Friday, 27 April 2012

Industry Practice - Global VMs (Part 2) – Down-Shift Products to Scale-Up Volume & Profitability.

Previously, Part 1 introduced and expanded upon the auto-industry's more recent, necessary obsession with new product cost consciousness. Such singular strategic focus very necessary so as to try and industrially re-couple previously very separate cross-regional product offerings.

This effort to unify NPD operations ironically comes about as the result of the de-coupling of the advanced-industrial nations of the Triad 'olde worlde', and those speedily advancing-industrial nations that constitute an ever enlarging EM base; with 'established emergent' and 'newly emerging' status.

Such Triad vs EM developmental economic flux is most effectively illustrated by the ever apparent reduction of what was once a massive chasm in living standards chasm. Whilst still of course wholly evident between the top and bottom rungs of the social-ladder rungs, the fact remains that late 20th and early 21st century globalisation has elevated the living standards and aspirations of countless people across Asia, South America, the Middle East & Africa.

EM industrialisation largely replays the Western and Japanese models of yesteryear, and that of S.Korea more recently. In doing so, it has furnished lower cost goods and services to Triad markets thanks to the philosophy of intra-national competence, and has installed within EM regions self-perpetuating economic engines; comprised of: materials extraction, processing, goods production, multi-media marketing and an ever more sophisticated consumer. The foundations of the "economic miracle".

Global Product Convergence -

That convergence of national wealth and consumer expectation has in turn generated the general idiom of globalised product convergence. This most obviously seen in basic household items, fashion clothing and white and brown goods, but also increasingly evident with motor vehicle choices. The prime difference being that in such a capital intensive sector, the trend provides a basis upon which automotive VMs are able to re-utilise what were previously sunk costs in R&D and CapEx previously directed at Triad zones. That recycling of 'old' Triad technology and tooling thus able to provide seemingly new fashionable, safe and better performing vehicles to those buoyant EM zones.

In very simplistic economic graph terms; the matured Triad market demand curve has become increasing shallow, but now - at its near 'flat' end-point - been conjoined with a second EM market demand curve, which given high growth rate, shows a strong and steep gradient. This has been well understood for over a decade, and so the old-guard western and Japanese automotive companies have sought to combat the increasingly hostile Triad investment environment through global expansion, seeking to attract receptive new EM consumers by effectively 're-playing' – and critically technically re-utilising - those products and services which previously served Triad audiences.

Since 2008, it has become ever more apparent that the global macro-environment sees constrained consumption in western countries and fast paced consumer growth in the BRICS, CIVETS and remaining 'Next 11'. This trend has thus consequentially re-orientated the destination of corporate investment. But of course such decision making is not wholly binary nor wholly instantaneous. Thus we presently sit in an economic and commercial transition period, where the respective dynamics of consumer expectation and corporate capability relative to Traid and EM regions effectively overlap.

In reaction to this environment, VMs have sought to worked more intelligently, with rationalisation across the value-chain, but best illustrated by the undertaking of aver more joint ventures to provide geographic reach and the invention of sophisticated 'module-set engineering' to gain increased cost-benefits from creating a greater number of mechanical combinations. In turn, such engineering intelligence allows auto-makers to both extend the life-cycles of their newer automotive products and also recycle, with minimal changes, older cost-absorbed products. So greatly amortising the VM's overall costs, yet also able to maintain apparent product renewal and model variant choice for western consumers; seeking to maintain competitive advantage.

Such heavily cost reduced products are then able to be offered to government, fleet & private buyers in EM countries, with the additional volume gained also providing for additional cost reduction, and so product pricing flexibility.

Here then western auto-makers have sought to continue the 'recycling' of previous generation products & platforms, just as they has done previously with the many examples highlighted in Part 1.

But instead of being generally 'hands-off' as was the case, changed global conditions and opportunity require a VM to be far more 'hands-on'. Indeed to integrate 'product recycling' centrally into its strategic thinking.

They must then be able to recognise and satisfy both the similarities and differences between regions in a converging yet still disparate world; through construction of an ever more multi-faceted and intelligent corporate mindset.

