It is odd though that the $26,000 Honda Pilot comes with a nifty third seat that folds flat into the floor and the $40,000 M Class can't match it.
i don't think it is a question of money. the decision not to include 3rd row seats appears, to me, to be a comfort decision (second row is going to be much more spacious than in w163 or pilot).
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The Pilot also offers as standard equipment the locking differential feature that is an extra cost option on the M. As others have noted the new M Class is a close styling look-a-like to the Kia Sorrento but in terms of value and quality the Honda Pilot may be more threatening.
are you sure? i don't think you can get locking diff on a pilot. they have a 'limited slip' differential (like big old station wagons used to have). no locks.