ASIA'S CARS OF CHOICE

A Mercedes -- and a BMW, a Lexus, a Jaguar and the ultimate in luxury, a Rolls-Royce -- are, of course, much more than a means of getting from point A to intersection B. They are symbols of status. Malaysian Prime Minister Mahathir Mohamad and his deputy, Anwar Ibrahim, move around in white Benzes. Taib Mahmud, chief minister of Sarawak, has a sky-blue Rolls. Hong Kong businessman Richard Li, son of billionaire Li Ka Shing, likes a Lexus. Indonesian tycoon Mochtar Riady prefers a Nissan President. Luxury cars also make a lifestyle statement. Hong Kong socialites Kai Bong and Brenda Chau flit from party to party in a pink Rolls with a chauffeur in matching livery.

For the rest of us, posh cars are a badge of success. In Asia, that means the owner is making loads of money. "Our client profile here is a little different from those in Europe and the U.S.," says Singapore-based Michael Leitner, managing director of Mercedes-Benz Asia. "Our customers in Asia are usually richer." They have to pay more than almost anywhere in the world because many Asian governments slap punitive tariffs on imported cars. In Kuala Lumpur, a Mercedes E320 sells for $180,000. You can buy the same model for $45,400 in the U.S. -- and $50,885 in Germany, the 15% sales tax included.

So the Asian market's luxury segment -- high-performance cars priced at $31,000 and higher -- must be small, right? You'd be surprised. In Singapore, where people must bid for a Certificate of Entitlement to buy a vehicle, more than a fifth of the 32,000 passenger cars sold last year were high-powered marques. The proportion in Hong Kong is even higher: 27.5% -- nearly 5,000 new Mercedes Benzes, BMWs, Volvos and Lexus cars every year. "In Singapore, we now have 15% of the total market," says Leitner. "In our home country, Germany, we have a share of 9% -- and Mercedes-Benz employees account for about 4% of that."

To be sure, Singapore and Hong Kong are small markets. But Japan (cars sold in 1995: 4.4 million) and South Korea (1.1 million) are not. And luxury wheels have yet to roll in a big way into China and India. Then there is the potential of Malaysia and the Philippines, where posh cars make up less than 4% of the total market. That's why the world's luxury auto makers are targeting Asia. "It's quite obvious that growth rates in established car markets like Europe and the U.S. are not high anymore, not in our segment and not overall," says Bernd Pischetsrieder, chairman of Munich-based BMW AG. "We see Asia definitely as a top priority."

The German maker is introducing the region to its new 6- and 8-cylinder mid-range 5 Series cars. The BMW Z3, the roadster James Bond drove in last year's Goldeneye, will be launched in Hong Kong this month. Rival Mercedes started marketing its revamped medium-size 6-cylinder E-Class line in Asia last October and is now accepting orders for the SLK convertible. "But people will have to queue for a long time," says Leitner. "It's sold out for the next two-and-a-half years." Meanwhile, the new 6-cylinder Lexus ES300 has arrived in Asian showrooms. Coming soon: Jaguar's XK8 coupe, Porsche's Boxster sports car and Rolls-Royce's 1997 models. (The new Roll-Royce Silver Spur is on our cover.)

Asia will also be a battleground on other fronts: Mercedes is expanding its product line to include small A-Class cars (expected U.S. list price: $20,000) and M-Class off-the-road vehicles ($35,000). To become a full-range automaker, BMW is taking a different approach -- it has acquired Britain's Rover Group, which makes the 1,275-cc Mini, the four-wheel-drive Range Rover and compact sedans. "We're already in the [small-car and off-the-road] markets," says Pischetsrieder. "You can rest assured we will not give them up easily." Counters Peter Fietzek, the Mercedes Board of Management director overseeing Asian operations: "The final decision for or against a product rests with the customer. Today's winners may well be tomorrow's losers."

