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A Nano Car in Every Driveway? How to


Succeed in the Ultra-Low-Cost Car Market
Henry Fords 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 Indias 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?

o 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 Fords $850 Model T.

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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 ultralow-cost car market promises to create rich
opportunitiesand risky challengesfor 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).

The Market for Ultra-Low-Cost Cars

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A nano car in every driveway?

FIGURE: India and rest of Asia will make up more than half

of sales in the low-cost car market by 20201


17.0

17.5

15.0

17.5
Rest of
world
Africa
South
America

13.9

12.5

11.2

10.0

7.1

7.5

8.0

Rest of
Asia

8.5

5.4
5.0

3.0
2.5

India

4.0
3.0

2.9

2.0
1.0

China

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

Vehicles sold per year regular and ULCC (millions)

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

12007 estimates based on sales of regular low-cost cars and ultra-low-cost cars in the range of $3,100 to $7,800
(Nano + tax + distribution)
Sources: United Nations demographic studies; A.T. Kearney Global Business Policy Council population development,
infrastructure improvement and economic growth analyses

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.

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FIGURE 1

Low-cost cars are selling in advanced and emerging markets

Low-cost car (LCC)

Advanced markets

Mini-car
Current vehicle
Price: $7,801 to $12,000
Market size: 2.5 to 3.7 million
Also known as A-class vehicles
Achieves cost levels via
smaller size

Popular in Europe and


Japan, with growing popularity
in North America

Emerging markets

Regular low-cost car

Ultra-low-cost car

Current vehicle
Price: $5,001 to $7,800
Market size: 2.4 to 4.5 million
Uses technology and parts of minicars sold in advanced markets
Achieves cost levels via reduced
content and by purchasing from
local sources

Current vehicle
Price: $2,500 to $5,000
Market size: 2.3 to 3 million
Produced in high volumes with
basic trim
Achieves cost levels via reduced
size and content and by purchasing from local sources

Gaining popularity
in emerging markets

Attracting significant interest


from the automotive industry

Sources: J.D. Power and Associates; A.T. Kearney analysis

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 koda 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

levelswill 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
A.T. Kearney

EXECUTIVE AGENDA

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Similar to Henry Fords apocryphally attributed any - color - so long - as - it s - bl ack approach , the Nano offers consumers
few options, and only a fe w have any impact on the
manufacturing process .

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 worlds 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 Nanos components, and 97 percent of the vehicle is sourced
in India. Suppliers such as Bosch worked with
Tata and employed Indian engineers with motorcycle, 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 cars
wheels are attached with only three lug nuts
to reduce cost.
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A nano car in every driveway?

Invent rather than adapt. Tata encouraged


its design and manufacturing suppliers to be
innovativeto 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 carryover 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 Fords apocryphally attributed any-color-so-long-as-its-black approach,
the Nano offers consumers few options, and
only a few have any impact on the manufacturing process.
The Nanos 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

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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

A ULCC on Europes Roads? Probably.


On North Americas Roads? Probably Not.
Its an obvious question: Will the
ULCC segment target consumers
in the worlds two most affluent
markets, Europe and North America?
The answertwo answers, actuallyis 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 cars 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 frontalprotection standards. In developing
countries, the standards are lower,
and ultra-low-cost cars will encoun-

FIGURE: Price of ultra-low-cost cars can rise

in developed markets

Higher-end cars (ultra-low-cost or low-cost)

$1,000

$1,000

$388

$244

$210

$8,591

$125

$105

$108

$93

$3,806

$515

$9,107

$228

$4,034

Sales
tax

Total
cost

$750

$5,000

Tata Nano base model


$500

$375

$2,500

Base
price

Conver- Logistics Market- Manuing


facturer
sion
cost
profit

Dealership
profit

Import Expected
tariffs1 MSRP2

1For countries with normal trade relation status


2Manufacturer suggested retail price
Sources: Automotive News Data Center; Global Auto Insider; U.S. Department of Transportation Federal Motor
Vehicle Safety Standards; A.T. Kearney analysis

ter 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 a
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-lowcost car at the highest price point
in the category$5,000results
in a North American or European
sales price of more than $9,000.

A.T. Kearney

EXECUTIVE AGENDA

59

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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
Americabut not soon and not at the ULCC
price (see sidebar: A ULCC on Europes Roads?
Probably. On North Americas Roads? Probably Not
on page 59).

The Strategy: What Works?


What Doesnt?
Tatas 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
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A nano car in every driveway?

makes it impossible to develop radical new and


innovative thinking.
In addition to Tatas 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.
Whats more, all strategies and tactics focus
on avoiding cannibalization of current market
portfolios, deploying already scarce resources,
establishing robust supplier partnerships (designto-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

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FIGURE 2

Five key operating dimensions for the ultra-low-cost car market


Compare manufacturers within the lowcost car industry and analyze relevant
products outside the industry, to discover
innovative ideas in products, services and
warranties. Knowledge transfer is key.

Determine strategies for market entry,


export, product development, branding,
sales channels and distribution.

Benchmarking
and cost analysis

Entrance and
development
strategies

ULCC
Defend market position against
emerging low-cost manufacturers and
suppliers that are targeting established
markets.

Preservation
and protection

Cost and pricing


targets and
trade-off
decisions

Cross-functional
alignment and
collaboration

Source: A.T. Kearney

Develop new cost-cutting approaches


for manufacturing, distribution and
procuring components; create pricing
policies to address margin erosion,
dealer margins and inventory.

Form internal cross-functional teams and join


with suppliers and distributors to reduce costs.

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
A.T. Kearney

EXECUTIVE AGENDA

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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 worlds 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.

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