A Nano Car in Every Driveway?

How to Succeed in the Ultra-

Low-Cost Car Market
Henry Ford’s historic promise in 1908 to “build a car for the great multitude” resulted in
the production of more than 15 million Model Ts and created unprecedented mobility for
consumers everywhere. Will India’s Tata Motors deliver on its equally bold promise to a
new generation of consumers to bring the Nano to market for the “great multitude” at a
price of $2,500?

To fulfill his promise “to build a car small enough for the individual to run and care for,
[of] the simplest designs that modern engineering can devise, [and] low in price,” Henry
Ford exploited innovative product design, vendor relationships, manufacturing
techniques and distribution methods. One hundred years later, entrants into the ultra-
low-cost car (ULCC) market have the same agenda in their attempt to build a car with a
price tag of $2,500 to $5,000, which is lower in comparable dollars than Henry Ford’s
$850 Model T.

But this is not a history lesson that can be easily repeated. Today, all indicators point to
an automotive industry in recession, requiring its leaders to balance the global
economic crisis with future market demand. Industry consolidation and restructuring in
global markets will accelerate, propelled by the lack of availability to capital and
consumer financing, high fuel costs and low consumer confidence. Undoubtedly, a new
and improved automotive operating model will emerge from this crisis, facilitated by
innovation and low-cost solutions to serve the demands of a broader market of
consumers. Perhaps the launch of the ultra-low-cost car marks the beginning of a
redefinition of the competitive landscape for the entire industry.

Over the longer term, the emerging ultra-low-cost car market promises to create rich
opportunities—and risky challenges—for global auto industry participants that must
decide if they want to preserve and protect their current positions or participate and
prosper in the new market. Manufacturers and suppliers must be willing and able to
partner and, more importantly, to change their traditional operating paradigms.

Preserve and Protect or Participate and Prosper?

It is indisputable that the competitive landscape has been altered dramatically and
permanently (see sidebar: The Market for Ultra-Low-Cost Cars). Moreover, the
expansive potential of this market is commanding the attention of manufacturers and
vendors worldwide, with a number of global players recently announcing strategies to
enter or compete in the sector (see figure 1). General Motors, which produces the mini-
car, Spark, in India, expects to introduce another low-cost car in 2009. Hyundai and
Renault S.A.–Nissan have plans to produce a car for the low-cost car market, and
Škoda Auto, part of the Volkswagen Group, is investing in product development and
plans to expand capacity in India. Fiat announced in August that it would market three
models in China.
It is equally indisputable that using traditional design, manufacturing and distribution
approaches to achieve ultra-low-cost car entry prices below $3,500 will be a difficult
task. A low price point and razor-thin margins—estimated at around 3 percent at the
base model levels—will make hard-to-come-by profits easily susceptible to rising
commodity prices, product launch missteps and market economics.

The dynamic and powerful ultra-low-cost car market is forcing manufacturers and
suppliers to decide between two strategies. The first is to preserve their brand and
market positions and protect them against new market entrants, current competition and
future price pressures. Established suppliers opting for this stance risk falling into the
“low-cost trap” between manufacturers and their new component standards and lower
target prices. A new set of low-cost competitors will emerge with the potential to enter
mature markets and capture market share from the domestic suppliers, forcing existing
participants to protect their positions.

The other choice for manufacturers and suppliers is to participate to capture share in
the fastest growing segment of the industry and prosper by being leaders in developing
the market. We believe first movers will have the opportunity to capture market share
and build consumer loyalty.

Apply a Clean-Sheet Approach

Early movers on both the manufacturer and supplier sides have demonstrated that
nothing less than a clean-sheet approach to product development and manufacturing
can produce a vehicle that sells for less than $3,500. Tata Motors, for example, used
this approach to develop the Nano, the world’s least expensive automobile, by adhering
to four guidelines.

Cooperate with suppliers. Tata began the development process with 600 closely
integrated suppliers; only 100 remain. Independent suppliers provide 80 percent of the
Nano’s components, and 97 percent of the vehicle is sourced in India. Suppliers such
as Bosch worked with Tata and employed Indian engineers with motor-cycle, rather
than automobile, design experience to craft innovative low-cost components.

Reduce the number and complexity of parts. By focusing on the essentials and
encouraging creativity in making components smaller, lighter and cheaper, Tata avoided
engineering non-functional, non-essential parts. Bosch, for example, adapted a smaller
and lighter motorcycle starter for use in the Nano. And the car’s wheels are attached
with only three lug nuts to reduce cost.

Invent rather than adapt. Tata encouraged its design and manufacturing suppliers to be
innovative—to redesign parts for a simple and less capital-intensive manufacturing
process, and develop new ways to sell and distribute the Nano. In fact, suppliers were
forbidden to adapt carry-over parts from other Tata vehicles for use in the Nano, and in
some manufacturing operations, such as welding, engineers opted for cheaper manual
processes rather than automated ones.

Standardize at every stage of the value chain. Similar to Henry Ford’s apocryphally
attributed “any-color-so-long-as-it’s-black” approach, the Nano offers consumers few
options, and only a few have any impact on the manufacturing process.

