Auto Makers Capitalize on Boom With More Midsize Luxury Cars
                    October 4, 2000

                    By SCOTT MILLER
                    Staff Reporter of THE WALL STREET JOURNAL

                    PARIS -- When DaimlerChrysler AG pulled the cover off a compact
                    version of its popular C-Class at the auto show here, other luxury-car
                    makers probably weren't thrilled, but it was especially bad news for
                    mass-market makers like Ford and GM.

                    The new Mercedes, called the Sports Coupe, is the latest in a string of
                    attacks that luxury-car makers such as Bayerische Motoren Werke AG
                    and Volkswagen AG's Audi are launching on "volume makers."

                    Searching for new markets and armed with coveted hood ornaments,
                    upmarket makers are elbowing in on the profitable "midsize" segment
                    that has been the bread and butter of Ford Motor Co., General Motors
                    Corp.'s Opel and PSA Peugeot-Citroen, to name but a few.

                    The extra competition comes at a bad time for many of the
                    mass-market makers. Several are launching new models -- Renault SA's
                    Laguna, the Citroen Xantia, the Ford Mondeo and an updated version of
                    the VW Passat are coming to market -- and excess capacity is already
                    squeezing profits across the industry. Besides, the midsize market is

                    To be sure, luxury makers have been
                    eating into mass-market makers'
                    business for several years. BMW, with
                    its compact 3-Series, demonstrated
                    how successful such a strategy could
                    be a couple of years ago. Now,
                    however, the trend is gathering speed.

                    So why would luxury makers want to
                    move into a dwindling segment? First of
                    all, it isn't entirely new territory.
                    Industry analysts point out that
                    luxury-car makers are just making the
                    same size cars as they did decades ago.
                    BMW says one of its 3-Series models is
                    about the same size as one of the
                    5-Series editions from 20 years ago.

                    But as much as anything, the midsize
                    market may simply look like easy
                    pickings. It doesn't cost much for a
                    company to cut the size of one of its
                    existing models as long as major
                    components remain the same. Indeed,
                    luxury-car makers' share of the midsize segment is now up to about
                    26%, Ford says, from nothing 10 years ago. And what the upmarket
                    players have to offer is prestige for a slightly higher price.

                    The move has been most pronounced in Europe. The luxury market
                    there has only limited room for growth, so makers like Mercedes and
                    BMW have had little choice but to cast their nets wider. But it is also
                    gaining momentum in the U.S. Mercedes-Benz, for example, plans to
                    launch its small "Baby-Benz A-Class" in the U.S. in a few years. And
                    Ford's Jaguar is working on a cheaper edition in hopes of boosting U.S.
                    sales. Asian drivers, meanwhile, especially the Japanese, have shown a
                    growing appetite for premium nameplates on cars that fit on their
                    narrow roads.

                    "Moves downmarket really got their start in Western Europe, said
                    Jonathan Storey, an analyst at European Auto Research in England.
                    "But we are increasingly seeing luxury makers test the other two big
                    markets, the U.S. and Asia." According to his data, the share of the
                    medium-size segment luxury makers have grabbed is likely to grow to
                    20.2% this year from 17% in 1998.

                    Of course, mass brands aren't taking the heightened competition lying
                    down. The Mondeo, which won't go on sale for a couple more months,
                    is Ford's attempt to reclaim a larger share of the midsize segment. Ford
                    conducted 104 focus groups and found there was room for a model
                    priced below the luxury makers' models, as long as it offered features
                    they didn't.

                    So the company made sure there was ample room in the back seat, a
                    weak point on the new Mercedes and BMW 3-Series compact, and
                    loaded in safety features such as a side-impact curtain.

                    Opel is working on a replacement to its Vectra model, say industry
                    analysts. Like Ford, Opel hopes that a value-for-money campaign will
                    help turn the model around.

                    Auto-industry executives say rising personal incomes are giving luxury
                    makers a boost in the midsize sector. Unlike in lower segments, where
                    consumers may be more cost-conscious, people willing to step up to a
                    midsize car can sometimes be tempted to shell out a little more to get a
                    luxury model.

                    For their part, luxury makers say they have grown a little more
                    comfortable with at least one major dilemma: How to keep up the
                    perception of brand exclusivity while selling ever greater numbers of
                    cars, in more segments.

                    BMW is developing its small car with the intent of having the same basic
                    look and emphasis on performance as its bigger brothers. Unlike nearly
                    every other car in its class, for example, the new car will have rear-wheel
                    drive, which many analysts consider to be key to high-performance
                    handling. It won't be cheap, perhaps carrying a price in excess of
                    40,000 marks ($17,960). A new Golf costs about 25,000 marks.

                    Write to Scott Miller at