Such complicated research and development requirements are masked by the apparent simplicity of the generic term 'Low Cost Car'.

Re-Cap of the 'Low Cost Car' -

More detailed description was presented in the previous web-log (Part 1)and is perhaps best recognised by Renault's impressive efforts with Dacia's base car Logan, and its spin-off variants and models which grew and ever wider Dacia range.

Yet there have also been powerful examples before and after Logan, set by Detroit and other European VMs.

GM was able to re-conquer Brazil in the early 1990s with the introduction of a more durable yet cost-down engineered Corsa small car, also expanding that base model into other Latin only models.

Later Ford re-engineered its previous 'run-out' European Fiesta hatchback to gain market-share in India, regenerating model as the Ikon small sedan. And more recently enlarged its project budget to re-design the next generation European Fiesta to become India's Figo. Overlaying the Fiesta's mechanical package with (bigger brother) Fusion like styling so as to create a more mature premium-like product.

The long established and successful operations of FIAT Brazil meant that it could effectively create its new Novo Uno 'in-market', as a ground-up 'low cost' product. It sought to design a car “for Brazil by Brazil” (and Latin America), exploiting regionally lower R&D & CapEx costs, with the project's business case expected to gain from the boosted amortisation rate derived from high volumes thanks to FIAT's sizable Brazilian market grasp. (That car is very probably due to be both exported and productionised in Italy, with its formula of affordable no-frills functionality expected to be an Italian and Southern European hit if/when released).

However, it is the Ford Figo example which demonstrates the far greater cultural market sensitivity required by VMs when adapting new product for EM ragions and devising a 'low cost' car strategy.

The rate of competition and broad exposure to western consumer trends means that the expectations of those 'deeper pocketed' middle-class EM buyers has far surpassed that of a cheap, native, homogeneous, durable, 4-wheeled box. Being well down the track of their “economic miracle” relates to ever greater product and service demands - arguably more so than the western consumer. This because such regions are effectively "buyer's markets' where achieving complete consumer satisfaction is critical for business credibility and success. Obviously then, the idea of what could be called a 'commodity car' seeking to serve the expanding and demanding EM middle-classes is almost laughable; a fact known by most, except the least informed and so most blinkered of western eyes.

Mobilising a Nation -

Of course each EM nation is unique, each sits at differing points of the 'received' economic growth path and has differing social structures – statistically and culturally: the shape of the population pyramid, levels of wealth (wealthy, middling & poor) and levels of social (and commercial) interaction between different ethnic groups. All of which comprise a socio-economic matrix. Yet, even though many EM countries tend to have greater internal 'social mosaics', the historic precedence set by the economic growth models of 20th century America and Europe means that it is well recognised that any nation's GDP growth and parallel GINI rating depends a great deal upon the advancement of its citizens' personal and private mobility.

This is being achieved by virtue of an increasing size in the middle-class, yet these are largely 1st and 2nd tier city dwellers, and make up only a fraction of any EM nation's populace. The real challenge is to mobilise the remaining millions in other lesser cities, towns and villages so as to create far greater social links, commerce and enterprise across a country.

Vehicle affordability is of course key.

It has previously been sought by creation of 'national champions' with the invite / tender of foreign manufacturers, Malaysia's Proton & Perodua, and India's Maruti prime examples, via Mitsubushi, Daihatsu and Suzuki respectively. Such created entities have proven highly effective, their successes achieved via a combination of low cost assembly, protectionist vehicle market policies from government (often for lengthy periods) and secondary assistance through state-based vehicle purchase programmes to speed financial break-even. In this way indigenous commercial success of the 'national champion' is ensured, which in turn provides for 'organic' and 'bolt-on' growth of a nation's internal automotive value chain.

This model seen in India, China, Brazil and elsewhere essentially reflects the 'low cost' car template: licensed and re-utilised technology achieving a substantially lower ex-factory unit cost and offered to the still relatively thin sliver that is the new bourgeoisie. Whilst undoubtedly important for nation and fortunate individual, the such a template cannot reach and mobilise the less fortunate 'very shallow-pocketed' remaining millions that sit within the 'bottom-tier'.

