Ever since the first car turned a wheel, automakers have dreamt of producing low-cost cars to mobilise the masses. The recent success of the €5000 Renault Logan has forced rival companies to rethink their attitudes to emerging markets and to question their own processes in the search for truly cost-competitive products. In a landmark study Ricardo Strategic Consulting has analysed every fundamental of lowcost car design, production and distribution. Here, Tony Lewin looks at the strategic recommendations for a market that analysts say could grow to 9 million units by 2025
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There were many sceptical comments when Renault announced in 1998 that it was considering developing a car to sell at €6000 in emerging markets. Some doubted whether a car could possibly be built for such a low price; others openly questioned whether there would be sufficient demand for such a vehicle.
Still more commentators scratched their heads when Renault revised the price target to €5000 – at the then-prevailing exchange rate an even more challenging objective. But now, the remarkable success of the Logan under both its Dacia and Renault brand names has quickly silenced those critics. Upwards of 115,000 units were sold in the twelve months since production began in September 2004, most of them in eastern and central Europe.
The biggest surprise, however, was how eagerly western European buyers took to the model following its introduction in France, Germany and Spain in June 2005; almost 6000 took delivery in just three months.
The signs were so encouraging, in fact, that Renault managers soon raised their forecast for 2010 Logan production levels from 700,000 to 1 million units a year; at the same time, plans were advanced to bring other plants on stream to complement the markets, the middle east or Africa.
In arriving at these conclusions the researchers took into account the very different car purchase priorities in emerging markets: lower incomes and harsher conditions in these markets mean owners keep their cars for up to eight years, rather than swapping them after two or three, as is the case in the west. Thus purchase price, durability and ease of servicing are 200,000 unit Dacia facility in Romania. Already, production is underway in Russia, Morocco and Columbia, with India, Iran and Brazil set to join the list in 2006.
It seems, then, that Renault has hit upon the magic formula to enable it to offset the stagnation of western territories with profitable penetration in emerging – and thus growing – markets. And, inevitably, all the other automakers are looking closely at the Renault template to see how they, too, can get in on the low-cost car act.
Market potential
The study conducted by Ricardo Strategic Consulting in conjunction with the Aachen-based ifk and fka institutes does much more than examine the €5000 Logan’s value chain, fascinating though this is. Crucially, the report delves much deeper into the market fundamentals to assess the likely demand for lowcost cars and their derivatives – and the results show significant potential for large sales volumes.
Most remarkably, the study’s authors say that their estimate of a potential demand of 8.9 million €5000 cars by 2025 is a “very conservative” one which does not include western markets, the middle east or Africa. In arriving at these conclusions the researchers took into account the very different car purchase priorities in emerging markets: lower incomes and harsher conditions in these markets mean owners keep their cars for up to eight years, rather than swapping them after two or three, as is the case in the west.
Thus purchase price, durability and ease of servicing are top priorities: fuel consumption, performance and standard equipment hardly figure at all. Important, too, is the cost of ownership. Affordability goes beyond purchase price, say the authors; running costs are a key part of the equation. Incomes in the target countries are between a quarter and one-tenth of those in western nations, according to the report: whereas prices of western small cars tend to begin at around €10,000, in Russia 90 per cent of all new car sales in 2003 were of vehicles costing less than that figure. The conclusion: these markets are highly price sensitive and a low entry price is critical to reaching the growing numbers of middle-class people that are the target customers.
As for the vehicle itself, it will be the only vehicle in the household. Having to do double duty for both passengercarrying and business work, it has to be large, rugged and simple, according to the authors, with plenty of passenger space and a large trunk.
The low-cost business model
Many different approaches have been tried in the quest to produce a medium-sized, low-cost car suitable for world markets. Fiat’s Palio family was developed from scratch, though using many proven components; Ford’s Ikon for India is a de-specified western Fiesta, while Tata – also of India – has sought to up-spec its domestic Indica small car for international sale.
A fourth tactic is to revitalise an old design and build it under licence – an old-fashioned approach made famous by Lada’s continuation with decades-old Fiat cast-offs or Daewoo’s use of old Opel designs. Whichever route is chosen, however, the task is the same: to sell a car at €5000 requires a cost reduction of more than 50 per cent across the whole of the value chain – from the very first touches of the designer’s pen to the final handover to the customer. As the Ricardo report puts it, “this requires pulling all the cost levers, forcefully.”
The target demands much more than careful sourcing of components and efficient manufacturing: absolutely everything must be looked at with a fresh eye. Take design, for instance. Not only must the design process be economical and effective in itself, it must result in a vehicle which is economical in materials and simple to build and repair. Manufacturing, likewise, clearly needs to be situated in regions of low labour cost and with low levels of automation to keep overheads to a minimum.
