The previous three web-log sections have explained why the auto investor mindset across all genres – from institutional to privateer – should recognise the renewed importance of product cost, and the rise of reduced cost vehicle manufacture; which at its farthest reached – though mechanically unconnected – results in the ideals of the 'low-cost' and 'ultra low-cost' cars.
Précis -
Throughout the last decade, and especially so since 2008, there has been a structural re-orientation of the global economy; merging the prime characteristics of those previously distinctly separate 'advanced' and 'industrialising' nations, to form an increasingly 'convergent' global economy. Thanks to globalisation the once highly visible industrial, commercial and consumer chasm which existed has become increasingly blurred.
This obviously most apparent regards the private consumption household consumables, bottled drinks, cigarettes, fast food, coffee emporiums and fashion clothing, but also, as increasing national wealth escalates incomes and credit availability, the trend has become increasingly apparent regards medium-value and high-value goods and services, including of course passenger vehicles.
Consequentially, this ongoing post-2008 worldwide economic re-shuffle has remoulded the corporate perspectives across the world, perhaps most necessarily so and drastically so in the west as historic mature markets struggle to regain traction. But also critically those of advancing EM conglomerates and sector players who themselves see the convergence as not a challenge but opportunity.
Logically, along with the trend toward 'convergent markets' comes the 'convergent product' ideal, the ambition of which is to maximise volume production of a subtly altered but near standardised item to suit the cultural and pricing dynamics of mainstream cars across a broad geographical spectrum. Thus requiring R&D, development programme and production solutions which can finely balance the internal commercial demand of mechanical similarity with the external demand of product differentiation to create discretely matched intra-regional business cases that provide a high margin 'glocal' solution.
Comparing Apples & Pears -
Via the use of previous accompanying detailed diagrams, investment-auto-motives sought to explain the primary elements and issues to the notion of 'low cost' and 'ultra low cost' cars.
From the consumer perspective, the former practically aimed at a burgeoning global middle class across EM countries and the latter still theoretically targeted at mobilising the 'bottom tier' of very low income masses.
From the industrial perspective, the former essentially the commercial re-deployment ( ie notional 'platform recycling') of previously fully or part amortised high capex tooling & plant: typically re-located from 'advanced' to 'advancing' countries; undertaken autonomously by a Triad VM where possible or increasingly so, through JV arrangement with local EM manufacturer or representative.
Whilst the latter tends to the ideal of a largely or wholly 'all new' EM-designed vehicle, encompassing a mix of technology transfer from other mobility segments (primarily motorcycles, but also 3-wheelers and small 4-wheeled quad-bikes) and innovative engineering solutions
Part 4 -
As promised, this last section seeks to provide a closer view of the business formulae for the generic 'low cost' car and the 'ultra low cost' car.
A final Part 5 to follow, will identify and plot those national, regional and world-wide manufacturers which are seeming best placed – on the basis of this weblog's very limited research – to follow each path, and indeed recognise those manufacturers that are indeed able to follow both paths.
So...
Using basic description of the 2 prime examples seen to date: Renault's Logan and TATA's Nano. Although already much discussed, each is worthy to generally recount when set side by side to truly understand the respective prime differentiators.
How success of the inter-national 'low cost' car template depends greatly upon a VM's ability to read and integrate with the external dynamics of EM foreign affairs; with the assistance of its national government, EM regional economic development agencies and the links its own investment advisors hold, with critically the ability to forge deep political relationships.
And how success of the largely intra-national 'ultra low cost' car template is critically reliant upon the ability to orchestrate and leverage the internal dynamics of a conglomerate's own and supplier capabilities, whilst promoting the 'people's car' idiom amongst the masses to thus gain the 'wholesale backing' of the national government, integrating the project as part of the domestic and export growth agenda.
Thereafter, investment-auto-motives seeks to identify those publicly listed manufacturers (on global bourses) which by virtue of their current and near term product portfolio, their industrial divisions and their industrial alliances, are strategically well positioned to follow either or indeed both of the set courses so critical to medium and long-term global profitability*
[NB Though investment-auto-motives maintains that it will be the 'low cost' car, not the 'ultra low cost' car which will be the prime profit engine for regional and multi-national VMs, given the very nature of its narrower development focus, its multi-continental application, its 'middle-class' target market's greater & elastic disposable income, and its general formulaic repeatability]. .
Daimler Led the Way -
Yet before delving into both Renault and TATA overviews, the importance of Daimler's then already underway pioneering ambition must be re-stated. Having ostensibly invented the car in the 1880s, ninety years later the German company set out to re-invent it once again (ironically in near its original yet modernised form) by way of the SmartCar: and its associated business model. Other VMs, perhaps Renault and TATA most presciently, integrated learning from Stuttgart's far-reach and very brave 'live case study'.
This arguably has been the most progressive automotive industrial achievement of modern times - still to be applauded. It created of not just a whole new vehicle segment by way of the 'mass-customisable' 2-seater city-car - thus far retained to itself, but also a totally new, expansive, intelligent supplier-linked production hub; itself centred around an alternative vehicle build schematic.
Daimler's strategic recognition of its need to expand beyond premium cars and trucks, buses was met by a willingness to 'read' the far-horizon European and 'mega-city' future and develop an archetype vehicle with a well understood problematic initial gestation period until its 10 year break-even, but delivering thereafter a long-life (and arguably semi-protected) income stream to the presumable delight of institutional shareholders.
The SwatchCar / SmartCar project formally and informally broadcast its learning throughout the industry, with discrete methodological parcels across various disciplines either directly adopted by others or highly influential toward intelligent corporate practice.
The 'Low Cost' Car Template -
Renault's Dacia Logan: “The Master Class”
Though not in the same innovative vein, over the last decade pundits have applauded Renault's re-invention and scale application of conventional 'platform re-cycling' old platforms through Dacia.. With the 1989 fall of the Eastern-Bloc, Renault well recognised its position of comparative competitive advantage given its historical links with Romania.
