Mercedes, Audi Court Cher With Diesel Challenging Lexus Hybrids

Mercedes-Benz and Audi plan to double their U.S. diesel offerings to attract American luxury buyers ranging from superstar Cher to military man Tom Brown as the technology shakes off its soot-sullied past.

Cher tested a Mercedes diesel after rejecting hybrids, while Brown, a 57-year-old retired Navy lieutenant commander, is a buyer. He picked up a Mercedes E-Class diesel in October, his third car powered by the fuel.

“I started out with a diesel tractor,” said Brown, who lives in Hillsborough, North Carolina. “Having that familiarity led me to look more closely at the passenger vehicles. The new clean diesels are quiet, efficient, and the fuel is available, so I don’t see much downside.”

Newfound acceptance of diesel is boosting sales after the technology all but disappeared from the U.S. over the past two decades because of loud engines and health concerns related to the exhaust. Mercedes, Volkswagen AG’s Audi and luxury leader Bayerische Motoren Werke AG are now promoting diesel after falling behind Toyota Motor Corp.’s Lexus on hybrids.

Daimler AG’s Mercedes will present a diesel flagship S- Class at the Detroit Auto Show next week. The four-wheel-drive model, which gets about 35 miles (56 kilometers) per gallon, will go on sale in the second half and mark the brand’s fifth U.S. diesel model. Mercedes targets offering eight diesels in the U.S. by 2014, product management vice president Philipp Schiemer said in an interview.

“We don’t have to push diesel anymore,” he said. “Our expansion is being driven by customer demand. The customers who have tried diesel don’t want to switch back.”

Shares Advance

Preferred shares in Volkswagen, which also sells diesel models in the U.S., rose 3 euros, or 2.4 percent, to 127.85 euros in Frankfurt. Daimler fell 0.1 percent to 54.53 euros.

The widespread introduction of ultra-low-sulfur diesel in 2006 and components to filter out soot and remove smog-causing nitrogen oxides from emissions spurred German carmakers’ effort to sell Americans on the technology. The fuel’s availability has also improved, with 52 percent of U.S. stations offering diesel in 2007 compared with 35 percent in 1997, according to a 2010 study from trade group Diesel Technology Forum.

Diesel’s higher energy content helps engines burning the fuel go farther per gallon and emit less carbon dioxide. The BMW 3-Series diesel gets 36 miles per gallon compared with 28 for the gas version. BMW and Audi re-entered the U.S. diesel market in 2009, four years after Mercedes.

Sales Surge

U.S. diesel car sales in 2009 surged 20-fold to nearly 160,000 vehicles, after chalking up about 8,000 deliveries in each of the previous two years, as availability of the German carmakers’ models using the fuel increased. The 2009 sales marked the first time since 1984 that more than 100,000 diesel passenger cars were sold in the U.S., according to data from U.S.-based market researcher Ward’s Automotive Group.

Diesel’s share of U.S. light vehicle sales, which includes vans, SUVs, and trucks, rose last year to 2.6 percent from 2.2 percent, compared with a decline for hybrids to 2.4 percent from 2.6 percent, according to auto website Edmunds.com.

Audi currently sells diesel versions of the A3 compact and Q7 sport-utility vehicle in the U.S. Audi plans to offer diesel in the top-of-the-line A8 and full-sized A6 sedan within two years, sales chief Peter Schwarzenbauer said in an interview, adding diesel will eventually make up a third of the A6 and A8’s U.S. sales.

New Buyers

Diesel accounted in 2010 for 53 percent of A3 deliveries and more than 43 percent of Q7 registrations, Ingolstadt, Germany-based Audi said.

“The diesel A3 has brought a lot of people into the brand - younger, well-educated buyers,” Schwarzenbauer said. “We are convinced that diesel has a future in the U.S. market.”

Lexus, the biggest U.S. luxury seller, offers four hybrids and is sticking to that technology to woo environmentally conscious buyers, said Bill Kwong, a brand spokesman in Torrance, California.

Audi, whose diesel A3 won the Green Car of the Year award in 2010, is promoting the fuel with an advertising campaign with the slogan “Diesel. It’s no longer a dirty word.” Mercedes has solicited endorsements of its diesel vehicles from actress Emmy Rossum, who appeared in Clint Eastwood’s movie “Mystic River,” and “Desperate Housewives” star Kyle MacLachlan.

Mercedes, based in Stuttgart, Germany, expects diesel will eventually account for 10 percent of its U.S. sedan sales and 20 percent of SUV deliveries, Schiemer said, adding that the carmaker doesn’t need to discount diesels to attract buyers.

‘No Shelf Life’

“The Germans are selling every diesel they ship over; they have no shelf life whatsoever,” said Rebecca Lindland, an analyst with IHS Automotive in Lexington, Massachusetts. “Luxury buyers are more aware of the benefits of diesel,” and the added cost of diesel engines is less a factor in the high- end segment.

BMW plans to continue offsetting the higher price for diesel engines, which is $3,050 for the 3-Series sedan and $5,500 for the X5 SUV, by offering a $4,500 rebate, said Joe Wierda, diesel product manager for BMW’s U.S. unit.

The Munich-based carmaker, which also promotes the technology by encouraging dealers to offer customers diesel- powered loaners during service visits, is considering offering a diesel-powered 5-Series in the U.S., Wierda said.

“The success that we’ve seen over the last year makes us even more bullish” on diesel, he said.

Volatile Price

Still, the effort to promote diesel has been burdened by the volatile cost of the fuel, which has been more expensive than regular gasoline since July 2009, according to Oil Price Information Service. By contrast, diesel in Germany is subsidized with a tax rate that’s lower than on gas. That helped diesel account for 42 percent of car sales in the country in 2010, according to Germany’s federal motor vehicle office.

The U.S. government’s spending on diesel has been focused on refitting older soot-spewing trucks and buses. With electric cars being gradually rolled out, there’s little political interest in supporting a technology that dates back to 1897.

The U.S. Environmental Protection Agency is “fuel and technology neutral,” said Cathy Milbourn, a spokeswoman for the agency. “We just want the manufacturers to meet our standards.”

Cher Balks

“The real issue for diesel cars in the U.S. is the lingering image they hold from days past, when they delivered slow acceleration, a noisy idle and a black cloud of exhaust, but this image is fading,” said Karl Brauer, an analyst with auto website Edmunds.com based in Santa Monica, California.

Even as Mercedes, Audi, and BMW make headway in the public perception of diesel, demand remains hampered by fuel availability. Cher, the star of the movie “Burlesque”, balked at buying a Mercedes diesel, even after deciding hybrid technology was “pretty much all bulls**t,” because the fuel wasn’t available in her Malibu neighborhood.

“I found out there was no diesel places near us, so if there was a fire, I would not be able to get out,” Cher told Fox News in November. Sony Pictures, which is distributing her latest movie, didn’t respond to requests to contact the star.

To contact the reporter on this story: Chris Reiter in Berlin at creiter2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net.

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