The Race to Build Really Cheap Cars

Friday, April 13, 2007

How cheap is cheap? Renault-Nissan Chief Executive Carlos Ghosn is betting that for autos, the magic number is under $3,000. At a plant-opening ceremony in India Apr. 4, he was already talking up the industry’s next challenge: a future model that would sport a sticker price as low as $2,500?about 40% less than the least expensive subcompact currently on the market. Renault-Nissan is the first global automaker to take up the gauntlet thrown down in 2003 by India’s Tata Motors, which plans to launch a $2,500 car next year. Both are leading a race to the bottom that could affect the business every bit as much as Henry Ford’s Model T did a century ago.

After years of making their mass-market cars more expensive, the world’s automakers have abruptly shifted into reverse. With stagnant growth in the U.S., Europe, and Japan, they are now eyeing emerging markets for new opportunities. That means redesigning the car for buyers who might otherwise be able to afford only a motorcycle. And outdated, stripped-down models won’t do. Demand is surging for basic cars that combine modern comfort with safety at a fraction of today’s cost. The rush to build a modern, no-frills car could do for autos what airlines like Southwest Airlines Co. (LUV ) and JetBlue Airways Corp. (JBLU ) have done for travel, and H&M and Zara have done for fashion. Low-cost cars are “the single most important trend in the automotive industry today,” says Vikas Tibrewala, the Paris-based executive director of the Monitor Group consultancy.

Whatever the lowest sticker price turns out to be, the discounting trend will hit cars across the board, from minis to SUVs. Renault already has a runaway hit with its bare-bones Logan sedan. The automaker began offering the roomy Logan in Europe for just $7,200 in 2004?some 40% less than rival sedans?and has since sold 450,000 of the cars in 51 countries. Workers at its sprawling Dacia plant near the Romanian city of Pitesti and a newer plant in Russia toil in round-the-clock shifts but still can’t meet demand. “With the Logan we have the product and we have the lead,” says Ghosn.

A $3,000 car for Asian markets, built in low-cost India with a local partner, is the next logical step. “The main weakness of today’s global automakers is that they are incapable of delivering a car that fulfills basic needs at a very low price,” says Ghosn. “The people who have these skills are in India and China.”

That realization is now dawning on the industry’s giants. When Tata made its vow to build a $2,500 car, many Western auto executives ridiculed the project, dubbing it a four-wheel bicycle. They aren’t laughing anymore. Tata’s model is a real car with four doors, a 33-horsepower engine, and a top speed of around 80 mph. The automaker claims it will even pass a crash test. And while the car probably won’t win any beauty contests, it’s no ugly duckling either, according to the handful of industry insiders who have been given a glimpse. The rest is top secret, but Tata engineers are already testing a prototype as the clock ticks toward a late 2008 launch. The key is India’s low-cost engineers and their prodigious ability to trim needless spending to the bone, a skill developed by years of selling to the bottom of the pyramid. “You have to cut costs on everything?seats, materials, components?the whole package,” says Tata Group Chairman Ratan N. Tata.

There’s no lack of potential customers: Hundreds of millions of Chinese, Indians, Brazilians, Russians, and others will likely join the middle class in the coming decade, and cars are sure to be at the top of their shopping lists. As a result, the global car market is polarizing: The luxury segment continues to grow, cheap cars boom, and everything else gets squeezed. By 2012, the market for vehicles priced under $10,000 is likely to reach 18 million cars, or a fifth of world auto sales, according to Roland Berger Strategy Consultants. That’s up from 12 million today.

Continue reading “The Race to Build BOP Cars

Source: BusinessWeek (link opens in a new window)