Mercedes-Benz is likely to follow its high-end German rivals into the market for premium subcompact cars, but it will have to keep its costs down and volumes up to make money off any future miniature Mercedes.
It has yet to launch a subcompact - a class of cars best known for mass-market models like the Volkswagen Polo and Renault Clio and Opel Corsa.
Traditionally, margins in the sector have been tight and buyers motivated by value - but Audi's A1 and BMW's Mini have shown that even drivers of subcompacts will pay a premium for quality and style.
While Daimler makes the tiny Smart "microcar" - a class even smaller than a subcompact - the smallest actual Mercedes is its A-Class, a family car that competes with BMW's 1-series and Audi's A3.
A report in German weekly Focus on Sunday said Daimler was planning to position a new Mercedes model due in 2016 above the Smart, with technology to be based on the flexible A-Class architecture and with engines from French ally Renault .
A spokesman declined to comment on the Focus report but said: "We've never made a secret about the fact that every once in a while we examine whether there is room below the A-Class for another Mercedes model."
Mercedes already has its hands full this year with model launches including the new CLA four-door coupe, the flagship S-Class limousine and a major facelift of the E-Class.
THE RISK OF GOING SMALL
The subcompact segment was the last remaining bastion untouched by German premium brands until Audi launched the A1 in 2010.
Originally investors were concerned that an Audi built off a Volkswagen Polo platform would not be embraced by upscale car owners. Moreover, it risked diluting returns, since a general rule of thumb in the industry is the smaller the car, the lower the profit margin.
But careful price positioning and a well-thought out concept that clearly differentiated the A1 from its Polo sister proved that premium no longer is a function of size.
"This is the exact same discussion we had when premium brands moved into the compact segment. The days when you could have destroyed a premium brand's image with a subcompact are over in Europe," Ulrich Winzen, chief analyst at market forecaster Polk in Germany, adding the cars themselves have grown over time anyway.
"When you look at the space in the passenger interior or measure the outer dimensions, today's small cars are roughly the same size as a compact car was 10 or 15 years ago," he added.
HELP FROM RENAULT
Stefan Bratzel from the University of Applied Sciences in Bergisch Gladbach, expects Mercedes would need the help of its allies Renault and Nissan to create a strong enough business case for a subcompact.
"It's a very competitive market with much smaller margins so you need a very slim cost base and sell a high volume in order to be profitable. You can only realistically achieve this with a partner like Renault-Nissan," said Bratzel, who runs the Centre of Automotive Management at the university. -Reuters