Volkswagen Group had been the prime-mover of CEE auto-industry renewal, by acquiring interests in the former Czechoslovalia's Skoda Auto and euphemistically 'bringing it to Wolfsburg' by re-utilising older SEAT shared vehicle technology for marque renewal. In a twist of apparent fate – or more likely, the coherence of backstage CEE macro planning - VW's government tender for Skoda the company beat Renault's application, on the basis that the German company would invest more and produce higher grade vehicles in the country, versus Renault's attempt for a low-cost assembly centre. VW's plan made far greater macro-economic sense for the new lead role region with higher populace.
The Renault ambition would come to fruition in Romania with Dacia, and its sought to maximise that opportunity. Rather than simply produce its base model Twingo in a cost-efficient location - as had been the previous plan - it recognised the might of awakening EM markets across the neighbouring CEE and Russia, close-by MENA (expanding its Turkish operations), and to the further reaches of India, Mexico, Brazil, with the ideal of using these large markets as CKD hubs from which to access smaller yet fast growing regional economies.
So, with such a grand ambition, instead of simply shipping defunct tooling for gradual single local model use and decline, Renault re-deployed the recently 'run-out' X90 Clio 3 platform which has acted as the first shared technology base in the Renault-Nissan alliance. The company then maintained proprietary rights instead of typically selling them off via licence or JV so as to serve as the underpinning for the necessary low-cost programme to become Dacia Logan and its spin-off siblings. Such cost-consciousness supported by the much welcomed but still pragmatic capex refurnishing of the Mioveni plant..
This is a well told story, but the crucial understanding is that Renault was able to draw many strategic threads together, namely:
1. How to best exploit (and partly generate) the then new wealth effect within the CEE's then emerging economy
2. How to create a credible and sustainable entry level brand to compete against and undercut VW's Skoda & SEAT and Hyundai's Kia.
3. How to create a web of international links with the Mioveni plant as the CKD export hub
4. How to continually add / layer fully built and CKD volume capacity.
5. How to manage Mioveni to provide an anti-cyclical, 'off-set' income stream, relative to still heavy reliance upon French and W. European sales
6. How to wield a powerful procurement strategy so as to gain both usual YoY discount rates, increased volume discounts & obtain cost re-engineered parts discounts.
7. How to critically retain full control of what is viewed as the archetype 'world car'.
Fundamentally...
8. How to achieve a reported 6% unit margin (vs 2% on EU mainstream vehicles).
These few highlighted points then illustrate the near perfect alignment of corporate strategy to evolving macro-economic conditions, as 'master-planned' by CEO Carlos Ghosn and ex Head of Product Strategy and ex-COO Patrick Pelata.
[NB. The WSJ article dated 16.04.2012 (p20) quoted a financial analyst's view that “Renault's entry level products are what is saving the company”. This may not be wholly correct given the very important income contributions made by high volume Renault LCVs even in a depressed market and Nissan's passenger cars, but the margin figure stated explicitly assists in such a dour period].
Thus, given Renault's proven ability to produce a seemingly new entry-level class of 'low cost' product, offering mass-market sector leading margins, the race over the last 5 years of so has been for VMs to emulate such benchmark practice.
The 'Ultra Low Cost' Car Template -
TATA Motor's Nano
Part 2 of this web-log series provided a useful account of the hurdles facing those VMs and 'National Champions' that seek to create the 'ultra low cost' car, highlighting the truly fractured nature of personal finance and so credit provision that exists at the 'bottom-tier'.
It also provided general observation of the now legendary TATA's Nano project, illustrating how the original $2,000 vehicle price target drove a raft of considerations which necessitated the need for a wholly new product development approach. Hence creating the “4-wheeled motorbike” drew inspiration from within, but critically also external to, the car industry and so re-configuring the orthodoxy of NPD
The renowned consulting firm A.T. Kearney provided a useful synopsis of the EM affordable car topic, itself identifying the pricing regime of the 'low-cost' car at $5,000 - $7,800 whilst the 'ultra low cost' car spans $2,500 - $5,000.
[NB investment-auto-motives identified a true ultra low cost' car at $2,000 - $3,000 if it is not to be subsumed by “established incumbent” offerings or by naturally deflating used car values as a country's car parc grows].
However, the paper provides useful insight into the organisational and technical issues which enabled the Nano to move from 'vision to reality'. They include:
- Deep co-operation with suppliers
- Severe parts count reduction
- Invention over adaption
- Value chain standardisation
- New retailing model
- Organically expanded production sites
However, the paper omits TATA's self-admission that the Nano project stood on the shoulders of the previous micro-truck project, sold as 'Ace', 'Super-Ace' & 'Magic' variants. Thus whilst philosophically undoubtedly a 'clean sheet' approach, the fact that such recently developed, cost-absorbed components and systems were available (very probably 'packaged protected' or 'performance ratified' for Nano during the mini-truck programme) means that at least a degree of the 'all new' hype is unjustified.
[NB investment-auto-motives suspects that a number of core 'invisible' items such as steering rack, electrical harness, dashboard armature etc were originally designed to be dual purpose].
However, what is all new is the sales channel being used, with expectation that ever more 'mobilised' sales people will trek to the more remote towns and villages in rural India to presumably 'educate and enthral' about Nano. This then is an organic extension of the conventional sales process used in other sectors, but a first for modern automotive and more akin to sales teams that demonstrate agricultural equipment; but in itself a redeployment of the methods Ford used with his Model T.which took on various utilitarian farm and community roles.
[NB Here is the greatest achilles heel for Nano, the fact that it has limited utility compared to a mini-truck or regular pick-up. Presumably TATA's expectation being that it will in time sit amongst the plethora of TATA and other micro-trucks and bought for general parts and service compatability].