The Nano’s distribution model reflects its innovative heritage, too. The company plans
to mobilize large numbers of third parties to reach remote rural consumers, tailor the
products and services to serve their needs, and add value to the core product or service
through ancillary services. For example, one plant will produce vehicle modules that are
then sent to a number of strategically positioned satellite mini-factories, where the Nano
will be assembled and then delivered to the buyer. A central warehouse will stock spare
parts and accessories.

As demonstrated with the Nano, the clean-sheet approach offers another significant
advantage: innovation in product design, manufacturing and distribution. As innovative
product designs make their way down the segment tiers, manufacturing innovations will
make their way up the same tiers. For example, anti-lock braking systems and airbags
will find their way into low-cost cars while efficiency measures and cost improvements
are transferred into more expensive vehicles.

As powerful a tool as the clean-sheet approach is, however, it does not assure success
in the marketplace. A product designed to minimums will be vulnerable to sharp
increases in commodity prices that slow the creation of new parts and threaten margins.
The challenge will be to further reduce the cost of a product when there is very little
wiggle room to do so.

Success will be volume dependent, with margins held to the low single-digit range. And
that presents the inevitable question: Will ultra-low-cost car manufacturers enter the
European and North American markets in an effort to increase volume? We believe the
answer is yes to Europe and no to North America—but not soon and not at the ULCC
price (see sidebar: A ULCC on Europe’s Roads? Probably. On North America’s Roads?
Probably Not).

The Strategy: What Works? What Doesn’t?

Tata’s model is a case study in what to do right and stands in vivid contrast to less
effective strategies. Some manufacturers, for example, introduce older models into the
market to take advantage of their fully paid-up base of equipment and tools. The Buick
Regal was among the first entrants in China. While this approach provides rapid entry
into a new market, it does so at a cost: The cars often do not meet specific customer
needs and are at a competitive disadvantage in relation to locally tailored products.

Other car manufacturers streamline existing models to fit low-cost prerequisites or

redesign select parts to meet specific market requirements. While this provides an
opportunity to offer some customization, it limits the potential for cost reduction.

Finally, some manufacturers design a “new” car within a design-to-cost framework, but
reuse a significant number of existing parts. This minimizes engineering costs and
maximizes economies of scale, but makes it difficult to eliminate designed and built-in
functionalities, along with their built-in costs. It also makes it impossible to develop
radical new and innovative thinking.

In addition to Tata’s clean-sheet approach, we believe success in the ultra-low-cost car

segment requires the following (see figure 2)
Create entrance and growth strategies. So far, most entrance and growth strategies
have been similar as a multitude of manufacturers rush to gain first-mover advantage in
the rapidly growing Indian market. India, the default build-and-sell location, has the
greatest projected market growth in the Asia-Pacific region. Now, manufacturers are
developing plans to expand their production footprints beyond India, with Thailand as
one of the early target locations. Southeast Asia will remain the primary export market
for new models, and the Middle Eastern and African markets are in line for subsequent
growth.

A consistent design strategy is emerging based on a clean-sheet approach rather than

pulling from reusable vehicle architectures or pre-populated product shelves.

Entry into this market segment will not come without risk, however. It will require shifting
paradigms from the traditional global processes to thinking creatively and meeting target
market vehicle specifications and prices. The market must be sized accurately to
capture adequate volume and thus recover investments.
What’s more, all strategies and tactics focus on avoiding cannibalization of current
market portfolios, deploying already scarce resources, establishing robust supplier
partnerships (design- to-cost targets, truly collaborative engineering, volume
commitments and lifetime contracts, for example), and building manufacturing footprints
that can scale-up quickly with minimum capital outlays.

Establish targets and make trade-off decisions. Manufacturers will focus their
development efforts around design-to-cost targets—collaborating with key suppliers to
redesign interfacing components and sub-systems to keep costs low while also meeting
mass-market production targets. A variety of trade-off decisions must be made:

• Engineering. Should it be X or Y? Redesign or reuse components? Define new

technical specifications for materials and performance?
• Manufacturing. Where and what type of site? What production processes? What
degree of automation?
• Sourcing.How much local content versus how much imported?
• Pricing. Lower price and higher volume? Higher prices for export units? What is the
best approach to pricing and bundling optional accessories?