Not that Mercedes and BMW are moving away from their core segments -- even though others are moving in. Toyota's Lexus, a big hit in the U.S. when first introduced there in 1989, is the best-selling luxury brand in Japan. Fellow Japanese automaker Nissan is positioning its Infiniti as a luxury marque; Honda is doing the same with the Acura. Volkswagen has its Audi. Even Sweden's Volvo, known for its ultra-safe family cars, is getting an image makeover. "A safe car like ours is not necessarily boring to drive," says Anders Hesselbom of Volvo Car Asia-Pacific in Singapore. "We have added a lot more performance and driving pleasure in the coupe version of our 850R sedan and other new models."

Overall, Mercedes and BMW remain the deluxe market leaders. Rolls-Royce may enjoy more prestige, but with annual production of only about 160,000 units, the British company is a niche player. So are sports-car specialists like Porsche and Alfa Romeo, whose products appeal to only a small section of the luxury market. In contrast, BMW, which makes engines for Rolls-Royce, manufactured 595,000 cars last year. Mercedes production was about 5% lower. (Counting Rover vehicles, BMW manufactured 1 million units in 1995; Mercedes targets 1.2 million units by 2001, including A-Class and other new vehicles.) For the first time, BMW overtook its rival in unit sales in the U.S., the world's biggest market: 93,309 versus 76,752. But Mercedes is ahead in Asia, moving some 72,000 autos to BMW's 60,000. Lexus is No. 1 with nearly 80,000 units sold in the region, mostly in Japan.

Japan is Lexus country. The Toyota division sold 38,647 units of the Celsior (known elsewhere as the LS400) and 23,469 Windoms (the ES300) in its home market last year. In all, Japanese bought two Lexus cars for every one Mercedes or BMW in 1995. Price is a factor: locally manufactured Lexus cars are not subject to duties. The Celsior sells for $58,900, 44% lower than the price of a Mercedes S320 and 21% cheaper than a BMW 540i. "But we also win high marks for style, performance and dealer service," says Ted Kitagawa of Toyota Motors Corp. in Tokyo.

Both Mercedes and BMW worked hard for their piece of the road. Lueder Paysen, the BMW group executive who oversees operations in Asia, recalls his days as BMW Japan finance director and later president. "We were the first Western automobile maker to set up its own distribution network in Japan in 1981," he says. "That year, foreigners accounted for only 1% of the market, about 3,000 units. Many were driven by the Yakuza." To avoid being labeled as gangster car, BMW did not sell to the mob. How? "I can't tell you, but there are ways," laughs Paysen.

"We concentrated on people who wanted to be different, on people who bought Italian suits and wore French ties," he continues. "We focused on positioning BMW not just as a means of transport but as an attitude, a feeling." Some models were modified. "Mr. Paysen often came up with proposals that we found crazy," says chairman Pischetsrieder. "But we went ahead because he said it was what Japanese wanted." One innovation: a pull-down flap in the front seat. "In Japan, many of our customers like to put their feet up," says Paysen. "So we designed an opening in the front for them to do that." BMW also paid special attention to the back seat. Japanese and other Asians like to be chauffeured, unlike Westerners, who prefer to do the driving themselves.

Japan's car market is now relatively open -- tariffs on imported cars have been cut to be in line with the rates in Western countries. "We now target the mainstream successes, the businessman, the entrepreneur and the well-to-do employee," says Paysen. What has not changed is the emphasis on after-sales service. "We have a data bank of all our customers," says Paysen. "It's not enough to sell the best product. We have to offer the exclusive service that our customers expect of us."

Both BMW and Mercedes hope to replicate their Japanese successes in South Korea, Asia's second-largest car market. High tariffs and other trade barriers have kept the luxury segment to a tiny 0.3% of the total market. "Korea has done everything to protect its car industry from imports," complains Mercedes Asia's Leitner. "It can't expect to export unlimited numbers of cars to Europe while keeping us out of its market." Still, Mercedes sold more than 1,300 cars in Korea last year.

Mercedes has a 5% stake in Korean manufacturer Ssangyong Motors, which makes a light van modeled after the company's MB100 model. "We're starting to sell this van under the Mercedes brand in other Asian countries," says Stuttgart-based Fietzek. "We are in permanent discussions with Ssangyong about intensifying our cooperation. But we have not found a common platform for activities in the passenger-car segment." The new A-Class and M-Class vehicles will start production in 1997. When the decision is made to make them in Asia, says Fietzek, "Ssangyong is one of the alternatives."