As for the last highly important item listed, the company plans to 'mass customise' Nano and provide complimentary services to better serve 'bottom-tier' needs, thus able to add feature and service value.. This will be rolled out on a “micro-factory retailing” basis, where CKD & semi-complete vehicles are delivered to strategically positioned satellite mini-factories, where each ordered Nano will be assembled and taken to the buyer. This supported by a central warehouse of spare parts and accessories.
If this comes to pass, then TATA will have truly applied the type of new-age assembly process re-invention initiated by Daimler's SmartCar: using pre-coloured replaceable skin panels for late-stage configuration. If however, those pan-Indian regional configuration site are superseded by the building of standard factories then the great potential for process revolution will have been lost.
A.T. Kearney's paper begins and ends by citing a provocative question aimed at prodding the strategic thinking of established VMs. Whether to with relation to the 'ultra low cost' car...to “Preserve & Protect or Participate and Prosper”. (Such a statement implicitly conveying the consulting firm's overt enthusiasm about the transformational impact of the 'ultra low cost' car).
investment-auto-motives remains more cautious given the challenged faced by even those best placed such as TATA Motor. But emphatically hopes to see a continued focus by TATA on its parallel 'smart-thinking' for the good of its bottom-line, broader industry learning, re-bouyed market-capital values and obviously the promise of improved shareholder returns.
Not Such A Simple Choice -
The previously mentioned consultant's paper posits a choice for auto-makers: whether should continue with 'business as usual' or make a leap of faith toward the 'ultra low cost' vehicle. Of course such 3rd parties have intrinsic interests in citing provocative black & white questions.
The reality is of course, as well understood by automotive CEOs and CFO's, is that simplistically described idioms pertaining to general trends must be met with highly considered and detailed plans which themselves require near flawless execution. Truly meaningful strategic insight and strong operational capability are mutually necessary simply to competitively maintain an enterprise as complex as those in the auto-sector; each of which of course sits in its own very particular set of macro and micro circumstances.
To morph from being simply reactionary to socio-economic and market forces, to becoming an proactive, perception moulding, leading industrial vanguard typically takes not only a mind-shift of corporate outlook but also deep vertical and horizontal value-chain links and a suitably strong balance sheet.
Yet the sector lives in a constrained business environment. The very fact that the majority auto-sector participants survive from the innate stable conservatism required in a smoke-stack industry to attract share-based equity, maintain a stable credit rating, to enable corporate bond issuance, retain revolving credit sources to ultimately meet or beat quarterly, half-year and annual earnings expectations.
A large automotive company's operational complexity is often equally matched by its financing complexity and its long-term obligations to both mid and long-term bond-holders and its pension obligations.
Thus corporate radicalism of the central mindset relating to products, services, markets or manufacturing is only ever typically seen when a company faces either near extinction, or when it can financially afford to expend time and effort to generate a distinctively new competitive advantage, or when it has implicit/explicit national backing.
The verge of extinction radicalised Chrysler in the early 1980s to re-create itself as 'avant garde' and regained N. American popularity. It was a combination of solid corporate finances and recognised need for a long-term USP that prompted Daimler to create SwatchCar / SmartCar. And it was conglomerate industrial reach and echoes of India's 1947 “national promise” that set TATA on its course with Nano.
Thus three different motivational catalysts to actively mould the future.
To Follow -
In Part 5, investment-auto-motives very simplistically evaluates the prime national, regional and global automotive manufacturers, to better understand the present strategic perspective of each.
So as to ascertain the likelihood of following a single-path 'low cost' car route, or a far more demanding dual-path 'low cost' (LC) and 'ultra low' (ULCC) cars development route. The general picture is given greater conjectural content by the inclusion of other possible 'new entrant' companies which could theoretically alter the state of play if able to develop far lower cost non-traditional cars.
Thursday, 17 May 2012
Friday, 4 May 2012
Industry Practice - Global VMs (Part 3) – Down-Shift Products to Scale-Up Volume & Profitability.
In contrast to the high PR impact, but low financial 'value-added' of innovative cars like the GM Volt Nissan Leaf or BMW i3, investment-auto-motives has sought to re-prompt previous strong debate about 'low cost' and 'ultra low cost' NPD and product actions, amongst both the investment community and its intersect with auto-sector.
'Far-horizon' high innovation products – typically EVs and (ICE generator “range extending”) RE-EVs – fill the pages of life-style magazines, TV advert slots and web-pages, extolling an ecological utopian future and 'halo-effect' over a brand. However, in stark contrast, the fundamentals of business and economic reality dictates that mainstream vehicle producers actually focus a far far greater portion or R&D and development budget and innovative focus toward the far less 'sexy', but singularly important, topic of cost.
Thus Far...
Part 1 explained the basic premis of global 'product convergence', itself a consequence of the reducing wealth divide between (largely western) post-industrial / advanced industrial countries and the advancing industrial countries across the globe.
In short, constrained consumerism in the west contrasted with expanding consumerism elsewhere has created a general 'purchasing parity convergence' effect. To react to this more price sensitive yet far larger global market, major VMs have sought to create more affordable passenger cars, which in turn places 'cost-down' new product development (NPD) initiatives high on the corporate strategic agenda. The outcome has been new interest in the idea and execution of the contemporary 'low cost' car, consisting of the 'recycling' of primary vehicle systems, NPD de-costing efforts and product 'de-contenting' to provide budget motoring solutions.
Furthermore, the previously ignored 'bottom-tier' of global society is increasingly explored by progressive enterprise, so as to reach into a millions / billions strong global market-place whilst also depicting corporate social responsibility.
Part 2 illustrated such attempts with the three influential case studies of: 'micro-pack retailing', the (supposed) '$20 laptop' and 'micro-finance' credit programmes. Yet whilst each has enthralled the ranks of middle management, the reality is that to date each has incurred very real business case hurdles; these born from the reality (not theory) of the 'bottom-tier' environment.