The 'Ultra Low Cost' Car -

To do so theoretically requires something akin to a 'commodity car'; very low cost, simple construction and mechanics, good durability, easy repair and minimal running costs.

Such qualities are the prime aims within the design brief of what is now known as the 'ultra low cost' car.

As its name implies, recognition that a large economic gulf exists between the newly emergent middle class of a certain financial standing and those uthers who live and work (when available) within the 'bottom tier' of society.

[NB. Whilst the very ideology of such a 'commodity car' appears exemplified by the old Eastern-Bloc Trabants, and FIAT sourced LADA's, FSO's & Polski's, given their near omnipresence, it is evident that these instead befit the 'low cost' car business model].

The massively challenging goal facing optimistic 'visionary' industrial pioneers is to create a widely accepted, popularised, bought and so successful 'ultra low cost' car.

However, such an ambition appears to obviously 'fly in the face' of convention.

Convention dictates that the automotive sector's 'natural order' is one where the ongoing manufacture of ever better new vehicle replaces a previous generation vehicle. Replacement purchase of ever newer vehicles then releases older vehicles for sale on the used car market, thus creating the typical descending staircase of market prices; each 'price point' step – latterly aided by independent pricing guides - reflects a vehicles age, condition, specification level etc. The model notionally stands true even if actual prices are highly dependent upon each nation's unique market characteristics.

So, logically, the 'commodity car' exists at the far end of this staircase, where price and pure functionality meet. Such as in the UK, where a cheaply bought old vehicle can be used as everyday commuter transport to the local train station.

However, given the importance of vehicles in EM countries, they tend to retain good residual values with merit given to brand reputation, condition and new and used parts availability - as opposed to the bias of age as is the more the case in the west.

The Mass-Mobility Exclusion Effect -

Circumstances then create a pricing sandwich where by new cars are far far too expensive for those on society's 'bottom tier' to afford even if there own manufacturing cost-floors have been reduced by way of the 'low cost' car basis. Yet also, there presently exists a nigh on static price-floor for even the majority of old used cars which still remains far beyond the means of most.

Whilst this remains the case presently, the fact that global TIV growth is heavily biased to EM regions suggests that eventually that price-floor will lessen when the availability-demand equation alters.

However, to the far-sighted EM industrial moguls, these prevailing, presently deeply embedded conditions which have thus far excluded the majority, are viewed as a central challenge to the national economic good.

To date healthcare for the masses, whilst not yet wholly adequate, has improved immeasurably thanks to government and foreign NGO efforts. Likewise, educational reform has ensured that far more of those children living below, at, or just above the poverty line do receive a basic education, so that they may be better prepared for adulthood; even if again much is still yet to be done. Public transport improvements in rail and bus have been ongoing for decades so as to mobilise the workforce. Housing has slowly improved, though of course man urban slums remain prevalent as people seek to maximise their income levels from higher paying city jobs whilst seeking low cost living areas. Yet even the slums are morphing into conventional neighbourhoods as corrugated steel is swapped for concrete, and sanitation and roadway programmes are started to better the locale. And in rural regions ongoing - though slow industrialisation in some areas - promises better paid, more stable incomes from the core of agriculture, aswell as mining, processing and assembly factory work.

Yet economic progress and so the development of a sophisticated bottom-tier consumer culture the is still largely distant, and highly correlated to population size, its educational capability, the speed of national and regional economic advancement and the bias of cultural issues such as caste, ethnicity and class.

Yet given the size of populations and the inherent inertia therein, the pace of progress seems snail-like.

Plying the Bottom-Tier of the EM Social Pyramid -

In many spheres beyond the auto-sector, and well before the financial crisis, consumer goods companies (and the supporting suppliers of materials and capital goods) have long sought additional income streams by building models which could adequately satisfy the global 'bottom-tier' customer – if he/she can be so generalised

[NB Generalisation must be viewed as overtly simplistic and very probably misleading, so may be a highly deceptive concept, given the 'real world mosaic' which exists within such a stereotype].

