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ZippyDSMlee's picture
Joined: 2006-09-30

[QUOTE]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 And outdated, stripped-down models won't do.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.

So far this year, every major carmaker has announced its own 21st century Model T project. Toyota (TM ), Volkswagen (VLKAY ), Fiat (FIA ), and Peugeot have all vowed to build cut-rate Logan-killers. General Motors Corp. (GM ) intends to use its Korean subsidiary, GM Daewoo, to design a model that will sell for about $7,000. Chrysler (DCX ) is developing low-cost cars with Chinese manufacturer Chery. Korea's Hyundai Motor Co. is making India its global hub for small-car production and expects to double its output to 600,000 cars annually by yearend, many of them destined for Europe. "Automakers will have to live with a trend of lower-cost vehicles. It is difficult but that's where the demand is," says David Nicholas (Nick) Reilly, president of GM Asia Pacific. The average retail price for many compacts will probably sink to $9,000, while minis will go for around $7,000, Reilly predicts. That's about 15% below current model prices.

Car manufacturers, of course, have always sought to cut costs and pack more value into each new-model generation to stay competitive. But now, emerging markets like India offer cheap engineering, inexpensive parts-sourcing, and low-cost manufacturing. For its new car, for example, Tata should be able to slash the cost of the engine to about $700, or 50% lower than a Western-developed equivalent, says one consultant close to the company. Combine Indian brainpower with Western innovation in design, materials, and processes, and the potential exists for a quantum leap in cost-reduction without major sacrifices in quality. Tata and Renault's Indian partner Mahindra & Mahindra Ltd. are already doing engineering work for global automakers at cut-rate prices. Tata, for example, is working on a coupe for a major Western customer.

Another new factor in the low-cost car segment is the possibility of huge volumes that can drive profits. Ultra-cheap cars historically have not sold in large numbers. In 2005, low-cost cars represented less than 1% of new-vehicle sales in the U.S., according to Roland Berger. By contrast, emerging markets, which held little appeal for the major car brands even 10 years ago, now offer a volume bonanza that can make even cheap cars profit spinners. In India alone, some 1.6 million motorcycle and scooter riders are likely to buy a car over the next five years, the Berger study estimates. India's auto market is set to double to 3.3 million cars by 2014, while China's will grow 140% over the same period, to 16.5 million cars, according to J.D. Power (MHP ) Automotive Forecasting. That kind of demand makes dirt-cheap cars viable. "The real trick and idea behind the low-cost segment is to increase volume as much as possible to bring costs down," says Alfredo Altavilla, CEO for Fiat Powertrain Technologies. (Fiat signed a technical partnership with Tata Motors in February.)

What automakers learn from experimenting with discount cars may well shape how more expensive models are made. To make a success of the Logan, Renault manufactured in low-cost Romania. It developed a design that reduced the total number of parts and made assembly a cinch. It stripped out sophisticated electronics, dispensed with high-tech curved windshields, and even saved $3 per vehicle by using identical rear-view mirrors on each side. The biggest breakthrough: Renault was able to eliminate expensive prototypes and the pricey tooling involved in building them. As a result, it could move directly from digital mockup to production, an innovation that saved the French car company $40 million. Now Renault has figured out how to eliminate physical prototypes for all of its models.

Toyota is working on a bottom-of-the-line car with an expected sticker price of under $7,000 that could hit emerging markets such as India and Brazil by 2009. Toyota's management is banking on breakthroughs in new materials, manufacturing, and low-cost factories. If the Japanese company's engineers do their job, the cost-saving strategies will be deployed in everything from Corollas to Lexus SUVs. "When I asked for the low-cost development project two years ago, I wanted to see technology that would be applied to other vehicles as well," says Toyota President Katsuaki Watanabe. A prototype is expected this spring. A successful Toyota venture in this segment could "scramble all the eggs in emerging markets," says Fiat's Altavilla.

To automakers' astonishment, cheap cars are also proving to be just as popular in established markets as they are in the developing world. Renault originally expected to sell the Logan only in Eastern Europe and other emerging markets. But in 2005, the automaker started offering it across Western Europe. Buyers have flooded showrooms to get behind the wheel of the no-frills model. Yesterday's cheap cars (remember the laughably bad Yugo?) failed to take off in the West because of poor quality. The new generation of cheap cars will be sturdy and reliable and will appeal to Western consumers who want to spend money on things other than transport. "It's all about price for performance," says Frankfurt music teacher Elmar Kolle, who in November replaced his Ford (F ) Mondeo with a marine-blue Logan sedan. "I'd have to pay 5,000 euros [$6,500] more for a comparable car" from another manufacturer.

The shift to cut-rate wheels is jarring for an industry that has fixated for at least a decade on premium cars and their fat margins. BMW earns an estimated $3,300 per car on average, vs. Logan's $400 per car, according to Ferdinand Dudenhöffer, director of the German Center for Automotive Research. And when you get down to a sub-$3,000 sticker price, some experts say it'll be tough to cover the cost of the parts involved. "Any way you look at it, it will be difficult to be profitable," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.


Ah modern gaming its like modern film only the watering down of fiction and characters is replaced with shallow and watered down mechanics, gimmicks and shiny-er "people".
Incoherence is my friend and grammar my bane, which is the fulcrum of suffering I place upon others!:ZippyDSMlee

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