Eddielogic

– Thoughts on Strategy and Management

Low Cost Cars

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When reading the FT today I discovered a piece of information, which – when put together with some other things – seems to form up a very interesting bigger picture.
It was in an analysis of the success of Indian companies in global markets and it said that Indian Tata Motors has a “one lakh car” project. “Lakh” is a unit of 100,000 and in this context means that Tata wants to build a car that can be sold for the price of 100,000 Rupees. That is a bit more than USD 2,000! I had to do a bit or research here because I don’t know anything about Indian car prices. According to this list from March 2006, prices for new cars start at Rs 2.19 lakhs, the majority is between 4 and 17 lakhs and some foreign cars such as Mercedes Benz are well beyond that. So the “one lakh car” is as impressive as it seems. One lakh is less than half the price of the most inexpensive car sold in India today.
As the FT writes “… Tata Motors plans to cut costs by changing the supply chain, among other measures. Rather than trucking finished cars from the factory to the dealer, for example, the company will ship kits en masse to warehouses where dealers can pick them up.”

As it happens, only two and a half weeks ago Toyota had revealed its plans to build a low-cost car undercutting Renault’s emerging-market Logan. According to Toyotas president Katsuaki Watanabe “Everything from design to production methods will be radically changed and we are thinking of a really ultra-low-cost way of designing, using ultra-low-cost materials, even developing new materials if necessary”.

The third piece that fits this picture is the Renault Logan car, produced in Romania, which is already a success. This car is targeted at emerging markets like Russia and China, but is also sold in western Europe. It is not the big hit in western markets so far, nevertheless, sales figures toped expectations (which were admittedly low).

So what is all this going to tell us? I don’t think that we will see a massive market shift towards low cost cars in developed markets like Europe or the US. Experience shows that car buyers are very price sensitive in these markets. However, they are looking for “value for money”. Most attempts to introduce low cost cars failed because low cost meant small, low power, little standard equipment, even little safety relevant equipment and poor design.
On the contrary, if the efforts described above will finally succeed, the effect will be much wider. Especially Toyota and Tata (and to a certain degree Renault) will than develop a considerable position in specific low cost market segments. This will give them economies of scale and cosiderable experience. In a second step, they will be able to transfer this experience from their new car concepts to their models targeted at all other market segments.
Both, Toyota and Tata plan to go far beyond the usual cost cutting exercises. They are willing to radically change the way cars are developed and produced. If this is working for low-end cars, it is a logical step to apply these new materials, processes and the like to their total operational system, including up-market products. This could give both companies an advantage similar to the lean production system invented by Toyota years ago. They may finally be able to deliver all their cars at lower prices, without compromising the levels of design, quality and equipment customers are used to. Tata might even feel to be in a position to enter global car markets, as the Chinese are trying to do today.

If this happens, the threat for the traditional mass car manufacturers could be really dangerous.

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One Comment

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