Aston Martin scraps Cygnet city car after dire sales

By Rhys Jones and Kate Holton

LONDON (Reuters) - Aston Martin (:ASTON.UL) has abandoned its attempt to tap into the popularity of so-called city cars after selling fewer than 150 of its "Cygnet" model, an embarrassing blow to the struggling 100-year-old British luxury sports car maker.

A source close to Aston Martin said its two-door Cygnet, which started production in 2011 based on the Toyota (:77203.T) iQ but was marketed at three times the price, had been dropped from the company's line-up after dismal sales of the 32,000 pound ($51,500) vehicle.

Aston had hoped to sell up to 4,000 Cygnets a year to environmentally conscious city dwellers thought to be keen on a small, easy to park, luxury vehicle. But buyers were put off by the Cygnet's high price, particularly since it lacked the characteristic performance of a brand that achieved fame with the DB5 sports car featured in 1960s James Bond movies.

"The Cygnet was intended to catapult the brand into a new market but at roughly double the price of many competing cars in that segment, it was misjudged by Aston Martin," said Ian Fletcher, an automotive analyst at research consultancy IHS.

"The premium supermini market is a good place to be at the moment but Aston got it wrong in thinking putting a grill and a fancy interior on what was basically a Toyota iQ would make people buy it."

European carmakers have recently done well out of producing high-end micro cars. Audi's upmarket A1 supermini is selling well, while Mercedes is considering making a luxury supermini to take on BMW's (XETRA:BMW.DE - News) successful Mini. Research consultancy IHS forecasts some 594,000 city cars will be sold across Europe in 2013 and expects this to grow to around 803,000 by 2020.

However the popular BBC program Top Gear and other car websites suggested that Aston ventured into the city car market to help it meet EU targets for fuel emissions and to justify the development of V8 and V12 engines for its high powered cars such as the DB9 and Vanquish models.

Aston Martin was not immediately available to comment.

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The luxury car maker, owned by Kuwaiti and Italian private equity groups, has struggled to grow since the economic downturn in 2008. Failing to find success when the luxury sector is growing rapidly does not bode well for Aston Martin, which also lacks a luxury SUV model - excluding it from another market that has defied Europe's recession.

Its weakness has been exacerbated by a lack of funds from its private equity owners, which include Investment Dar - a major Kuwaiti finance company which ran into trouble during the financial crisis and had to restructure $3.7 billion worth of debt. By comparison UK rival Jaguar Land Rover has enjoyed more than 4 billion pounds of investment since being bought in 2008 by India' deep-pocketed Tata Motors (NSE:TATAMOTOR.NS - News).

As a result Aston Martin's sales and profits are on the slide. It reported 2012 adjusted pretax losses of 24.6 million pounds, down from the 21.2 million pound loss it posted a year earlier. It also took an 8.5 million pounds charge related to scrapping Cygnet.

Retail volumes fell to 3,800 units in 2012, from 4,200 a year earlier, but Aston is aiming to double sales by 2016, helped by new V8-engine versions of the Vantage and DB9 models.

Those numbers stand in stark contrast to Bentley, which reported a 30 percent rise in 2012 sales, helped by new showrooms and growth in the United States and particularly China, with its large number of super-rich consumers as well as a fast-growing middle class eager for luxury western items.

Aston's withdrawal from the supermini market is particularly disappointing after Italian private equity fund Investindustrial agreed to buy 37.5 percent in the carmaker last year and raised hopes that its promise to invest $1 billion in new products and technology would boost Aston Martin's fortunes.

The Gaydon, Warwickshire-based company also teamed up with Daimler's (DAIGn.DE) high-performance Mercedes-AMG GmbH division to develop a new generation of bespoke V8 engines. That move, taken earlier this year, aimed to help it better compete with the likes of Volkswagen's (VOWG_P.DE) Bentley and Porsche units, as well as Jaguar Land Rover, which has achieved strong sales growth, especially in China, since 2008.

Both of those deals should help Aston Martin overcome its latest blow, analysts said.

"Investindustrial turned around motorcycle maker Ducati who were in trouble and have a similar history to Aston so their involvement is a huge positive, while the Daimler relationship can only help develop the technology under the skin, which is key," said IHS's Fletcher.

Meanwhile the British brand's next challenge may be just around the corner. Media reports suggest its charismatic CEO Ulrich Bez is set to step down at the end of the year after 13 years at the helm and with no clear successor.

($1 = 0.6219 British pounds)

(Editing by Sophie Walker)

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