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Let's Get Small: How Low Can Mercedes Go When It Comes to Fancy Cars?

For carmakers such as BMW, Mercedes, and Audi, the past ten years have been all about affordable luxury. In the U.S., these German luxury brands have succeeded in getting people who might have once thought the cars were out of their league to buy and lease some snazzy rides. But has success gone to the Germans' heads?

Modest luxury hits American shores
For BMW and Audi -- both automakers that are focused on performance -- going small is a simpler proposition. The first BMWs that showed up the USA were small-ish sedans and coupes, a counterpoint to the big muscle cars and Cadillacs of the 1960s and '70s. Volkswagen-owned Audi has always traded on all-wheel-drive versatility.

Mercedes, of course, is a different story. You don't rise to the top of the luxury auto mountain by doing small. However, the company has been able to doing medium: its C-Class now serves as an entry-level Merc and sells for less than $40,000.

Small is luxury's new frontier
Going larger and larger with luxury obviously isn't a problem: consumers naturally associate luxury with scale and will pay accordingly for a roomy car with plutocratic appointments. The challenge is to take luxury and compress it without undermining the core values of the brand.

Cadillac infamously tried to do this with the Cimarron in the 1980s, a car now widely considered to be Caddy's nadir. Mercedes is entering this treacherous zone by saying that it plans to bring its small cars, the A-Class and B-Class, to the U.S. These compact cars, which have done well in Europe, will have everything that ostensibly makes a Mercedes-Benz a Mercedes-Benz: upholstery, build-quality, technology, safety and the smell of bank vaults.

But what they may lack is that intangible Mercedes-ness.

Does Mercedes really have a choice?
At this point, the C-Class has been around for more than ten years. General Motors (GM), Ford (F) and other automakers are now producing compact cars that incorporate luxury elements. It makes good business sense for Mercedes to eye the gap between, say, a top-of-the-line $22,000 Chevy Cruze LTZ and a $40,000 BMW 3-Series and decide to court new, young, fuel-cost conscious customers in that price range.

Improved fuel-economy is also a factor in Mercedes getting its U.S. fleet to adhere to tougher future EPA standards.

So a race of sorts is on. BMW is already there with the 1-Series, but sales have been pretty tepid by comparison with the 3-Series. Audi has done well with the A3, a small wagon. Lexus and Acura are also thinking small. But does Mercedes want to damage its hard-earned and platinum-plated reputation for luxury by joining this competition?

Growth versus profits
Mercedes could always wait out the gas-price cycle and refresh its current U.S. lineup, anticipating that Americans will live up to their reputation for flirting with small cars while remaining married to big ones.

Unfortunately, the small luxury segment has become too tempting for carmakers who want to grow. Mercedes doesn't want to get left in the dust, or be stranded with an aging customer base -- even if it makes a lot more money on its larger vehicles.

In the U.S., with mid-sized sedans, luxury carmakers have been able to have been able to sell downsized luxury. There a limit to how small you can reasonably go with posh -- and I'm afraid Mercedes is about to encounter it.

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Photo: Mercedes-Benz