Nevertheless, an apparent automotive market opportunity has been identified by local and global auto-makers, the core proposition of an 'ultra low cost' car formed from observation of commercial success in the household consumables sector and social transformation ideals of the IT sector. The case studies themselves could be viewed as a marriage of 'management science fact' & 'management science fiction' given their respective real-world and theoretical origins. However nonetheless, for some years now an emerging school of corporate thought regards 'bottom-tier' opportunities has arisen. Three of the most influential influential examples have been:

1. 'Micro-Pack' Retailing
2. '$20' Laptop
3. 'Micro-Financing' Initiatives

'Micro-Pack' Retailing -

Claimed corporate successes have been achieved by staple consumer goods companies which have expanded 'product-line reach' via the offering to poorer customers the purchase of re-packaged goods into smaller quantities or sizes. Known nominally as 'Micro-Packs' they are also termed “one-hit” or “bite-size”, and span such basic consumables as washing powder, coffee, cigarettes, imported foodstuffs (chocolate/candy) etc. Typically sold through alternative informal distribution channels using local sales peoples who themselves are already respected, or command soft-power, within the community.

Such corporate initiative mimics the dynamics of local market trends that have been in-situ for decades; where local “entrepreneurs” recognising the limited spending power of people have split often (legally & illegally) imported standard sized boxes of goods and split them into far smaller pack sizes for re-sale. This multiplication then offering greater profit margins on each item sold.

There have been apparent corporate successes, but realistically most corporations still face a very tough task in circumnavigating those indigenous self-styled “goods broker” entrepreneurs. They have for decades bought goods through a well established commercial network which when 'multiplied' are sold via a network of street hawkers; often door to door. Those apparently enterprising connections also often linked to less desirable parties such as loan sharks and protection rackets.

Across the more squalid quarters of Mumbai, Maputo & Mexico City the reality of local conditions is that of an invisible but prolific 'power-centric' economic ordering; often corrupt and with powerful links to local authorities.

Hence, many large western corporations who had little previous EM 'bottom-tier' experience gained from in-market production, have woken-up to the fact that reaching-out to directly service cities, towns and communities with their own official micro-pack goods (such as cigarettes sold in packs of five, or sachets of washing powder) is far harder to accomplish given the vested interests already in place.

Thus whilst the central rules of 'simplification' and 'multiplication' could be seen to simplistically apply to automotive, as 'de-contenting', 'de-costing' & production capacity expansion, the intimacy, intricacy and 'persuasive' element of the everyday sales connection is absent.

The '$20' Laptop -

Further inspiration for auto-makers conjecture and exploration – though far more ethereal than 'micro-packs' - comes from deliberations within the electronics industry.

Specifically the 2009 announcement about the Indian “$20 laptop”. To purportedly aid the education of even the poorest and most disadvantaged of Indian school-children.

As is often the case the PR buzz masked the reality of a much smaller concept-based untested hand-held device that offered little of the original promise.

However, whilst there is at least some feasibility in building a $50 laptop by simply using low grade motherboard, processor and screen technology, there seems little direct automotive equivalent.

Simply because the rate of 'standardised' technological change and improvement is so vastly different between the electronics industry and vehicle industry. The former gains from a comparatively far greater 'linear' R&D advancement in product (largely processing) performance – as invoked by the now legendary Moore's Law. Whilst there is no similar seemingly endless exponential advancement curve for automotive, whose own industrial fundamentals were initiated a century earlier. It is to compare what is ostensibly a 1970s industry with an 1870s industry

Drawing direct parallels between the still empty dream of education boosting cheap laptops and the ideal of the cheap mass mobility car is then either inadvertently naïve or highly disingenuous. Contrary to the possibilities of personal electronics, it is not only product but indeed whole process that requires full re-invention. Not to do so only leads back to the pricing limitations – the inherent business model 'floor' that is already 'low cost' car.

