Tesla's Model Y was a game-changer in the auto industry, blowing away fusty old manufacturers to become the bestselling vehicle globally. Now the world's top luxury car brands are fighting back.

In recent days, BMW and Mercedes-Benz have revealed new electric sport-utility vehicles -- a category dominated by the Model Y -- that will test car buyers' appetite for expensive European brands at the same time technology from the U.S. and China increasingly sets the auto industry's agenda.

The fruits of billions of dollars of investment, the SUVs will travel farther and charge faster than most of today's electric vehicles. They will also put smartphone-inspired technology at the heart of the vehicle, allowing drivers to connect to cutting-edge artificial intelligence on the go and manufacturers to send more software updates remotely.

Mercedes took the wraps off its electric GLC in Munich's former royal palace on Sunday, ahead of IAA Mobility, Europe's most important car show. Two days earlier, BMW Chief Executive Oliver Zipse had showed off the company's new iX3 at an event he called a "once-in-a-lifetime moment" for his team.

"When else do you get to reimagine a brand like BMW from the ground up?" Zipse asked the crowd.

Whereas Tesla developed much of its technology in-house, the German companies are relying on partnerships with Silicon Valley to turn their vehicles into giant smartphones on wheels.

Chip designers Nvidia and Qualcomm are helping Mercedes and BMW, respectively, to achieve a higher level of autonomous driving. The so-called virtual assistant in the new Mercedes GLC can do everything from find nearby restaurants to open the windows, thanks to AI from Alphabet's Google and OpenAI's ChatGPT.

The Model Y upended the auto industry when deliveries started in 2020, taking the slick EV technology introduced in Tesla's Model 3 sedan to the increasingly popular crossover category. As Tesla increased output at new factories in Texas and Germany, the product raced past the Toyota Corolla to become the world's top-selling nameplate in 2023.

To compete, legacy automakers rushed out rivals such as Ford's Mustang Mach-E and Volkswagen's ID.4. But early imitators typically failed to match the Model Y on range, cost or software smarts, leading to slow sales, particularly as EV mania faded in 2024.

Set to reach U.S. showrooms next year, the new iX3 and electric GLC are among the most comprehensive efforts yet by old-school automakers to redesign vehicles around software, rather than the mechanical engineering that made them household names.

The luxury SUV charge from Germany comes at a moment of weakness for Tesla, particularly in Europe. This year, the U.S. company's sales have fallen by roughly one-third in the region, following CEO Elon Musk's embrace of right-wing political activism and the retooling of its Berlin factory for an upgraded Model Y. The facelift hasn't yet shown signs of reigniting growth.

At the equivalent of roughly $80,000 in Germany for the BMW iX3 in Europe, the German SUVs will be more expensive than the Model Y, which starts at roughly $60,000 for a long-range version. While Tesla initially recruited drivers from luxury brands, Musk has lowered prices toward mainstream levels in recent years to hit aggressive sales targets. (Mercedes hasn't yet announced the price of its electric GLC.)

But the companies still compete for more affluent, tech-forward consumers. In the U.S., BMW is already attracting the most "Tesla defectors," the company told investors in July.

The new iX3 and electric GLC will run for 497 and 457 miles on a single charge, respectively, based on European testing. That compares to 387 miles for the long-range Model Y, which was upgraded earlier this year. The German models also feature higher-voltage powertrains that, given the right infrastructure, should allow faster charging than the Tesla SUV.

The digital technology that makes them "smart" will gradually be rolled out to the rest of the companies' products -- including those with internal-combustion engines.

Europe's prestigious car brands have a lot of catching up to do, according to a recent "digital automaker index" by consulting firm Gartner that put Mercedes and BMW in 13th and 14th places, respectively. That was slightly lower than last year, after two new Chinese brands, Xiaomi and Li Auto, entered the league table with high scores. Tesla was at the top of the list.

The latest EVs should improve the rankings of BMW and Mercedes, said Pedro Pacheco, the report's author. The index tracks the digital capabilities of cars on the road, not those in development.

The iX3 debuts an entire family of vehicles that BMW calls its Neue Klasse, or new class, echoing a previous Neue Klasse that saved BMW from near-bankruptcy in the 1960s. Zipse has described the project, which cost well over EUR10 billion, equivalent to more than $11.7 billion, as the single biggest investment in the company's history.

A similar project has been underway at Mercedes. Together with a small sedan launched in May, the GLC SUV marks a fresh start for Mercedes EVs after a series of flops under the "EQ" badge. For the GLC and successor models, the company is moving back to classic Mercedes designs and vehicle names.

Volkswagen Group, which owns Porsche and Audi, is lagging behind Mercedes and BMW in upgrading its digital technology. Last year it tried to accelerate by forming a joint venture with U.S. EV maker Rivian, following a similar deal with XPeng in China.

In China, the world's largest car market and a crucial source of profit for German automakers, the new iX3 and GLC will feature digital assistants powered by local tech champions Alibaba and ByteDance, respectively. German brands have lost market share to technologically sophisticated Chinese EV makers in recent years, prompting them to adapt to local consumer tastes.

"They grew up faster than everyone thought," BMW's Zipse said in an interview.

Increasingly, Chinese automakers are bringing their high-tech approaches and low prices to Europe, too. This month, XPeng started shipping a new version of its long-range G6 EV, a small SUV packed with the latest digital technology, for EUR47,600, equivalent to roughly $55,800, in Germany.

"Have I seen anything in the Neue Klasse or the new Mercedes models that will make the Chinese scared? No," said Steve Fowler, an industry consultant and car reviewer.

The German players remain more cautious in their approach to vehicle autonomy than Tesla or their tech-forward Chinese competitors. While driverless so-called robotaxis are at the top of Musk's agenda at Tesla, Zipse said BMW would "rather have the impression that we're lagging something and not one casualty."

When it starts shipping to the U.S., the new iX3 will drive itself under supervision on highways, but automated urban driving will only be rolled out gradually.

"I have my doubts about whether German brands can regain the advantage they had in the diesel and gasoline era," said veteran analyst Jürgen Pieper. "It was a phenomenal position they had, and I don't see it coming back."