Driving Down Car Costs

August 7, 2007

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Small, no-frills subcompact cars are already selling in India and Eastern Europe at prices in the $7,000 range. Now the race is on to sell new cars for even less: $3,000 and under.

Automakers outside the United States know the average price for a new vehicle is beyond the reach of many consumers. And hundreds of millions of consumers in China, India, Brazil, Russia and elsewhere in the world are expected to join the middle class in the coming decade.

Is it too much to assume that cars will be at or near the top of their shopping lists?

Not according to BusinessWeek, which reports that the market for low-price cars is huge, due to the global demographic shift.

"The luxury segment continues to grow, cheap cars boom, and everything else gets squeezed," BusinessWeek reports. "By 2012, the market for vehicles priced under $10,000 is likely to reach 18 million cars" — up from 12 million today — "or a fifth of world auto sales," the publication notes of Roland Berger Strategy Consultants' estimates.

When Indian automaker Tata Motors made its vow to build a $2,500 car, many Western auto executives ridiculed the project, dubbing it a four-wheel bicycle.

Tata Group Chief Ratan Tata told shareholders last year that the launch of the car would "create a new paradigm in low-cost personal transport, carve out a new market segment and reach a broader base of the pyramid," according to Rediff News. "The car will be launched in early 2008 and we believe it will be extremely attractive to the Indian consumer, particularly younger families," at a price level of about 100,000 rupees (US$2,500), Tata said.

India is Asia's fourth-largest automobile market, according to Forbes, and compact hatchbacks account for three-quarters of passenger vehicle sales, which grew 13 percent last quarter.

Auto execs aren't laughing anymore, as BusinessWeek points out.

French automaker Renault and Romania's Dacia already have a runaway hit with their Logan sedan. In 2004, the automakers began offering their bare-bones auto in Europe for just $7,200, some 40 percent less than rival sedans, and have since sold 450,000 of these models in 51 countries.

renault-logan-sedan-front.jpg The Logan is so popular, apparently, that two plants work 24 hours a day and still struggle to keep up with demand. Credit: Renault/Dacia

No doubt irritating top managers at Detroit's "Big Three" offices — whose share of the U.S. market dropped below 50 percent last month for the first time in history — the race for cheap cars is of concern to some European automakers, too. Consider the high profit margins many are used to: BMW earns an estimated $3,000 per car on average versus Logan's $400 per car, BusinessWeek quotes Ferdinand Dudenhoffer, director of the German Center for Automotive Research, as having said.

Auto companies are counting on volumes to make profits as they develop cheaper cars amid rising costs of raw materials like aluminum, adds Forbes. "The market for these vehicles could start with a quarter million units and rise to over a million, auto analyst Ashustosh Goyal at Edelweiss Capital told Forbes.

But, he added, demand would increase only if multiple automakers roll out offerings in a similar price range.

China's Geely makes a car for $3,900, and it is aiming to export the car to the U.S. by 2010.

Suzuki Motor Corp., which sells cars starting at $4,400 in India, will launch a new compact in 2008 and export it to Europe.

Korea's Hyundai Motor is offering its Santro for $6,300 in India. The company will also export cars to Europe, Russia and Latin America.

In Japan, Toyota is working on a car with an expected price of under $7,000 that could enter emerging markets such as India and Brazil by 2009.

General Motors intends to use its Korean subsidiary GM Daewoo to design a model that also will sell for about $7,000.

Chrysler is developing low-cost cars with Chinese manufacturer Chery.

Mitsubishi Motors Corp. is developing a low-priced car for emerging economies in Asia based on the automaker's fuel-efficient Colt, writes Bill Belew, writer for PanAsianBiz.com, at Rising Sun of Nihon, a blog covering Japan's economy and industry. Belew cites The Nikkei Weekly in anticipating the car's price to be about $8,000.

Volkswagen, Fiat and Peugeot have also vowed to build cut-rate Logan-killers.

Low-cost cars are "the single most important trend in the automotive industry today," according to Vikas Tibrewala, the Paris-based executive director of the Monitor Group consultancy. "Automakers will have to live with a trend of lower-cost vehicles. It is difficult but that's where the demand is," David Nicholas (Nick) Reilly, president of GM Asia Pacific, told BusinessWeek.

Some big questions remain, though: Will quality for these basic cars be up to par? Will the cheap and compact cars be able to combine modern comfort with safety and reliability at a fraction of today's cost? Will car consumers — especially in the U.S. market — let skyrocketing fuel prices drive their car-buying decisions?

Resources

The Race to Build Really Cheap Cars by Gail Edmondson, with Ian Rowley in Tokyo, Nandini Lakshman in Mumbai, David Welch in Detroit, and Dexter Roberts in Beijing BusinessWeek, April 23, 2007

Top 10 Best Small Cars Gayot.com, May 10, 2007

India's Model T: Tata's $2000 Car Out by 2008 by Rob Katz NextBillion.net, June 26, 2006

Mitsubishi Plans Low-Cost Cars for Emerging Markets by Bill Belew The Rising Sun of Nihon, May 12, 2007

Other

Automotive – Business History of Manufacturers, Suppliers

Plenty of Smiles per Gallon Richard S. Chang The New York Times, April 20, 2007

Chevrolet Corvair

U.S. Automakers Market Share Lowest Ever by Tom Krisher The Associated Press, Aug. 1, 2007

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