Align across functions and collaborate with suppliers. To deliver a car priced between
$2,500 and $3,500 and to meet local market specifications, emissions and safety
standards will force use of fewer carry-over parts, which will necessitate major new
product innovations. The only way for the ultra-low-cost car manufacturer to accomplish
this is by:

• Forming new organizations dedicated to the creation of an ultra-low-cost car

• Redesigning processes and policies so the entire team works toward common goals
• Revamping incentive structures to manage conflicts and balance trade-off decisions
• Expanding supplier-selection criteria to include innovation and product diversification
• Partnering with suppliers early in the design, manufacturing, engineering and
assembly processes

Protect and preserve market position and profits. Success in this market will require
manufacturers and suppliers to employ their know-how in the higher-cost vehicle
segments, including vast experience in emerging markets, product innovations and cost
structures. Those that decide not to participate in the ultra-low-cost car segment must
protect and preserve their current brands, market positions and profit margins. Real
risks will emerge if any of the following scenarios occurs:

• In the next two to five years, safety and emission standards are met and ultra-low-cost
cars are exported and distributed to mature markets
• Manufacturers adopt a new set of target prices from ultra-low-cost car product
innovations and expect competing suppliers to comply
• A manufacturer or supplier enters the market but cannibalizes its existing portfolio
• The competition generates “know-how” that gives them an early-mover advantage in
the market

Regardless of which scenario plays out, or if they all do, the risks will be considerable.
The mantra will be to identify competitors—their capabilities, product plans, partnerships
and target costs. Equally important is to have a flawless launch cycle and sustain
volumes to maximize returns. It is essential to know how much time is left before
emerging-market competitors re-engineer or adapt their products and pose a credible
threat in mature markets.

Benchmark the competition. Benchmarking and competitive tear-downs (cost analyses

of competitors’ products) must go beyond comparing innovative ideas in the low-cost
car industry to evaluating innovations in adjacent industries. In these markets, why not
analyze the manufacturers of scooters and rickshaws? Focus on identifying innovative
ideas and employ a systematic approach to conduct the tear-down, capture insights and
inject knowledge at appropriate stages in the development cycle.

A Measure of Cooperation, Creativity and Innovation

We believe success in the ultra-low-cost car market can be achieved and will be
measured by cooperation, creativity and innovation. There is a certain and unknown
amount of risk, but this market is destined to change the industry landscape, much like
the Model T changed auto manufacturing and the world’s sense of mobility. While ultra-
low-cost cars may not be available on every continent, the innovative ideas and
techniques generated for this market will have a long-lasting impact on the entire
automotive industry.

Consulting Authors

Dan Oxyer is a partner based in the Southfield office. He can be reached at dan.oxyer@atkearney.com .
Graeme Deans is a partner based in the Toronto office. He can be reached at graeme.deans@atkearney.com .
Shiv Shivaraman is a principal based in the Southfield office. He can be reached at shiv.shivaraman@atkearney.com
.
Sudipta Ghosh is a manager based in the Southfield office. He can be reached at sudipta.ghosh@atkearney.com .
Ruediger Pleines is a manager based in the Munich office. He can be reached at ruediger.pleines@atkearney.com .

SIDEBAR

The Market for Ultra-Low-Cost Cars

In emerging markets, there are at least 10 models already selling for less than $6,000.
India and the rest of Asia (excluding China) represent the fastest growing regions. We
project annual low-cost country volumes to grow to approximately 17.5 million units
globally by 2020 (see figure). Although China and India will continue to be the most
populous countries in 2020 with 1.4 billion and 1.3 billion people respectively, their
receptiveness to low-cost vehicles differs. The more rapid increase in disposable
income in China, combined with an aging population and a historical preference for
larger vehicles, lead to the conclusion that India and the rest of Asia (excluding China)
will be the most promising ultra-low-cost car markets, accounting for perhaps 60 percent
of the estimated global market potential. This is not to say that China should be
neglected. The size of the Chinese market in 2020, estimated at 2.6 million units, will
contribute significantly to the rise in overall vehicle production and, ultimately, to the
profitable production of low-cost vehicles.

A ULCC on Europe’s Roads? Probably. On North America’s Roads? Probably Not.

It’s an obvious question: Will the ULCC segment target consumers in the world’s two
most affluent markets, Europe and North America? The answer—two answers, actually
—is not so obvious. We believe European consumers can expect to see an ultra-low-
cost car entry, but not soon. North American consumers will probably not see any. The
costs of regulatory compliance and distribution could drive the sale price up 60 to 90
percent.

Three overarching factors will shape the ultra-low-cost car’s future in both markets:

Emission standards. Western Europe, Japan and North America established

emissions standards more than a decade ago. Emerging markets such as China and
India are adopting European standards, but with a five- to seven-year lag. Autos in the
lightweight low-cost car segment, with their small engines and modest fuel
consumption, will meet current emissions standards.

Safety regulations. North America and Europe have similar government-developed

safety regulations with respect to seat belts, rollover and rear-, side- and frontal-
protection standards. In developing countries, the standards are lower, and ultra-low-
cost cars will encounter few, if any difficulties, in meeting those standards. As European
and North American governments continue to establish higher standards, there will be
compliance issues.

Distribution. Bringing an ULCC to the North American or European market will result in
a significant price increase (see figure). The $2,500 target base price of the Nano, for
example, could jump to more than $4,000, with conversions to meet government
regulations. With logistics, marketing and promotions, manufacturer-dealer profits,
tariffs, account destination fees, and taxes bumping the final cost up even further.
Applying the same percentage increases to an ultra-low-cost car at the highest price
point in the category—$5,000—results in a North American or European sales price of
more than $9,000.