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More models could pinch profits at Europe's carmakers

First came the people-mover, then the minivan, and now the mini-minivan.

Carmakers are charming Europe's motorists into showrooms by inventing myriad new model niches, but this can leave companies with heftier manufacturing bills while failing to lift prices significantly, spelling bad news for profitability.

France's Renault is set launch the Modus, a smaller type of minivan later this year based on its Clio compact car in a move that could open up another round of competitive cloning.

In a region where manufacturers wage perpetual war for a share of a saturated market, carmakers are churning out new models at break-neck pace, giving way to new segments.

Analysts say that while the trend might mean more consumer choice and may spur sales, it is fragmenting mainstream car segments and crimping economies of scale.

There is also the risk of "cannibalisation" as new models tempt motorists already loyal to the brand to jazzier new models, without actually winning new customers.

"It flies in the face of basic economics," said one London-based autos analyst. "You can slice up the market in as many different ways as you like, but you won't sell more cars. Plus more products means more capital investment, and in terms of manufacturing, you're losing economies of scale."

The cut-throat "C" or mid-sized segment -- western Europe's biggest, which includes the Volkswagen Golf, Renault Megane and Peugeot 307 -- tends to be first in line for segment slicing as carmakers seek to stand out from the crowd.

Carmakers themselves argue they have little choice and need to keep launching new products to compete. They say they keep costs down by using the same parts, including the engine, across different models and by building them on the same production lines.

That means cars like Renault's Clio and Modus, or Volkswagen's Golf and Touran, which come from the same families, have around 75% of their content in common.

Analysts concede that sharing parts caps costs, but note it still costs money in an industry with already skimpy profit margins. They say pricing is key.

Carmakers only offset higher costs if they manage to charge significantly more for niche cars than they would for their plain-vanilla peers, and if they maintain the premium even when rivals launch equivalents.

"The impact of product proliferation on profitability is positive only if the price premium achieved recoups the cost of additional derivatives," said Sandford Bernstein analyst Stephen Cheetham in a recent research note.

And while launching a new derivative could freshen up a car as it starts to look dowdy, successful new models are usually quickly mimicked by rivals, forcing down prices and prompting carmakers to slap on profit-eroding incentives.

Minivans, or multi-purpose vehicles (MPVs), have proved a hit since the late 1990s in Europe, where Renault has pioneered the segment with the Scenic and rivals have built copies.

But while carmakers still manage to charge a bit more for a Volkswagen Touran than its no-frills Golf equivalent, analysts say the minivan is becoming as run-of-the-mill as a hatchback and will ultimately be the victim of its own success.

"We saw this with the Scenic," said a second London-based analyst. "It was the first of a kind and commanded a big premium on the Megane. But the new version now has a host of rivals and pricing is much less lucrative. Eventually car makers will compete prices down on MPVs and lose all premium."

Cheetham argues a more lucrative trend is that of high-end carmakers who are making inroads into mainstream segments that were previously the preserve of mass manufacturers.

High-end German carmakers like DaimlerChrysler's Mercedes and BMW could fare better because replicating their sportier, muscular, or more luxurious offerings is more difficult. They are also more likely to maintain a price premium, and to win over new customers rather than steal sales from their existing models, he said.

"Cloning the Renault Megane Scenic is relatively easy and has already been done with some success... while cloning the BMW 1 series or the Audi A3 is likely to prove more problematic.”


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