The auto world skews rich by Alex Taylor III @FortuneMagazine August 12, 2014, 5:35 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons When you talked cars not long ago, chances are you talked about the mass market brands: Mustang vs. Camaro, minivan or SUV, Toyota quality and Nissan design. Luxury models were an afterthought, a tiny slice of the market designed for the wealthy that was focused on more rather than better: more wood, more leather, more chrome, more status. Now the balance is shifting. Mass manufacturers are struggling with skinny margins, shifting loyalties, and global competitors while the makers of high-end cars seem to coast above the fray. They are accumulating record sales and building waiting lists of eager customers. More models bearing luxury brands are coming to market than ever before—and at more accessible price points. BMW alone will bring out five new or redesigned models for 2015, including its first two electrified cars. When the directors of the North American Car of the Year compiled their list of potential candidates for this year’s award, fully half were from luxury manufacturers. (For the purpose of this column, luxury brands include Mercedes, BMW, Audi, Porsche, Lexus, Infiniti, Jaguar, Land Rover, Cadillac, Lincoln, Volvo, Acura, and Tesla). To date, the big winners have been two German makers and one Japanese. While car sales inched up a mere 1% in July, luxury car sales jumped 6%, led by Lexus, Mercedes, and BMW. This year, high-end brands have accounted for 16% of all sales growth this year, though they represent just 10.8% of the overall market., according to Automotive News. Luxury car sales should top 1.8 million cars and trucks this year and may exceed the all-time high of 1.83 million set in 2007. Some of the surge is coming effortlessly from the easy-money, low-interest-rate economy and pig-in-the-python demographics of the aging population. “Luxury brands offer great financing deals, and very attractive lease rates,” says independent analyst Warren Browne. “In addition, the age of the baby boomers supports the ‘I deserve this now that I have made some money’ purchase rationale, and I expect this demographic effect will continue for the next ten years. But a bigger push is coming from the manufacturers themselves. They are refreshing their product lines faster than any time in memory and extending their brands in ways that would have been unthinkable a decade ago. Few are holding back. Jaguar, a maker of sports cars and sport sedans, is working on a compact crossover, while Bentley is developing an SUV. They are following in the well-established tire tracks of Porsche. The sports car maker has doubled its sales with the Cayenne sport utility and Panamera four-door. At the same time, upscale manufacturers are pioneering new technologies that put substance behind their outsize price premiums. Mercedes is a leader in assisted driving while BMW pioneers carbon fiber research and Jaguar Land Rover perfects techniques in aluminum body structures. There are lots of risks associated with this new dynamic business model, and it’s early days. All manufacturers want a share of luxury sales, and giants like General Motors GM are continuing to upgrade their popular-priced offerings, forcing consumers to choose between a stripped Cadillac and a loaded Chevy Impala. Says Edmunds.com analyst Jessica Caldwell: “As luxury brands move down-market with their product offerings, mainstream brands are increasing content and in-car amenities. As a result, there is a bit of squeeze happening. Right now, luxury brands have a lot of equity built up over the years but that doesn’t last forever especially as car shoppers look for value.“ More worrisome for luxury manufacturers is the damage that could be done to long-established reputations as they move down the price ladder. History provides some lessons in how not to succeed. Those with long memories will recall GM’s efforts to turn a Chevrolet Cavalier into the Cadillac Cimarron in the 1980s or Mercedes’ half-hearted C230 Kompressor hatchback from the early aughts. Lexus boss Mark Templin warns that a $30,000 price may be the cut off. “You can’t build a Lexus with the quality, the durability, the reliability, the craftsmanship, the content that we put in a Lexus and sell it profitably under $30,000,” he tells Automotive News. “You just can’t do it. But where there is risk, there can be reward, and aggressive behavior has been paying off where it counts: higher sales and richer profits. Mercedes has been selling a front-wheel drive compact sedan, the CLA, for the better part of a year with a starting price of $29,900 and has moved 12,954 units in calendar 2014. The CLA I drove had a surprisingly sophisticated design and a smartly fitted interior. Likewise, Audi has managed to reinterpret its best features in the A3, which carries a MSRP of $30,975, without sacrificing too many of the brand’s traditional qualities. Lower-price cars make it difficult to achieve the lush profits upscale makers are used to. BMW has margin targets of 8-10%, but that will be under pressure as the proportion of smaller, lower-margin cars like the 1- and 2-series rises to more than 40 percent of the group’s overall vehicle sales from 25-30 percent currently. Daimler CEO Dieter Zetsche is pushing for Mercedes to become the most profitable luxury-auto producer with a 10% margin goal, but he will have a hard time doing so by selling $30,000 CLA’s. A decade ago, Mercedes Benz transaction prices were 93% higher than the industry average. In 2013, that number went down to 75%, according to Edmunds.com. Not every manufacturer is sharing in the swelling of the luxury brand market. Honda’s traditionally under-performing Acura seems to be in perpetual transition. Originally designed as a step-up brand, it has never been able to market its interpretation of frugal luxury. Nissan’s Infiniti, meanwhile, still lacks a strong identity and established reputation. It suffered a big loss earlier this year when its highly regarded leader Johan de Nysschen, who had been recruited from Audi, defected to equally-needy Cadillac. De Nysschen’s first task will be propping up sales of the compact ATS and fullsize XTS, both of which have been disappointing, and the electric ELR, whose sales have been invisible. After he has been in Detroit for awhile, he may wish he is back in Germany, where he would be closer to heart of the luxury car business.