedes-Benz A-Class suggests that Daimler has either misinterpreted the market, by increasing production and effective capacity whilst other OEMs struggle with overcapacity; or that it has read the market trends correctly. The company appears very confident that it will continue to see rising demand for its Mercedes-Benz A- and B-class models and derivatives over the next four years. The expected increase in demand is such that the only way of meeting it is through extra capacity – hence the remarkably quick decision to contract production to Valmet.
While demand for premium models in the compact segment is growing, demand for established volume players’ models in this market – like the Renault Megane, Opel Astra and similar models from Ford, Peugeot, Citroen and Fiat – is falling, or flat at best.
On balance, despite the economic turmoil facing the world, the betting must surely be that Daimler has read the market correctly; it clearly believes that there is still plenty of growth in the premium segment of the compact (C segment) market. And this decision is consistent with Dieter Zetsche’s earlier pronouncements that Daimler’s biggest problem is a lack of capacity, not overcapacity.
Initially, the news that Valmet would build these extra A-class cars seemed surprising, but set this news against full order books for the two (yes two) plants which are making the A- and B-Class and derivatives, and it becomes understandable. It is also consistent with the situation at BMW, which has been looking for additional production capacity for the Mini, and at Audi which has had to increase capacity for the next A3; production targets for the smaller A1 were also increased not long after output began – another example of rising demand for premium small cars.
While demand for premium models in the compact segment is growing, demand for established volume players’ models in this market – like the Renault Megane, Opel Astra and similar models from Ford, Peugeot, Citroen and Fiat – is falling, or flat at best. These traditional brands are the embodiment of the squeezed middle: in addition to competition from above (the premium brands), there is the threat from below, on price and, increasingly, quality from new entrants and value brands like Kia, Hyundai and Skoda which are hitting the volume players hard.
Daimler’s Valmet move, the probability that BMW will announce additional capacity for Mini and derivatives, and the continued strength of Audi mean the challenges facing the volume manufacturers in the compact segment will only get tougher.
The fact that Daimler, BMW and Audi all need to increase their compact car production, to meet European and global demand, suggests that overcapacity per se is not a universal problem; demand is there for the right product. Make the products consumers want and it’s likely to be a lack of capacity which will be the biggest problem. Daimler thinks the premium compact car market could be ten million units a year by 2021; although this seems a little optimistic, it is clear that the market for premium compact vehicles is growing and justifies additional production volumes.
The implications, by contrast, for the traditional volume brands are much less attractive: Daimler’s Valmet move, the probability that BMW will announce additional capacity for Mini and derivatives, and the continued strength of Audi – and of course Volkswagen – mean the challenges facing the volume manufacturers in the compact segment will only get tougher.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Ian Henry is a director of AutoAnalysis, an independent automotive research and consulting company based in London.
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