German Luxury Brands Face Uncertain Future In U.S.

October 2, 2009
2011 Mercedes-Benz SLS AMG

2011 Mercedes-Benz SLS AMG

As we mentioned a couple of weeks ago, new fuel efficiency and emissions regulations issued by the Environmental Protection Agency and the Department of Transportation could have a serious impact on gas-guzzling luxury vehicles. If approved as they stand in draft form, the regulations provide very little room for deviation, which could result in some very uncomfortable mergers and partnerships among brands like BMW, Mercedes-Benz, and Porsche.

Current regulations allow manufacturers to pay fines on vehicles that fail to meet U.S. efficiency and emissions standards. Those fines are fairly small, and they're passed on to luxury consumers, who don't really bat an eye. However, the new regulations are much stricter, and the proposed fines may be quite high. (Ironically, higher than the per-vehicle cost of implementing fuel-efficient technology.) There is even the suggestion that vehicles that don't meet the standards won't be allowed on the lots, period. Of course, the rules are far from finalized, and there are loopholes for manufacturers that sell less than 400,000 vehicles per year in the U.S., but those loopholes aren't quite as gaping as automakers would like.

Analysts at Bernstein Research of London see this as a huge problem for German automakers -- far more so than for manufacturers from other parts of the globe, many of which long ago incorporated fuel-efficient technology into their lineups. By 2012, high-end German vehicles will need to get around 31 miles per gallon, which is a 25% increase from their average today. Four years later, in 2016, they'll need to average 35.5 miles per gallon, which is a 40% increase from today. That's a little daunting.

There are at least three ways this scenario could play out for manufacturers:

One: automakers could actually work hard and meet the standards (though the technology costs passed onto the consumer might render their vehicles less competitive in showrooms).

Two: automakers could downgrade some of their performance-oriented gear, moving to more sensible, efficient four-cylinder engines (though that's likely to put off many loyal customers who continue to buy those brands precisely for their muscle).

Three: luxury automakers could merge with larger brands, which could absorb the formers' high-end, low-efficiency figures into their more mid-range, high-efficiency fleets. (Porsche may be heading down this path, even as we speak.)

More likely than not, we'll ultimately see a combination of those scenarios. But hey, it's Friday, so maybe we're wrong, or maybe we've missed something. By all means, let us know.


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