Nonetheless, a few visionary industrialists in EM regions strive onward, India given its massive yet largely poor population a prime arena. TATA Motors' Nano the poster-child of an industrial movement which takes the ideology of the 'low cost' further still, toward the 'ultra low cost' car. Bajaj Auto also having conceptually developed an aesthetically less sophisticated city-car directed at its and competitor's (ie Force Motor's) rickshaw drivers.
Although described by investment-auto-motives, the TATA Nano deserves meaningful investigation by the auto-industry, investors and business/industrial academia alike. Cynics may view the prime intent of the car programme to substantially minimise development and manufacturing costs under the banner of an ethical edict. Then at launch raising the product's price, starving the market of entry-level vehicle volume and over time raising the average / median product price to a trends-led (critically middle class) marketing influenced consumer as additional 'content' (ie specification features) are built onto the base car, thus spawning additional substantially higher priced model variants. The real intent to supplant the entrenched and massively popular Maruti 800. Nano project supporters would conversely highlight that the mission of mass-motoring is still on track – even if those real-world 'bottom-tier' headwinds hurdles do pose problems in the near-term. They cite that Nano's launch price increase the inevitably result of input costs inflation, with little left to financially squeeze from the car itself, and that the provision of more variants will ensure that the low utilisation rate of the Nano factory will be improved to in turn lower unit costs and so provide flexibility for medium-term return to the promised “1 Lakh car”.
Thus we see that for strategically well placed corporations such as TATA – typically indigenous to a large EM market with a massive conglomerate capability (like past examples of Toyota in Japan and Hyundai in S.Korea) - the 'ultra low cost' business model, when perfectly constructed, is a very attractive proposition. It will muster national popularity and draw world attention, which polishes the corporate name, it provides a rational by which to engage suppliers in R&D and strongly negotiate supplier pricing structures, and so provides valuable route toward a very low cost product solution. One which gives the foundation of a much reduced 'cost-floor' upon which which layers of unit profit-margin can be built.
Part 3 -
So far, investment-auto-motives has explained the macro-level (PESTEL) shifts and micro-level (auto-sector) replies by comparing the modern notion of the 'low cost' car and the 'ultra low cost' car; which to re-iterate are distinctly different creatures
The 'low cost' car intrinsically important to globally established multi-national VMs - whether self-marketed or by way of a joint venture agreement. In the JV case, a strong commercial proffering to those large, high-potential and so understandably self-defensive BRIC nations; illustrated by VW-FAW, VW-SAIC, GM-FAW, GM-SAIC, Dongfeng-PSA, Changan-Ford, and GAC Group's affiliations with PSA, FIAT, Honda, Toyota, Mitsibushi & Isuzu and so many other Chinese couplings. Russia of course touts the Renault-Avtovaz relationship to help modernise its sector.
With very probably PSA seeking new JV agreements across MENA and the CIS regions as political and socio-economic stability increases; and quite possibly a new similar (though retrograde) JV structures inside Argentina if it seeks to continue its nationalistic ferver.
The 'ultra low cost' car thus far, though attempted and often failed by private enterprise (eg AFRICAR) is largely the ideology and domain of the indigenous EM auto-maker – either established or new - in support of a national economic agenda seeking to generate a substantial medium to long-term growth. This to be achieved partially through a 'productivity-push' itself linked to formulaic wage increase (ideally during an inflationary period ) to create an internal-market demand (akin to Ford's landmark “$5 per day” initiative), and partially through broader policy and socio-commercial efforts to financially integrate what is presently a very fragmented socio-economic 'bottom-tier'. (One such effort being Kenya's M-PESA scheme, in which local shops act as banks' deposit-taking agents and the personal mobile phone acts as a payment transferral device).
Two Very Different Routes -
Both new product development strategums form what could be described as powerful 'investment magnets', yet as demonstrated, the business model each incorporate must be considered 'poles-apart' and could be emphatically labeled as 'Darwinian' and 'Creationist'.
The 'low cost' car is a far more technically and financially “evolutionary”, small and medium step improvements in standard practice across all operational facets of an auto-maker. The practice was perhaps best illustrated by Ford's Model T, where ongoing cost absorption allowed ongoing price decreases; a lesson deployed time and time again to a less obvious degree by established VMs throughout the decades – typically seen in detail artifacts such as windscreen wipers, door-handles, quarter glass, side market lamps and such, the more expensive 'under the skin' mechanicals re-deployed to an ever greater extent given their hidden nature; this of course not publicised when advertising what is supposed to be a truly new vehicle.
Whilst the 'ultra low cost' car demands that an organisation be either radically altered to embrace the 'revolutionary' leap of faith idea, or more likely, a distinctly separate mini-organisation be created – a type of officially sanctioned skunk-works - to critically avoid any central corporate disruption, as a standalone business unit and cost centre, and to convince external bodies of its autonomy to introduce change.
From investors' perspectives, the prime distinction is not necessarily operational – though of course key to successful implementation – but the fact that here appears two distinctly different 'investment threads'.
Mapping the Vehicle Cost (& Investment) Space -
By its very nature of horizontal and vertical industrial reach, the automotive sector's cost-base is highly complex, which without the very rare event of corporate disclosure of accounting details for worldwide divisions, cost-centres and administrative departments makes the de-constructing of company workings – essentially the cost-benefits – nigh on an impossible task.
Investors, from institutional to private individual of course have a multitude of investment originated formulae and criteria by which to assess the performance of companies. And whilst many standard 'market ratio' conventions are useful by virtue of the fact that they are standard, simple, popular and so influential (eg such as p/e's, EPS, dividend rates, book values, the raft of measures across profitability ratios, liquidity ratios, activity ratios and debt ratios can lead to an infinite number of results but clouding overall conclusion, aswell as being overtly “micro-micro”.