'Micro-Finance' Initiatives -

These have developed over the last 15 years or so, and as the name suggests, have been created to assist those small scale typical sole traders who were caught effectively in a poverty loop whereby a sizeable portions of their daily profit was paid to their wholesale goods provider and to the owner of the vending cart or retail plot, thus unable to secure the savings required to grow their business. Their unfortunate position meant that access to formal bank loans which offered lower borrowing rates was prohibited given a bank's typical need for an asset-backed security, whilst the borrowing available from informal (loan shark) lenders is ridiculously high.

The book 'Poor Economics' notes that on average formal bank lending – as opposed to family, shop or 'loan shark'- represents under 7% of loans for the rural poor and about 10% for urban poor. State-backed lending exercises at reduced rates are often skewed to political bias or were operationally inefficient, running at YoY financial loss.

Thus, often because of local social network or intimidation pressures, usury money-lenders are by far the default port of call when the poor need external financing. However, more often than not the terms are onerous.

These circumstances then left room for the start-up of funds providers with a social consciousness and so less demanding rates of return and this different business models.

Micro-Financing Initiatives (MFI's) originated by way of middle-class individuals and groups seeking better ways to more effectively back the 'bottom-tier' populace, with the intent that such availability of small-sum capital would create a catalyst for the creation of small businesses in local communities.

Fifteen or so years on and this new financial sector, offering alternative financial instruments that rely heavily on local social inter-responsibility, has spawned many operators. Yet it has encountered problems, and is unable to grow the size of its loan book - or more likely unwilling to risk the higher exposure - as small company borrowers seek greater sums to become larger entities. The model is then successful in taking small margins from a broad worldwide customer base, but cannot provide the bridge for people to move out of their 'bottom-tier' lives.

Furthermore, its very ethos of social consciousness can be both intentionally abused or exposed to the far higher life risks that poorer people generally face. Such risks the very reason why formal banks and co-operatives do not lend to the poor and why informal lenders are able to charge such high rents.

Lending to the poor then is known to be a demanding, time consuming and often loss-making enterprise, where the cost of initial client due-diligence, monitoring and repayment administration eats into the low loan margins gained if seen to be a socially conscious lender.

Thus, even for VMs with in-house 'captive' finance divisions which appear to be set-up to expand into the 'bottom-tier', the risk exposure to lend is high, and the vehicle re-possession efforts costly.

The Visionary Challenge -

Hnece the aforementioned issues and no doubt many more indicate that the headwinds for such apparently good-willed and high-minded visionary industrialists are still immense, and appear very hard to ultimately overcome.

'Bottom-Tier' Business Learning -

Tapping into the consumer habits and aspirations of the many millions that reside in the lowest social strata may appear a tempting 'text-book' solution to achieve that magical thread of long-term profitability. And yes, there obviously exists massive numbers of poor, so necessarily thrifty customers who en mass appear to provide large-scale & small-margin commercial reasoning.

But as seen in the commercial history of household consumables, such an approach typically takes great financial muscle to achieve, even then only when a company is or has become culturally enshrined in the region, which can take decades for foreign entities. The item or service must work with the market's popular consciousness and provide a truly meaningful functional advantage, and so create a powerful emotional affect.

Even then, the instigator is open to attack either horizontally by a similar domestic or foreign enterprise, and especially from those with greater cultural or political connection or financial might.

Within this, it must be recognised that bottom-tier EM market consumers have an in-built bias toward their respective indigenous manufacturers, a natural consequence of local history, engrained by cultural roots and the protectionist or pseudo-protectionist measures that are put in place as national economies morph through different phases of a mixed economy from a communist or heavily socialist past toward a free-market economy. Yet realistically apparent 'free-market' steps are only taken when new knowledge can be obtained from external foreign parties to the advantage of a specific primary, secondary or tertiary industrial sector.

This sense of nationalism and the 'national good' tends to reside most prevalently in poorer countries where melded national, group and personal identities are far more closely coupled to a generational historicism. This exacerbated by a sense of being the global underdog and an ambition to recapture lost regional or worldwide status from a bygone age.