These, however, are only a few of the most obvious factors influencing the final cost of the vehicle. Taken in isolation, they would shave only a few per cent off the car’s asking price. To halve the cost of the car requires a far more fundamental investigation of everything that goes into the vehicle’s make-up: accordingly, the Ricardoifa/ika study goes into the detail of every process, every policy and every nut, bolt and washer in search of potential savings. In some areas the savings are impressive – over €400 can be saved by specifying a simpler powertrain, for instance, and simpler plastics can halve the cost of an interior – but most of the cost reduction is achieved by painstaking rethinking of materials and a huge number of small details.
No saving is too small to be ignored. Choosing a plain, flattish backlight instead of a complex, curved rear screen can cut the glass bill by eight euros, for instance, and eliminating highstrength steel from the body design saves a further three. Euro by euro, the component-cost savings made at the design stage add up, leading to a total potential saving of almost €1400 compared with the typical Germansourced B-segment car.
Sometimes the savings have a virtuous circle effect, too. Eliminating some of the electronic equipment found on upscale cars saves not only the cost of the devices themselves but also allows an estimated €66 saving because the wiring harness is now simpler; the power generation system can be de-specified, too, as the current demand is lower, there are fewer sensors and the ECUs can be less sophisticated as they have fewer functions to carry out. (see table below)
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Manufacturing
Renault’s Logan provides a textbook example of how design priorities can be realigned from the very first stage. Having decided to use as many carryover parts as possible and to carry out as much as possible of the process digitally, rather than with costly prototypes, the development budget amounted to just €360 million, around one third of that expended on a typical all-new model. Renault would contend that no corners were cut, though clear savings must have been made by engineering the model with just one body type, with only gasoline engines (a diesel comes next year) and by not aiming for the full five stars in the EuroNCAP crash test.
Major savings were made, according to senior Renault executives, by not pursuing the ultimate in NVH sophistication: eliminating every last trace of wind noise, for instance, is a disproportionately costly and timeconsuming task. Having designed the car for easy manufacture, Ricardo estimates €640 per unit as a realistic build cost. This takes into account major body pressings, body-in-white, paintshop, trim and final assembly. Powertrain build is not included.
The manufacturing figure assumes production in a low cost country (labour in Romania is 5 per cent of that in Germany), low levels of automation and overheads, lean production principles and a three-shift work pattern to make the most of the fixed investment. These measures, says the report, can reduce manufacturing costs by up to 70 per cent. With design changes already having reduced the material costs from the €5200 of the reference B-sector car to €3805, an estimated further 25 per cent saving can be achieved by sourcing the items from low-cost countries. This brings the total material cost saving to 45 per cent compared with the reference vehicle.
Again, Renault’s strategy provides the model: there is only one robot at the Romanian Pitesti plant building the Logan, and of the 143 Tier-1 suppliers to the programme, 43 are local in Romania, nine are from Turkey and five from eastern and central Europe.
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Marketing and distribution
The final piece of the puzzle is the downstream activity of getting the vehicle from the factory gates and into the hands of the customer. Here, though the policy imperatives are clear, the savings are harder to quantify with accuracy. Ricardo Strategic Consulting and ika/ifa estimate that by trimming margins at the dealers, confining promotional spend to below-the-line advertising and keeping incentives to a minimum, savings of 80 per cent could be made from habitual western European sales and marketing budgets.
The biggest potential gains could, however, be offered by a move to a hub-and-spoke dealer network. In this model, the principal dealer central to region handles both sales and service, while satellite franchises in the surrounding areas undertake service activity only. The advantages are several: the dealer hub can afford to maintain a full customer-facing showroom, while the satellite service agents are close enough to provide regular customer contact.
Strategic recommendations
The evidence assembled by the study is compelling: there is clear potential in the low-cost car segment, with a global total of over eight million units per year by 2025. This is a slice of business many volume carmakers cannot afford to ignore, and with the addition of other emerging markets not included in the study the potential could be greater still. But while the demand for vehicles at the €5000 level is clearly there, it will take considerable ingenuity on the part of designers, planners, strategists and manufacturing experts to deliver such a vehicle and earn a sensible profit margin too.
Being profitable, says the Ricardo study, requires an holistic approach to the entire value chain. To reach an affordable cost structure, original thinking will have to be pursued at every stage – from design for low cost, to low-cost country manufacture and sourcing, to lean distribution and effective, targeted promotion. Renault has already shown one way in which it can be done, though some commentators continue to question the real returns the company is achieving on its investment.
Yet Renault’s task is nothing compared with that of Indian industrialist Ratan Tata. Tata has made it his mission to develop a car costing just €2000 to bring the four-wheeled message to a still broader slice of the world’s population. Even Volkswagen is tipped to be interested in the low end lowend market, with a programme code named 3-K for a roomy, simple sedan costing just €3000 to make. Yet, whichever strategy the competing carmakers opt for, each needs to be well organised, well resourced and well advised. The cars’ costs may be low, but the stakes are high.
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This article was first published in the Ricardo Quarterly Review, a publication prepared by Ricardo in association with TwoToneMedia.