The other extreme is to over focus on general – or rather perceived trends – in the macro-economic picture, which can be themselves very ethereal and long-range, adding little value to the here and now of topic appreciation.
What is required is an intermediate model which combines both the micro and macro perspective, in a meaningful manner. This the real creative task of value-creation analysis
So to provide a far broader understanding of the 'low-cost' car vs 'ultra low cost' car discussion, investment-auto-motives provides an accompanying matrix diagram, which marries the two prime aspects of a vehicle's cost-base: its development methodology and its generalised production location & its specific build process type.
To this end, the diagram highlights the five different new vehicle development route options and the three regional types of location, each divided by 3 generic build approaches.
Thus the vertical shows NPD type in ascending cost order, spanning:
- All new 'ultra low' cost
- Recycled 'low cost' platform
- Standard platform evolution
- Modular systems set
- All new premium hi-cost
And the horizontal shows location and build type:
- TRIAD production base
- BRIC production base
- CIVETS / “Next 11” production base.
These sub-divided by:
- Capital intensive build methods
- Mixed cost methods
- Labour intensive build methods
Interpretation -
The diagram then depicts a very general schematic of the car production cost-base, each square effectively representing a specific cost-base environment, which either underpins or undermines any new vehicle business model.
The innate complexity of whole industrial equation, - market type relative to product type relative to production capability type - highlights historic industrial tendency to “feed the machine”.
Nonetheless, in order to create other types of non-standard (ie steel monocoque or steel chassis) vehicles, various other low-volume production methods have been developed over decades specialising in lightweight and hi-strength alternative materials including aluminium, magnesium, other alloys, and basic and advanced composites; carbon fibre perhaps the best recognised today. Used for dedicated performance and specialist products, ranging from a plethora of race-track categories, to various road-based sports cars directed the wealthy, to emergency service, agricultural, national defense and other specialist tasks on and off road.
Companies providing such vehicles tend to operate at the top of the cost-base (see top right of diagram), creating innovative structural, propulsion and task-orientated solutions; applying both hi-R&D and practical pragmatism when devising, constructing and producing their vehicles. Such operators are mostly located in the Triad countries and primarily rely upon a broad semi-skilled and skilled labour force suited to the physical fettling of prototypes and the practical demands of a largely unmechanised build process which avoids onerous capital expenditure.
However, when feasible, such companies may seek to move production, low-value elements of development (such as product testing), and indeed aspects of central services 'off-shore', to a much lower cost country (ie a “Next 11” nation) especially if close to a major foreign market. So as to lower the man/hour assembly costs of the labour intensive build process, reduce development and overhead costs. Alternatively, another company based in a low-cost location may seek to undertake manufacture and / or other activities by way of a JV partnership, or seek to sub-contract to a third party.
Importantly, the learning and methods previously deployed in this most cost extreme area has had a direct effect upon the lowest cost area (see bottom left of the diagram). The position from which various auto-industry 'disruptors' have sought to create the 'ultra low cost', going against the grain of the conventional business model. Through the decades, business start-ups seeking to offer low-priced mass-mobility to the 'bottom-tier' have well recognised the very different business model constraints - spanning market dynamics, customer income level & seasonality, and the very different general product use conditions their hypothetical, prototype and production cars should satisfy.
Yet to date, nothing has truly convinced as true competition to the omnipresence of 'grey import' or locally assembled motorcycles, rickshaws, old but durable Japanese, Korean, German passenger cars (in towns) and Japanese and Indian 2WD & 4WD LCV double-cab trucks (in rural areas).
Yet nonetheless, the basic demographic and national growth numerics offers much apparent promise.
Yet any such opportunity looks far less likely to be tapped by new entrants, typically with high ideals but shaky finances, unless as seen with electric vehicles, a whole crop of new VC community backed enterprises are born and backed; in the knowledge that but a small few may grow “from acorns into possible oak trees”. Yet recent EV history is a solemn one, with a loss of many such enterprises and no surviving company (inc Tesla and Fisker) actually having made any substantial headway into the premium space of the mass market.
More likely that any 'ultra low cost' space is to be hard fought by those well established names; if indeed more than a few are compelled to join, given the over-whelming presence of the 'low cost' model. They appear the only present viable candidates since they have the core industrial competencies and for the most part far stronger balance sheets. Of these the most likely are those EM national champions with conglomerate standing (as seen with TATA) which are in a position to design and manufacture a credible product, have a broad distribution network, can tie-in sales with other goods and services, may offer a good after-sales service and critically create a sound financing basis by which to gauge potential customers and so step-by-step popularise the vehicle.
Even so, as of today and well into the medium-term, the previously described barriers and pitfalls in serving this apparent mass-market presents substantial challenges; the willingness to absorb substantial start-up costs and 'burn cash' for years to come until the tipping-points of slow break-even and market acceptance is attained.
A wholly new realm targeting Indian and SE Asia, and the rural far reaches of China, which could in time transform from a trickle into an stream and onto a river,.
But the competitive terrain which that trickle must pass will be uphill and with broad meander as the business model is honed year after year.
Continued Prevalence of the 'Low Cost' Paradigm -
Hardly surprising is the seeming majority opposition of Triad auto-makers and their Chinese counter-parts, so as to seek to maintain general global market dominance in the sales of new vehicles, and expected increasingly control of their product in used car sales channels. To defend their prominent position, they will leverage the increasing cost-benefits that intelligent engineering will bring, and so promote the evolutional character of the 'low cost' car, which will increasingly consist not of whole cost re-engineered platforms but distinctly discrete systems modules, which themselves can be more effectively re-engineered for specific functionality. Speedier amortisation of systems and parts and so give further business boost to similar and extended future 'low cost' car ambitions.