Beyond the cultural connection, the domestic commercial advantage is often retained by pro-domestic governance, an historical ruling elite (though under a pro-people banner) with family or keiretsu / chaobol-type holding structures across much if not all of major industries.

[NB As seen in Japan to this day, this method used to ensure that sections of corporations cannot be wholly bought or majority controlled by foreign interests – the lessons of history].

However, this industrial holding structure is criticised – typically by western bankers - as being archaic since it prohibits the wider transformative influences of entrepreneurialism and access to more broadly available capital. In contrast, those poweful business leaders and politicians across sections of Japan, S. Korea, India, China, Russia, Brazil and elsewhere view the importance of self-determination as vital, with the endemic conglomerate heirachy not as a barrier to ideas sharing and internal entrepreneurialism but as a pathway.

[NB Both philosophical corners have merit, and should ideally be combined to provide EM countries with an ethos of “Dynamic CSR” (for want of a better phrase) so that some EM countries do not take similar retrograde steps to those seen by Argentina recently with Repsol YPF].

This then gives a massive home advantage to domestic goods and service providers within that seemingly all important 'bottom-tier' consumer population.

Chasing the Ultra Low Cost “People's Car” Dream -

Nevertheless, the attraction of satisfying the 'marginalised masses' for some indigenous CEOs and executives still appeals; stepping in the footsteps of historically important others who have initiated 'people's cars'. Especially so, when such individuals lead a domestic industrial power-house, one with an engrained popular social connection and wields political influence.

That 'People's Car' path has obviously already been trod by Henry Ford with the Model T in 1908, the Austin 7 & Citroen Type C in 1922, the FIAT Topolino of 1936, the VW Beetle in 1938, the 2CV of 1948, the FIAT 600 of 1955 (also SEAT & Zastava badged), and the1959 Austin Mini.

Yet lesser known is the long distant 'ultra low cost' car path traversed by many early pioneers and established companies in the late 19th & early 20th century. Much as is being discussed today within EM spheres, they offering small light and critically affordable 'voiturettes'; also known as cycle-cars given their technical re-appropriations of bicycle and motorcycle technologies . Many names appeared, the majority Anglo-Franco initiatives, and ranged from Amilcar in France to Mascot in Sweden to Pluto in Germany to Xtra in Britain.

There is an obvious primary difference between the creators of those now legendary successful 'People's Cars' and the forgotten 'Cycle-Cars'. The former were firms led by individuals with strong financial muscle or backing, had political influence (private or as part of the national agenda), often had engrained social connectedness from established operations, played a role (subtle or less so)in social-engineering and created a self-perpetuating momentum by having its staff earn enough to buy the very cars they were building.

In contrast many, though not all, Cycle-Car companies were set-up in a manner far more like today's Venture Capital operators. Recognising the mass-market opportunity, they combining the singular attributes of different business entities from different sectors (eg bicycle makers, generator firms, hardware companies and failed aeroplane makers) to create the theoretical fundamentals of a small car manufacturing business, aided by high budget spend in newspapers and exhibitions. All had the same profiteering dream of shrinking the dimensions, specifications and so price of what were ostensibly luxury car products, to suit the motoring desires of the masses.

Needless to say given the voracious level of competition few survived their initial start-up periods, and many were consolidated to try and create volume efficiencies and grow market share. But even the most successful in Europe were themselves vanquished by the break-up of the Austro-Hungarian Empire, Europe's ensuing economic volatility and the beginnings of WW1.

The few that survived such as Britain's Morgan Motor Company relied upon the originator's own independent wealth and had the wherewithall to reposition themselves away from the previous 'commodity car' offering toward a sporting car offering afforded by the virtue of its lightweight design.

That small car space was entered by the mainstream manufacturers after WW1 who were able to ride the new economic boom that lasted between 1918 & 1929 selling to the spreading lower-middle class, and gained again when those small cars proved popular amongst all motoring types during the financially tight but optimistic 1930s.

