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Luxury Car Sales Keep Skidding

European luxury-car companies are introducing their usual lineup of new and pricey models at this week's North American International Auto Show in Detroit. But analysts and some industry executives are unsure about how many buyers there are likely to be this year or even in the foreseeable future.

Sales for all luxury auto brands were down across the board for 2008. In 2009 the luxury segment of the auto industry is expected to fall below 1 million units sold for the first time since 1996, according to a forecast by Global Insight. Sales tracking firm Autodata said sales last year were 1.19 million units, down 21% from 2007 when sales were 1.41 million. Luxury sales have been as high as over 1.5 million in recent years.

Ford Motor (F), which has recently sold most of its luxury car business, doesn't think it made the wrong decision, especially given, as Ford sales analyst George Pipas calls it, "the financial restructuring" that a lot of baby boomers are going through as a result of the collapse in housing values, Wall Street investments, and consumer savings. "Consumers in the age range of 50-65 are a huge part of luxury sales, and this group is in a retrenchment that could take at least a few years to complete," says Pipas.

AutoNation (AN), the world's largest retailer of automobiles, has seen its luxury vehicle business slide since last September. CEO Mike Jackson says he believes a lot of traditional luxury buyers are going to weigh a lot more options when their leases come due. "The consumer's psyche is scarred," says Jackson, who was Mercedes' top U.S. executive in the 1990s. "People have lost money in ways they never thought possible, and many will look beyond luxury."

Angling for Buyers Moving Downmarket

That's where companies and brands like Hyundai (HYMOF), Ford, Honda (HMC), and General Motors' (GM) Buick are hoping to gain share in the next few years as they upgrade their models and sell loaded vehicles for around $30,000 to $40,000.

Hyundai's Genesis sedan, which sells for around $37,000, won the North American Car of the Year award, an annual prize voted on by around 50 journalists. It was a first for Hyundai, and a validation of its risky bet building a car with the similar equipment, ride, and handling of a BMW (BMWG) or Infiniti, but for about $8,000 to $10,000 less. "I think we are in a good position to help consumers rethink what 'value' really is with our products," says Hyundai's acting CEO John Krafcik.

Even the Ford Taurus could draw former luxury buyers. "We've got European styling and options that are more commonly found on premium and luxury [vehicles], such as adaptive cruise control, push-button start, paddle shifters, heated and cooled seats, so we think we can turn some heads in what could be a changed environment," says Ford Americas President Mark Fields. The Taurus' pricing is between $28,000 and $33,000.

Hopes of a Bounce-Back

That kind of talk doesn't bother James O'Donnell, president of BMW North America, whose company is launching a new 7 Series sedan this spring with prices topping $100,000 and a Z4 Roadster. BMW's sales were down in 2008, but less than the overall luxury segment, which means it gained market share. "Luxury sales, we believe, will bounce back in the second half of the year," says O'Donnell, who cites President-elect Barack Obama's proposed stimulus package and the $700 billion Wall Street bailout for his optimism. "I have heard estimates for the whole industry as low as 10.3 million [vehicles sold] this year, and that just can't be with all this stimulus."

Daimler-Benz (DAI) CEO Dieter Zetsche, who previously ran Chrysler in the U.S., says the collapse of auto sales, including luxury, in the fourth quarter surprised him. "Usually, luxury car sales drop a few months after a financial event like we had, but this time it was immediate." Still, says Zetsche, "people don't trade out of brands like Mercedes-Benz easily.…We have the highest loyalty rate in the industry." About 40% of Mercedes buyers in the U.S. are over 50 years old, which is the demographic most likely to be rethinking big-ticket purchases as they get nearer to retirement with depleted savings.

Forecasting sales in 2009 is proving too difficult for auto companies, including luxury brands. Guessing how the consumer will react, and comparing this recession to past financial setbacks, say some executives, is impossible. "This crisis is a deep, structural crisis.…The financial system in the U.S. is broken," says Volkswagen of America CEO Stefan Jacoby. "Usually I can set annual targets and goals, but I can't do that this year," he added.

No Retreat for Volkswagen

Volkswagen is one of the brands that could benefit from a traditional luxury car buyer retrenching, and altering buying habits. VW offers the German engineering pedigree, but at prices much lower than Mercedes-Benz, BMW, and even its corporate sibling Audi, which is owned by Volkswagen AG (VOWG). VW also gained market share in 2008.

Indeed, despite the recession, Jacoby says he is sticking with the company's sales target of increasing combined Volkswagen, Audi, and Bentley sales in the U.S. to 800,000 by 2018, up from about 300,000 in 2008, with the vast majority of that increase expected to come from Volkswagen.

Independent marketing consultant Dennis Keene says mass brands like VW, Hyundai, and Ford have chosen a good time to come forth with a lot of very good products that probably exceed customer expectations. "I won't go so far as to say the recession will be good for some car companies, but the fact is that some companies will gain share and benefit at the expense of others," says Keene.

Click here to see a lineup of high-end cars that are getting crossed off many millionaires' shopping lists as the economy continues to struggle.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

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