For its part, BMW thinks Korea is ready to open up, given its membership in the OECD, the rich nations' club. "Our experience in Japan is that it clearly does not help to complain about trade barriers," says Pischetsrieder, who was in Seoul last month to push BMW's Korean campaign. "A lot of them are normally related to customs and history. So you have to show [Korea's] decision makers and leaders what the product can deliver. You don't achieve that by just moaning and groaning." BMW's Korean subsidiary sold 714 cars after it opened in 1995. That number was surpassed in just the first six months of this year.

What about other markets? Taiwan and Thailand already have sizeable luxury segments. Car makers believe Singapore and Hong Kong are saturated. The luxury segment in Indonesia is a high 20.6%, but that may be because mass-market cars are still beyond the reach of ordinary citizens. Things are changing, though, with the entry of cheap models like the Timor, the controversial Korean-made Indonesian "national car" backed by President Suharto's third son, Hutomo Mandala Putra.

Pischetsrieder and other foreign car makers do not approve of the the way Jakarta is developing its car industry. "Steps like the Malaysian and Indonesian people's car concept are not supportive of free trade," says the BMW chief. Malaysia has built a national car industry around the Proton Saga, a local car that borrows heavily from the know-how of Japan's Mitsubishi. (Proton may enter the luxury stakes: it reportedly reached a preliminary agreement last week to acquire British sports-car-maker Lotus.) Mercedes, BMW and Volvo have set up local assembly plants in Southeast Asia, where tariffs on foreign cars can be prohibitive. "In Malaysia, an import duty of 42% is imposed on car kits," says Pischetsrieder. "If you import a complete car, the duty can exceed 250%."

All three European firms have plants in Indonesia, Malaysia, the Philippines and Thailand. In addition, Mercedes has a facility in Vietnam and a passenger-car venture with Tata Engineering and Locomotive in India. BMW, which also assembles cars in Vietnam, plans to build a factory with the Hero Group in India (see interview, page 50). Mercedes and BMW are also looking at China, potentially the world's biggest car market. Mercedes already makes engines, buses and heavy trucks there.

Perhaps because their mass-market divisions dominate Asia's highways, Japan's car makers do not seem very interested in the region's luxury competition. Lexus, which has no dealer network in Southeast Asia, China or Korea, is focusing on the U.S., where it sold nearly 79,000 cars last year, 2,234 units more than Mercedes. Nissan is also concentrating on America, where it sold 58,700 Infiniti autos (U.S. list price: from $30,000) in 1995. "We also compete with Honda's Acura," says Saito Masataka, a corporate communications executive at Nissan in Japan. In 1995, Americans bought 97,000 Acura cars (from $22,000).

How big a threat are the Japanese? "In Europe, the luxury models of Nissan, Honda and Toyota never made a great impact," says Pischetsrieder. "In the U.S., we had a big problem with their [low-price] strategy, but BMW is now in a very good position against them." For his part, Fietzek concedes that Mercedes initially lost market share to Lexus, which had 11% of the American luxury segment in the early 1990s. "But as of August this year, its share has gone down to 8%," he says. "Mercedes-Benz, BMW and Volvo have now reached nearly the same market-share level of 10%."

Launched in the late 1980s, the Asian autos have yet to establish a strong identity as a luxury marque. Image is everything in the deluxe business, and the Europeans have had decades to build their franchise. Their products may be slightly modified to suit local tastes. "But the character of the car must not change," says Pischetsrieder. That is why BMW bought Rover instead of relying on internal growth to become a full-range car maker -- it does not want to dilute its brand. But Mercedes, whose tri-star logo also adorns buses and trucks, does not share its rival's concern. "The A-Class customer of today may well be the S-Class customer of tomorrow," argues Fietzek. Whoever is proved right, one thing is sure. Asia and the rest of the world are in for a great ride. Vrooom.

-- With reporting from Tokyo, Singapore, Hong Kong, Kuala Lumpur, Jakarta, Bangkok, Beijing and Seoul