These years saw the reappearance of 3-wheelers but this time primarily for commercial use, with Germany leading the way providing much of that engineering capability to then allied Italy and made highly evident in the post WW2 austerity and regeneration years via Piaggio and Lambretta. These companies in turn licensing their products for manufacture by India's Bajaj Auto and Force Motors which made famous for their 3-wheeled 'tuk-tuks'.

Even though cycle-cars had perished, Reliant Motors sought to revive and modernise a similar 'commodity car' genre from 1935 onward, but in 3-wheel form, offering commercial van and private car models which saw moderate success with low income buyers who has previously ridden motorcycles and were limited by the conditions regards vehicle class of their driving licences which restricted them to 2 & 3 wheelers. Whilst 3-wheel models continued to the 1980s sales declined from the 1950s onward, the company creating 4-wheeled variants from the late 1970s onward but in very low numbers, finally trying to compete in conventional niche sportscars; closing in 2001.

Thus we see that the fortune's of yesteryears 'light car' – engineered as the 'ultra low cost' car – were very much dependent upon very specific time periods of economic squeeze; with reduced cash liquidity and minimal credit availability. Their popularity boosted in such times when governments (such as French and British) saw fit to alter road-tax regimes to benefit small capacity engined cars as part of national economic renewal efforts.

Critically 3-wheeler models survived in the UK for a lengthy period because of personal transport needs of a very specific (generally older) driver type. Similarly France had a larger similar demographic who maintained the fortunes of the re-invented 4-wheeled light-car category from the 1970s to this day.

The cycle-car, light-car or 'ultra low cost' car's market popularity then heavily depends upon a mixture of low personal income and the limitations of a restricted driving licence

Modern Re-Invention of the 'Ultra Low Cost' Car -

The idea of the 'ultra low cost' car was re-born in 2003 when Ratan Tata, Chairman of the TATA Group of companies, saw fit to start a new vehicle development programme that would mobilise India's 'bottom-tier'. The project known as the “1 lakh Car” (approx $2,000) ran for 6 years, the vehicle presented in 2009 as the now famous Nano and available to the public in 2011.

With such great expectation the car created a media and public fire-storm.

Unsurprisingly the high-mindedness and ensuing massive publicity of the TATA project then saw some of its prime Indian small vehicle rivals: Maruti, Bajaj Auto and Force Motor claim that they too were developing similar 'people's car' programmes, either independently or impressively with the aid of renowned western volume manufacturers.

[NB investment-auto-motives retrospectively believes the some of these Indian companies exploited the 'Nano-mania' effect to simply attract foreign VMs with the true intent of seeking other more fundamental industrial synergies]

Thus far the only competitor to showcase a Nano-like vehicle has been Bajaj Auto with its BE60 model shown at the 2012 Delhi Auto Show. Like Force Motor, Bajaj specialises in motorcycles and 3-wheelers, so BE60 is the company's first attempt at a 4-wheeled car. Although Bajaj did indeed instigated 'ultra low cost' car talks with Renault-Nissan in 2010, the BE60 visually appears independently produced, its basic mechanical packaging and cosmetics reflecting utilitarian origins. It is then befitting that Bajaj seeks not to compete directly with Nano, but instead seeks to attract its rickshaw taxi customers into the vehicle, proffering greater comfort and safety.

Thus India now arguably has 2 'heirs apparent' to the 'ultra low cost' car throne, but neither yet can claim that distinction if the 1 Lakh price point determines the winner. Nano retails at a base car price of $2,400 whilst the BE60 is offered at $2,500.

Nano has undeniably suffered marketing, sales and so production capacity problems since launch, beginning with the under-stocking of TATA's dealer inventories' when released, cases of instantaneous combustion, and a failure to reach the predicted 25k per month unit sales figures which fills full production capacity at the Gujarat factory. The contraction in Indian consumer credit availability mid to late last year is blamed for an 85% fall in YoY sales figures in November 2011.

