Is Ford Motor making the correct decision by replacing the Ka minicar in Europe with an average-looking subcompact instead of developing an upscale product to compete with the Fiat 500 or Opel Adam?

Fiat and Opel are seeking higher profit margins by aiming at the upper part of the minicar segment and some industry watchers say Ford is missing a sizable opportunity by not following its rivals.

But I think Ford has the right strategy. Too many of Europe’s mass-market brands are trying to move upscale to squeeze more revenue from stagnant sales. But their ambitions are often too far from the reality of the market.

The Fiat 500 is an exception. The retro-styled, three-door hatchback has a 50-year heritage to help it win buyers. BMW’s Mini brand is also successful because of its long heritage.

The current three-door Ka is built alongside the 500 at Fiat’s factory in Tychy, Poland, using Fiat underpinnings and powertrains. But the Ka commands considerably lower prices because it does not have the 500’s heritage.

Ford plans to launch a new five-door Ka in Europe in two years based on the Ka Concept unveiled in Brazil last month. At 4000m, the new Ka will be longer than the current Ka, which is 3620 mm. It will be about the same size as the 3970mm-long Fiesta subcompact but will be marketed as a value car aimed at families on tight budgets who can only afford one vehicle.

The new Ka likely will cost almost the same as the current model, so it will be priced about 2,000 euros below the Fiesta. It will come at the right time for recession-hit families, particularly in southern Europe. They don’t need more upscale products in today’s economic climate.

Ford is using its global organization to offer in Europe a budget car conceived in Brazil and built there, as well as in India, where it will replace the Figo.

The U.S. automaker should be able to earn adequate margins from the new Ka by leveraging its global volume. To date only Renault with its Dacia brand has earned good profits from budget models.

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