Obviously, not directed not a the 'bottom-tier', but far more logically toward the greater near-term (and long-term) promise of an ever growing, more prosperous EM middle-class, as well as a less prosperous western middle-class.
As seen today and over the last decade, the eastward migration of western automotive technologies has provided a 'low cost' furrow for both the western corporate IPR proprietors and their EM manufacturing partners. Such ongoing 'low-cost' and 'reduced cost' vehicles will undoubtedly form a continued cornerstone in such commercial relationships. Those EM partners gain relatively advanced western engineering for national manufacturing and self-branding needs, whilst the Traid company gains from yet further rounds of NPD cost re-engineering and reduced cost manufacture.
Given that the endemic prevalence of the 'low cost' car has far greater affect upon the real-world economics of the auto-industry, and the conventional cars' economic impact across many industrial & service sectors, although some academics and management consultants are enraptured by the idea of ultra low cost cars (due to intellectual fascination with re-orientated practices), the fact remains that its very existence - in comparative terms - will be at the edges of the global automotive story, relatively fringe given the present 80 millions plus annual units of conventional vehicle produced; though undoubtedly of major lifestyle impact to those few million across the Indian sub-continent and elsewhere, if indeed proven on market, product and business bases.
Paradoxically, by default of the general status quo, at least an equal amount, if not more, auto-industry and externally sourced 'brain-power' ought to be devoted to progressing 'low-cost' car thinking, so as to vitally understand how it can better fit within conventional business practice, and how a new 'basement level' business model could operate at the Tier 0.5 level, itself created from the integrating the interests of VMs, Tier 1 (OEM) suppliers and contract manufacturers.
To Follow -
This web-log piece was intended to be limited 3 distinct sections, providing:
A. general overview of both the 'low cost' car and 'ultra low cost' car theorums.
B. these 2 distinct models within the wider global cost-base picture
C. conclusion: highlighting the overwhelming weight of the 'low cost' model
However, an important issue promised – but as of yet unaddressed - is analysis regards the strategic positioning of international, regional and national vehicle producers. So as to maximise the leverage of one, or indeed possibly both, these highly absorbing and business critical income stream models.
A Part 4 will end this series by reviewing a suite of VMs which are publicly listed across the world's major bourses.
'Far-horizon' high innovation products – typically EVs and (ICE generator “range extending”) RE-EVs – fill the pages of life-style magazines, TV advert slots and web-pages, extolling an ecological utopian future and 'halo-effect' over a brand. However, in stark contrast, the fundamentals of business and economic reality dictates that mainstream vehicle producers actually focus a far far greater portion or R&D and development budget and innovative focus toward the far less 'sexy', but singularly important, topic of cost.
Thus Far...
Part 1 explained the basic premis of global 'product convergence', itself a consequence of the reducing wealth divide between (largely western) post-industrial / advanced industrial countries and the advancing industrial countries across the globe.
In short, constrained consumerism in the west contrasted with expanding consumerism elsewhere has created a general 'purchasing parity convergence' effect. To react to this more price sensitive yet far larger global market, major VMs have sought to create more affordable passenger cars, which in turn places 'cost-down' new product development (NPD) initiatives high on the corporate strategic agenda. The outcome has been new interest in the idea and execution of the contemporary 'low cost' car, consisting of the 'recycling' of primary vehicle systems, NPD de-costing efforts and product 'de-contenting' to provide budget motoring solutions.
Furthermore, the previously ignored 'bottom-tier' of global society is increasingly explored by progressive enterprise, so as to reach into a millions / billions strong global market-place whilst also depicting corporate social responsibility.
Part 2 illustrated such attempts with the three influential case studies of: 'micro-pack retailing', the (supposed) '$20 laptop' and 'micro-finance' credit programmes. Yet whilst each has enthralled the ranks of middle management, the reality is that to date each has incurred very real business case hurdles; these born from the reality (not theory) of the 'bottom-tier' environment.
Nonetheless, a few visionary industrialists in EM regions strive onward, India given its massive yet largely poor population a prime arena. TATA Motors' Nano the poster-child of an industrial movement which takes the ideology of the 'low cost' further still, toward the 'ultra low cost' car. Bajaj Auto also having conceptually developed an aesthetically less sophisticated city-car directed at its and competitor's (ie Force Motor's) rickshaw drivers.
Although described by investment-auto-motives, the TATA Nano deserves meaningful investigation by the auto-industry, investors and business/industrial academia alike. Cynics may view the prime intent of the car programme to substantially minimise development and manufacturing costs under the banner of an ethical edict. Then at launch raising the product's price, starving the market of entry-level vehicle volume and over time raising the average / median product price to a trends-led (critically middle class) marketing influenced consumer as additional 'content' (ie specification features) are built onto the base car, thus spawning additional substantially higher priced model variants. The real intent to supplant the entrenched and massively popular Maruti 800. Nano project supporters would conversely highlight that the mission of mass-motoring is still on track – even if those real-world 'bottom-tier' headwinds hurdles do pose problems in the near-term. They cite that Nano's launch price increase the inevitably result of input costs inflation, with little left to financially squeeze from the car itself, and that the provision of more variants will ensure that the low utilisation rate of the Nano factory will be improved to in turn lower unit costs and so provide flexibility for medium-term return to the promised “1 Lakh car”.
Thus we see that for strategically well placed corporations such as TATA – typically indigenous to a large EM market with a massive conglomerate capability (like past examples of Toyota in Japan and Hyundai in S.Korea) - the 'ultra low cost' business model, when perfectly constructed, is a very attractive proposition. It will muster national popularity and draw world attention, which polishes the corporate name, it provides a rational by which to engage suppliers in R&D and strongly negotiate supplier pricing structures, and so provides valuable route toward a very low cost product solution. One which gives the foundation of a much reduced 'cost-floor' upon which which layers of unit profit-margin can be built.