The vehicle is in the process of being technically upgraded so as to boost popularity, with inclusion of a broader colour palette, additional features and importantly the inclusion of a more powerful 800cc engine by which to directly match the old but iconic Maruti 800 ('low cost' car). These specification changes will obviously add cost, which together with rising general manufacturing input costs will ultimately create a far broader pricing structure for Nano, relative to chosen engine capacity (624cc vs 800cc) and chosen trim level (Std, CX & LX), thus providing for 6 variants within India, and reaching above the present price ladder of between INR 140,880 rupees ($2,800) and 196,959 rupees ($3,914).

Nano has also been touted in a European guise named 'Europa' which includes additional feature to compete more credibly against entry level cars across the continent, with a base EU price of E6,000, whilst the Pixel concept shown at Geneva recently is presumed to be a halo-effect precursor to Nano's eventual EU arrival.

Thus, even with consideration of much risen input costs which invariably at such a low level cannot be 'swallowed', it appears that TATA's real strategic aim was to create a long-run popular buzz about Nano being something very different prior to and at launch. Although much admired for its engineering simplicity and lightweight ethos, the true point of the vehicle programme was realistically to drive down development and capex costs, so that the car could be latterly adapted to become far more conventional in both Indian, other EM and Triad markets in order to eventually boost per unit profitability and so corporate margins.

Though perhaps very misleading to the press and public at large, with the recent turnabout in the product proposition, if sales figures can critically meet and beat those of the programme's core business case early in the product's intended lifespan, investors will be impressed with TATA's commercial prowess.

To try and overcome any consumer ill-feeling about the broken initial 2003 1 Lakh pricing pledge, TATA is offering a doubling of product warranty to 4 years, a cheap monthly service contract, fast-track 48 hour loan approvals and a low deposit value of just INR14,000 ($300).

Nano then proves itself less than a truly new class of car, but instead – if successful – highlights that the small car business template may prove profitable yet.

This done by initially setting a very low cost target for the product, achieved via very shrewd engineering solutions and hard-nosed supplier negotiations to drive down up-front capex and piece costs. Then launching the car in its original no-frills guise whilst intentionally 'starving' the marketplace, with the true intention of simultaneously pumping up consumer demand. Re-setting base level pricing yet higher, and undertaking what would be considered premature product re-engineering to boost performance and feature specification early-on in the car's lifetime so broaden the pricing ladder, attack head-on the prime competition and ready the much upgraded car for international exposure.

Conclusion -

From the much debated TATA example, and the recent Bajaj example, it appears that the hoped for dream of a mass mobility car provided at an astonishingly low price remains an anathema. Although that specific dream appears dashed for obvious commercial reasons, the fact is that Nano (and presumably BE60) both progress the raison d'etre of ever lower build-costs for small but ostensibly mainstream vehicles.

When developing the Nano TATA managed to combine its conglomerate industrial muscle with a sense of true innovation by questioning the conventional and the possible in both product, process and promotion. Thus TATA managed to impressively coalesce the very distinct and separate attitude and capabilities of those industrial giants and innovative VC-like cycle-car entities from a century ago.

Although still criticised by press and public, TATA's long-view pragmatic perspective with Nano should deliver impressive results over the coming decade, but only if it can maintain its USP relative to more sophisticated similar cost used cars that will unavoidably continue to threaten.

It is not surprising that the fruits of an ultra low cost car build should be orientated in the manufacturer's favour. The positive outcome being that it assists overall company profitability at a time when EM manufacturers must build their financial resources and reserves. Creating such financial fire-power if they are to credibly enter the world stage with plausible business ambitions and attractive product propositions. Both of which will necessarily require in-built operational cost and unit pricing flexibility given the political and pricing power of American, European, Japanese, S Korean and now Chinese players.

Failure of the 'ultra low cost' car to eventually appear and change the lives of millions is of course somewhat sad, but the effort to propagate what can only be regarded as a powerful business template if and when proven - from that original high ideal should be applauded by investors.

India's progress thus far with what should ultimately conclude as a very much altered automotive business equation – in its design, build and marketing methodologies - will very probably be of major influence to other smaller EM nations across the CIVETS and elsewhere who seek to speed their own economic development agendas.