Should BMW buy Mercedes?

German luxury car manufacturers BMW and Mercedes are riding the crest of a wave, growing richer as they sell more and more premium vehicles to traditional and emerging markets around the world.

But increasingly effective competition from Audi, Lexus, and Porsche, is ganging up against the traditional market leaders, and according to a report from investment banker Morgan Stanley, the interlopers have two ace cards which are likely to become ever more powerful.

Audi is owned by German mass car maker Volkswagen, and Lexus by Japan's gigantic Toyota. This means that the cost of many basic components like engines, transmissions and components, which are used under the skin of ordinary as well as exotic machines, can be spread over huge numbers of vehicles allowing the interlopers what could be a killer long-term cost advantage.

And there's another huge cost problem looming over the horizon.

New rules expected from the European Union will force all car manufacturers to raise the fuel efficiency of their engines in the name of saving the planet from global warming caused, it says, by excess carbon dioxide (CO2) from energy in general and cars in particular. This will mean another hugely expensive investment which will inevitably cost BMW and Mercedes more per car than its massive rivals, giving Audi and Lexus another cost advantage.

Morgan Stanley, in its report, paints a chilling picture of BMW and Mercedes parent company Daimler's prospects. More at Detroit News