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A Disturbing Trend for Automakers

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I'm not sure what it was. Maybe I was just in a good mood. But I enjoyed the Super Bowl commercials more this year than last. There was one in particular that made my jaw drop, and not because it was the funniest or flashiest, but because it just flat out surprised me: The Mercedes-Benz commercial, with Willem Dafoe acting as the devil, showed the luxury CLA model with a sticker price starting at $29,900.

There's a big push by automakers to capitalize on the 75 million Americans in the 30- to 40-year-old range, many of whom desire luxury vehicles but can't afford the $40,000-plus price tag the baby boomers can. Yet as an auto investor, I can't help noticing that the new entry-level luxury segment is all of a sudden crowded. I'll show you how many vehicles are in this segment, and why it could lead to big problems for Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , Toyota Motors (NYSE: TM  ) and Honda (NYSE: HMC  ) . I'll also cover factors that we, as auto investors, need to keep in mind going forward.

According to Edmunds, there are 27 vehicles in the luxury segment in the $25,000 to $35,000 price range. Looking specifically at the target line of $30,000, here is the list of vehicles competing.

Model Price
Meercedes-Benz CLA $29,900
Audi A3 Diesel $30,250
SAAB 9-3 Wagon $30,330
Acura TSX $30,510
BMW X1 $30,800
BMW 1 Series $31,200
Volvo S60 $31,900
Lexus CT $32,050
Audi A4 $32,500
Cadillac ATS $33,095
Saab 9-4X $33,380
Volvo XC70 $33,600
Hyundai Genesis $34,200
Lincoln MKZ $35,925 

It's unbelievable that the Mercedes CLA comes in cheaper than all those luxury competitors. It also leaves me with mixed feelings. On one hand, the CLA's price opens up a new potential customer base and puts extra pressure on Toyota and GM's successful Lexus and Cadillac models. It's also going to make reviving Ford's Lincoln brand much more difficult. But on the other hand, Mercedes could have hurt its brand image by offering such a "cheap" Benz. And this isn't just a one-off experiment: The CLA is the first of three models that will hit the $30,000 price target.

That's not the only cause for concern. As the line between mainstream and luxury blurs, competition for sales will heat up more rapidly. The expansion of this segment could also come back to haunt automakers if demand for luxury vehicles takes a dive, forcing dealerships to increase incentives to stay competitive.

"Everybody seems to be expanding their product line, and you wonder if that isn't going to lead to problems," said Wilbur Ross, CEO of private-equity firm WL Ross, recently at the Automotive News World Congress. "It may lead to some more volatility in market share, and it may lead to, in effect, overcapacity in particular segments." 

Among the unlikely names entering the luxury segment are Ford, with its Lincoln MKZ sedan and MKC crossover; Kia, with its 2014 Cadenza premium sedan; and Volkswagen, with its CrossBlue crossover.

Factors to watch
The auto industry is finally recovering from the doom and gloom of the recession. There's real momentum in sales and in the broader economy in general, and experts estimate that the U.S. auto market could reach 17 million units in sales by 2015. Margins, profits, and transaction prices are all up, while incentives remain low.

In that kind of environment, we have to make sure that increased competition and expanding product lines don't lead to incentive wars or a loss of consumer trust with inaccurate statements -- such as Honda's recent overstatement of fuel-economy numbers.

With so many launches in new segments, companies also have to make sure they keep their rollouts flawless. Ford already fumbled when it didn't get its new MKZ to dealers as promised in December, resulting in a 73% plunge in MKZ January sales as dealers ran out of 2012 models. Now Lincoln is going to offer dealers cash assistance to help keep customers who are frustrated by the delays.

As the MKZ episode illustrates, rushing into new segments -- and making mistakes in the process -- could be costly for automakers and investors alike, and it's one area in particular to watch as companies exit their comfort zones and jump into this new luxury segment. 

Bottom line
There's an explosion of competition as automakers try to grow market share with these new product lines. Keep an eye on the factors I've discussed here, and watch incentives closely over the next few years. Investors who do will be able to spot tomorrow's winner and realize nice portfolio gains in the process.

According to KPMG's annual survey, 81% of auto executives polled believe VW will increase global share more than any competitor over the next five years. Which company do you think will come out on top? Let me know in the comments section below.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2013, at 2:46 AM, chrisausten wrote:

    I agree with this article, but not so much as a disturbing trend for all of the automakers mentioned, but most definitely for Lincoln because they have cut off their nose to spite their face. They have managed, in one fell swoop, to alienate almost everyone who has ever bought a Lincoln in the past. It's understandable to want to appeal to a new demographic, but you don't pull the rug out from under those customers who have been loyal to you for decades. They brought in a foreigner (Max Wolff) to redesign an American luxury car...what's wrong with this picture! We can all see the result. It would not have been so bad had they produced two or three cars with the "new" style and kept at least one or two traditional style Lincolns...but no, they decided to burn all their bridges behind them. The article states that "The expansion of this segment could also come back to haunt automakers if..(it) takes a dive",...well, the 30 & 40 something crowd is more volatile and less stable than the Boomers...and Lincoln has bet the farm on that unstable and easily swayed segment. They have nothing to fall back on. Each and every model in the current lineup looks like a monotonous and lackluster flattened out PT Cruiser. Lincoln has soiled itself.

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