It’s the hottest of hot topics – but it’s open to the widest of interpretations, writes Mark Bursa. What, exactly, is a low-cost car? The Dacia Logan? Fiat Palio? Toyota Aygo? Tata Nano? Maruti 800? Lada Zhiguli? Or a five-year-old VW Golf?
The answer is all of them. Low-cost cars are the agents of growth in the global car market. German Tier 1 supplier Bosch estimates low-cost vehicles priced below EUR7,000 could reach a 13% share of the world market – or about 10m vehicles – by 2010. Consultants Roland Berger estimate annual global production of 18m sub-EUR10,000 cars by 2012. The reasons are clear. As the developed word stagnates in terms of car sales, emerging markets are driving growth. And producing cars that suit the needs of consumers in these markets is an imperative for the car industry.
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That means driving down costs to the consumer – low purchase price; low running costs. And it means driving down costs for the manufacturer in order to maximise profitability. Getting this equation right is essential – there’s less room to manoeuvre with a low-cost car, and margins are inevitably slight.
It’s clear from the selection of cars above that there are many different approaches to low-cost cars. This is because the emerging regions of the world are not a homogenous whole. The demands of car buyers in, say, Brazil, India, China and Russia differ greatly. Factors such as affluence, infrastructure, taste, tradition and nationalism all have a bearing on consumer choice.
Emerging markets are emerging at different speeds, too. Around 20 years ago South Korea had all the characteristics of China today. The young urban professional in Seoul probably doesn’t see himself as part of an emerging economy – though the poor farmer in the south of Korea almost certainly does.
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Our research, available in a full-just-auto research report, came to these conclusions:
- There is no single ‘low-cost segment’ – rather low-cost is a philosophy that can be applied to a range of different sizes and types of cars – with different price points in the marketplace. The selling price of a Fiat Linea is approximately five times that of a Tata Nano – yet both are low-cost programmes.
- Renault’s experience with Logan suggests it is possible to make strong profits from a low-cost car. Logan offers a 6% margin, compared to Renault’s average of 3%. The benefit to the bottom line for companies with a strong presence in the low-cost sectors is clear; manufacturers without low-cost programmes are at a disadvantage in the long term, especially given production forecasts of up to 18m sub-EUR10,000 vehicles per year by 2012.
- High per-unit profitability is only achievable if a large proportion of sales are for higher-specified versions of the car. It is estimated that Logan would not be profitable if cars were sold at the initial target price of EUR5,000. The fact that average price is closer to EUR8,000 is the main reason for the high profitability.
- It is extremely difficult to make a single car to suit all emerging market regions worldwide. There is some crossover between certain regions – for example, Latin America and India, or Russia and China. But even the Logan, as close as possible to finding the common ground for a ‘world car’, is probably unsuitable for China, and has required an extensive redesign (as Sandero) for Brazil and, eventually, India.
- The appeal of ultra-cheap cars such as the Tata Nano is even more limited, as these vehicles only really have any appeal in India and south Asia. If a large number of manufacturers enter this segment, it may be difficult to make a profit as volumes are finite.
- Environmental criticism of Nano is perhaps unfair, considering the substitution effect it will have on scooters, mopeds and tuk-tuks. Upgrading the Nano to Euro V or VI standards would add so much cost that the project would probably be unworkable. Likewise, in safety terms, the Nano falls short of Western standards, but in the context of India, it is much safer than a family of four travelling on a single scooter. The emerging markets need to be cut some slack here, and not be judged on Western values.
- One bonus for manufacturers designing low-cost cars for emerging markets is a surprising appeal in developed markets, providing the product is right. Logan has sold strongly in Western Europe, with low marketing and distribution costs, making for profitable business. The Tata Nano could repeat this trick, especially in a post credit-crunch, more austerity-oriented Western economic environment. Basic transportation without ostentation may be an attractive lifestyle statement – though this must be accompanied by exceptional environmental performance.
- Development of low-cost programmes is an excellent learning experience for vehiclemakers in terms of supplier management, extracting economies of scale from manufacturing and tailoring platforms to specific markets. While the Fiat Project 178 has never hit its volume aspirations, it has benefited the entire group and has led to the development of other global programmes such as Linea.
For more details on the full just-auto research report: Low-cost cars: opportunities and challenges