Part 3 -
So far, investment-auto-motives has explained the macro-level (PESTEL) shifts and micro-level (auto-sector) replies by comparing the modern notion of the 'low cost' car and the 'ultra low cost' car; which to re-iterate are distinctly different creatures
The 'low cost' car intrinsically important to globally established multi-national VMs - whether self-marketed or by way of a joint venture agreement. In the JV case, a strong commercial proffering to those large, high-potential and so understandably self-defensive BRIC nations; illustrated by VW-FAW, VW-SAIC, GM-FAW, GM-SAIC, Dongfeng-PSA, Changan-Ford, and GAC Group's affiliations with PSA, FIAT, Honda, Toyota, Mitsibushi & Isuzu and so many other Chinese couplings. Russia of course touts the Renault-Avtovaz relationship to help modernise its sector.
With very probably PSA seeking new JV agreements across MENA and the CIS regions as political and socio-economic stability increases; and quite possibly a new similar (though retrograde) JV structures inside Argentina if it seeks to continue its nationalistic ferver.
The 'ultra low cost' car thus far, though attempted and often failed by private enterprise (eg AFRICAR) is largely the ideology and domain of the indigenous EM auto-maker – either established or new - in support of a national economic agenda seeking to generate a substantial medium to long-term growth. This to be achieved partially through a 'productivity-push' itself linked to formulaic wage increase (ideally during an inflationary period ) to create an internal-market demand (akin to Ford's landmark “$5 per day” initiative), and partially through broader policy and socio-commercial efforts to financially integrate what is presently a very fragmented socio-economic 'bottom-tier'. (One such effort being Kenya's M-PESA scheme, in which local shops act as banks' deposit-taking agents and the personal mobile phone acts as a payment transferral device).
Two Very Different Routes -
Both new product development strategums form what could be described as powerful 'investment magnets', yet as demonstrated, the business model each incorporate must be considered 'poles-apart' and could be emphatically labeled as 'Darwinian' and 'Creationist'.
The 'low cost' car is a far more technically and financially “evolutionary”, small and medium step improvements in standard practice across all operational facets of an auto-maker. The practice was perhaps best illustrated by Ford's Model T, where ongoing cost absorption allowed ongoing price decreases; a lesson deployed time and time again to a less obvious degree by established VMs throughout the decades – typically seen in detail artifacts such as windscreen wipers, door-handles, quarter glass, side market lamps and such, the more expensive 'under the skin' mechanicals re-deployed to an ever greater extent given their hidden nature; this of course not publicised when advertising what is supposed to be a truly new vehicle.
Whilst the 'ultra low cost' car demands that an organisation be either radically altered to embrace the 'revolutionary' leap of faith idea, or more likely, a distinctly separate mini-organisation be created – a type of officially sanctioned skunk-works - to critically avoid any central corporate disruption, as a standalone business unit and cost centre, and to convince external bodies of its autonomy to introduce change.
From investors' perspectives, the prime distinction is not necessarily operational – though of course key to successful implementation – but the fact that here appears two distinctly different 'investment threads'.
Mapping the Vehicle Cost (& Investment) Space -
By its very nature of horizontal and vertical industrial reach, the automotive sector's cost-base is highly complex, which without the very rare event of corporate disclosure of accounting details for worldwide divisions, cost-centres and administrative departments makes the de-constructing of company workings – essentially the cost-benefits – nigh on an impossible task.
Investors, from institutional to private individual of course have a multitude of investment originated formulae and criteria by which to assess the performance of companies. And whilst many standard 'market ratio' conventions are useful by virtue of the fact that they are standard, simple, popular and so influential (eg such as p/e's, EPS, dividend rates, book values, the raft of measures across profitability ratios, liquidity ratios, activity ratios and debt ratios can lead to an infinite number of results but clouding overall conclusion, aswell as being overtly “micro-micro”.
The other extreme is to over focus on general – or rather perceived trends – in the macro-economic picture, which can be themselves very ethereal and long-range, adding little value to the here and now of topic appreciation.
What is required is an intermediate model which combines both the micro and macro perspective, in a meaningful manner. This the real creative task of value-creation analysis
So to provide a far broader understanding of the 'low-cost' car vs 'ultra low cost' car discussion, investment-auto-motives provides an accompanying matrix diagram, which marries the two prime aspects of a vehicle's cost-base: its development methodology and its generalised production location & its specific build process type.
To this end, the diagram highlights the five different new vehicle development route options and the three regional types of location, each divided by 3 generic build approaches.
Thus the vertical shows NPD type in ascending cost order, spanning:
- All new 'ultra low' cost
- Recycled 'low cost' platform
- Standard platform evolution
- Modular systems set
- All new premium hi-cost
And the horizontal shows location and build type:
- TRIAD production base
- BRIC production base
- CIVETS / “Next 11” production base.
These sub-divided by:
- Capital intensive build methods
- Mixed cost methods
- Labour intensive build methods
Interpretation -
The diagram then depicts a very general schematic of the car production cost-base, each square effectively representing a specific cost-base environment, which either underpins or undermines any new vehicle business model.
The innate complexity of whole industrial equation, - market type relative to product type relative to production capability type - highlights historic industrial tendency to “feed the machine”.
Nonetheless, in order to create other types of non-standard (ie steel monocoque or steel chassis) vehicles, various other low-volume production methods have been developed over decades specialising in lightweight and hi-strength alternative materials including aluminium, magnesium, other alloys, and basic and advanced composites; carbon fibre perhaps the best recognised today. Used for dedicated performance and specialist products, ranging from a plethora of race-track categories, to various road-based sports cars directed the wealthy, to emergency service, agricultural, national defense and other specialist tasks on and off road.
Companies providing such vehicles tend to operate at the top of the cost-base (see top right of diagram), creating innovative structural, propulsion and task-orientated solutions; applying both hi-R&D and practical pragmatism when devising, constructing and producing their vehicles. Such operators are mostly located in the Triad countries and primarily rely upon a broad semi-skilled and skilled labour force suited to the physical fettling of prototypes and the practical demands of a largely unmechanised build process which avoids onerous capital expenditure.
