When luxury brands start to think small, will their profits follow suit?

Prestige manufacturers are eyeing the small car market in search of new revenue. David Wilkins says they should be careful what they wish for

Aston Martin made one of the motor industry's most surprising product announcements of recent times last June. It unveiled a concept car, the Cygnet, that is a complete departure from its typical range of luxury sports cars. Beneath the same high-end trim you'd find in its larger brethren and a signature Aston Martin front grille, the Cygnet is a Toyota iQ – a tiny city car designed to go head-to-head with the Mercedes Smart. Instead of a fearsome V8 or V12 engine like you'd find on a Vantage or DB9, the Cygnet retains the iQ's compact 1.3-litre engine.

All suspicions that the Cygnet concept might have been an elaborate joke were dispelled when Aston Martin displayed the finished car at last month's Geneva Motor Show. Reports suggest that prices for the Cygnet will range from £30,000 to £50,000, and the company says that, initially at least, it will be sold exclusively to existing owners of its more typical models.

The Cygnet is only the most recent example of a premium manufacturer testing the potential to exploit its brand by selling smaller cars. Audi also had a new small car to show at Geneva this year, the A1. Based on technology from Volkswagen's Polo, the A1 is expected to compete with cars such as BMW's Mini and Alfa Romeo's Mito when it goes on sale later this year in three- and five-door forms. BMW is now also considering whether to capitalise on its success with the Mini and launch compact cars under its own name. Any 0-Series models – as the new range would logically be badged – could share under-the-skin parts with future Mini models, and also benefit from BMW's existing links with Peugeot Citroë*in the area of small car design.

But while such fresh initiatives might suggest a new trend for manufacturers of prestige cars to downsize their range, this is, in fact, a well-trodden – although not always easy – path. It would be unkind to say that the plans for the Cygnet, A1 and 0-Series represent a triumph of hope over experience, but premium manufacturers putting their badges on smaller cars have probably encountered at least as many failures as successes.

So why do it? One of the most obvious reasons is to get at more of their customers' cash. Owners of big Astons may own several cars, including a Mini or a Smart for urban journeys, and might be persuaded to buy a matching Cygnet instead. Also, the average age of premium car manufacturers' customers has traditionally been very high, but smaller, less conservative models allow buyers to be converted to prestige brands earlier in life. A further spur is that CO2, fuel consumption and other legal requirements imposed on manufacturers are often assessed on a fleet basis. From 2016, for example, car manufacturers selling in the United States will have to achieve an average fuel consumption of 35.5 miles per US gallon; selling more small cars will help the prestige brands to meet the target.

But the main motivation is probably this: premium automotive brands are extremely valuable assets. In 2009, the branding consultancy Interbrand put the value of the Mercedes brand at $23.9bn, just ahead of the estimated value of the BMW badge at $21.7bn. The Audi and Porsche brands were valued at about $5bn and $4.2bn respectively, while even Toyota's still-young luxury brand, Lexus, was valued at $3.2bn. Even if the valuation of brands is an inexact science, the power of the Mercedes star, for example, universally and instantly recognised across the world as a symbol of over a century of prestige car-making, is hard to deny. The temptation, therefore, for managers at prestige car manufacturers to make their brands work harder by extending them into new segments of the market is almost irresistible.

The problem is, unless they are handled extremely carefully, such efforts can be self-defeating. The value of any luxury brand depends heavily on its exclusivity, so the very effort to exploit such a brand by making it more accessible and applying it more widely can undermine its value.

Mercedes took its first step towards smaller cars in 1982 when it launched the Ford Cortina-sized 190 saloon, the forerunner of today's C-Class. The 190 reflected Mercedes in every aspect of its design, except its size, and, after initial doubts, it came to be accepted by even the most sceptical enthusiasts.

At almost the same time, the US luxury car-maker Cadillac produced the Cimarron, a car of a similar size to the 190 that is now regarded as one of its biggest ever flops. Buyers were troubled that it is a lightly modified version of General Motors' J-platform cars, a model family that also included the ubiquitous 1982 Vauxhall Cavalier. So its Cadillac pedigree was felt to be rather thin. A quarter of a century later, Cadillac produced a rather better car, the BLS, this time heavily restyling the Saab 9-3, which it was manufactured alongside in Sweden. Such humble origins failed to entice the executive market it was built for and production ended only three years later.

Jaguar devotees voiced a similar level of scepticism when it introduced the X-Type in 2001. At the time, Ford owned Jaguar and it became widely known that the X-Type used parts also found on Mondeos. Consequently, its pedigree was viewed sceptically from the start, despite the Mondeo being exceptionally well regarded for its ride and handling. As well as taking the brand into a completely new size bracket, the X-Type probably antagonised fans of the brand by abandoning too many other Jaguar traditions; it was the first of its cars to be available as an estate and also broke new ground with the option of a four-cylinder diesel engine. But the biggest departure was that the X-Type's engine drove its front, rather than its rear wheels (although early models had four-wheel drive, which fudged the issue somewhat). While many car buyers neither know nor care which wheels drive their vehicle, many opinion-shaping motoring journalists do. They can wax evangelical about rear-wheel drive, which, for them, is the chief technical characteristic that distinguishes interesting, sporty and luxury cars from the banal everyday models that regular people drive.

Manufacturers with an established premium brand therefore cross the great front/rear wheel divide at their peril. Even if the resulting car is very good, they are bound to harvest acres of unhelpful coverage questioning their commitment to their traditional brand values and to providing the ultimate driving experience. Mercedes got away with the 190 in 1982 because, among other features, it remained faithful to rear-wheel drive. When the company finally adopted front-wheel drive, as it did for the Golf-sized A-Class in 1998, it ran into a lot more resistance. BMW would be wise to expect similar treatment if it makes the same switch for the new 0-Series.

While the negative press from adopting front-wheel drive causes enormous headaches for premium manufacturers, it also brings benefits. The system uses space more efficiently and raises the possibility of jointly producing components with mass manufacturers using the same layout – a vital factor in the motor industry where scale can be crucial to competitiveness.