However, when feasible, such companies may seek to move production, low-value elements of development (such as product testing), and indeed aspects of central services 'off-shore', to a much lower cost country (ie a “Next 11” nation) especially if close to a major foreign market. So as to lower the man/hour assembly costs of the labour intensive build process, reduce development and overhead costs. Alternatively, another company based in a low-cost location may seek to undertake manufacture and / or other activities by way of a JV partnership, or seek to sub-contract to a third party.
Importantly, the learning and methods previously deployed in this most cost extreme area has had a direct effect upon the lowest cost area (see bottom left of the diagram). The position from which various auto-industry 'disruptors' have sought to create the 'ultra low cost', going against the grain of the conventional business model. Through the decades, business start-ups seeking to offer low-priced mass-mobility to the 'bottom-tier' have well recognised the very different business model constraints - spanning market dynamics, customer income level & seasonality, and the very different general product use conditions their hypothetical, prototype and production cars should satisfy.
Yet to date, nothing has truly convinced as true competition to the omnipresence of 'grey import' or locally assembled motorcycles, rickshaws, old but durable Japanese, Korean, German passenger cars (in towns) and Japanese and Indian 2WD & 4WD LCV double-cab trucks (in rural areas).
Yet nonetheless, the basic demographic and national growth numerics offers much apparent promise.
Yet any such opportunity looks far less likely to be tapped by new entrants, typically with high ideals but shaky finances, unless as seen with electric vehicles, a whole crop of new VC community backed enterprises are born and backed; in the knowledge that but a small few may grow “from acorns into possible oak trees”. Yet recent EV history is a solemn one, with a loss of many such enterprises and no surviving company (inc Tesla and Fisker) actually having made any substantial headway into the premium space of the mass market.
More likely that any 'ultra low cost' space is to be hard fought by those well established names; if indeed more than a few are compelled to join, given the over-whelming presence of the 'low cost' model. They appear the only present viable candidates since they have the core industrial competencies and for the most part far stronger balance sheets. Of these the most likely are those EM national champions with conglomerate standing (as seen with TATA) which are in a position to design and manufacture a credible product, have a broad distribution network, can tie-in sales with other goods and services, may offer a good after-sales service and critically create a sound financing basis by which to gauge potential customers and so step-by-step popularise the vehicle.
Even so, as of today and well into the medium-term, the previously described barriers and pitfalls in serving this apparent mass-market presents substantial challenges; the willingness to absorb substantial start-up costs and 'burn cash' for years to come until the tipping-points of slow break-even and market acceptance is attained.
A wholly new realm targeting Indian and SE Asia, and the rural far reaches of China, which could in time transform from a trickle into an stream and onto a river,.
But the competitive terrain which that trickle must pass will be uphill and with broad meander as the business model is honed year after year.
Continued Prevalence of the 'Low Cost' Paradigm -
Hardly surprising is the seeming majority opposition of Triad auto-makers and their Chinese counter-parts, so as to seek to maintain general global market dominance in the sales of new vehicles, and expected increasingly control of their product in used car sales channels. To defend their prominent position, they will leverage the increasing cost-benefits that intelligent engineering will bring, and so promote the evolutional character of the 'low cost' car, which will increasingly consist not of whole cost re-engineered platforms but distinctly discrete systems modules, which themselves can be more effectively re-engineered for specific functionality. Speedier amortisation of systems and parts and so give further business boost to similar and extended future 'low cost' car ambitions.
Obviously, not directed not a the 'bottom-tier', but far more logically toward the greater near-term (and long-term) promise of an ever growing, more prosperous EM middle-class, as well as a less prosperous western middle-class.
As seen today and over the last decade, the eastward migration of western automotive technologies has provided a 'low cost' furrow for both the western corporate IPR proprietors and their EM manufacturing partners. Such ongoing 'low-cost' and 'reduced cost' vehicles will undoubtedly form a continued cornerstone in such commercial relationships. Those EM partners gain relatively advanced western engineering for national manufacturing and self-branding needs, whilst the Traid company gains from yet further rounds of NPD cost re-engineering and reduced cost manufacture.
Given that the endemic prevalence of the 'low cost' car has far greater affect upon the real-world economics of the auto-industry, and the conventional cars' economic impact across many industrial & service sectors, although some academics and management consultants are enraptured by the idea of ultra low cost cars (due to intellectual fascination with re-orientated practices), the fact remains that its very existence - in comparative terms - will be at the edges of the global automotive story, relatively fringe given the present 80 millions plus annual units of conventional vehicle produced; though undoubtedly of major lifestyle impact to those few million across the Indian sub-continent and elsewhere, if indeed proven on market, product and business bases.
Paradoxically, by default of the general status quo, at least an equal amount, if not more, auto-industry and externally sourced 'brain-power' ought to be devoted to progressing 'low-cost' car thinking, so as to vitally understand how it can better fit within conventional business practice, and how a new 'basement level' business model could operate at the Tier 0.5 level, itself created from the integrating the interests of VMs, Tier 1 (OEM) suppliers and contract manufacturers.
To Follow -
This web-log piece was intended to be limited 3 distinct sections, providing:
A. general overview of both the 'low cost' car and 'ultra low cost' car theorums.
B. these 2 distinct models within the wider global cost-base picture
C. conclusion: highlighting the overwhelming weight of the 'low cost' model
However, an important issue promised – but as of yet unaddressed - is analysis regards the strategic positioning of international, regional and national vehicle producers. So as to maximise the leverage of one, or indeed possibly both, these highly absorbing and business critical income stream models.
A Part 4 will end this series by reviewing a suite of VMs which are publicly listed across the world's major bourses.
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