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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?

T o fulfill his promise “to build a car small


enough for the individual to run and care
for, [of ] the simplest designs that modern engi-
distribution methods. One hundred years later,
entrants into the ultra-low-cost car (ULCC)
market have the same agenda in their attempt
neering can devise, [and] low in price,” Henry to build a car with a price tag of $2,500 to
Ford exploited innovative product design, ven- $5,000, which is lower in comparable dollars
dor relationships, manufacturing techniques and than Henry Ford’s $850 Model T.
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But this is not a history lesson that can Over the longer term, the emerging ultra-
be easily repeated. Today, all indicators point low-cost car market promises to create rich
to an automotive industry in recession, requir- opportunities—and risky challenges—for global
ing its leaders to balance the global economic auto industry participants that must decide if
crisis with future market demand. Industry they want to preserve and protect their current
consolidation and restructuring in global mar- positions or participate and prosper in the
kets will accelerate, propelled by the lack of new market. Manufacturers and suppliers must
availability to capital and consumer financing, be willing and able to partner and, more
high fuel costs and low consumer confidence. importantly, to change their traditional operat-
Undoubtedly, a new and improved automo- ing paradigms.
tive operating model will emerge from this
crisis, facilitated by innovation and low-cost
solutions to serve the demands of a broader
Preserve and Protect or
market of consumers. Perhaps the launch of Participate and Prosper?
the ultra-low-cost car marks the beginning of It is indisputable that the competitive landscape
a redefinition of the competitive landscape for has been altered dramatically and permanently
the entire industry. (see sidebar: The Market for Ultra-Low-Cost Cars).

The Market for Ultra-Low-Cost Cars


In emerging markets, there are at FIGURE: India and “rest of Asia” will make up more than half
least 10 models already selling for of sales in the low-cost car market by 20201
less than $6,000. India and the rest
17.5
of Asia (excluding China) represent 17.5 17.0
Vehicles sold per year — regular and ULCC (millions)

Rest of
the fastest growing regions. We world
15.0
project annual low-cost country 13.9 Africa
South
volumes to grow to approximately 12.5
America
17.5 million units globally by 2020 11.2
Rest of
Asia
(see figure). Although China and 10.0
8.5
India will continue to be the most 8.0
7.5 7.1
populous countries in 2020 with
5.4
1.4 billion and 1.3 billion people 5.0
India
4.0
respectively, their receptiveness 3.0 3.0 2.9
to low-cost vehicles differs. The 2.5 2.0
1.0 China
more rapid increase in disposable
0
income in China, combined with an
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

aging population and a historical


12007 estimates based on sales of regular low-cost cars and ultra-low-cost cars in the range of $3,100 to $7,800
preference for larger vehicles, lead (Nano + tax + distribution)
to the conclusion that India and the Sources: United Nations demographic studies; A.T. Kearney Global Business Policy Council population development,
infrastructure improvement and economic growth analyses
rest of Asia (excluding China) will be
the most promising ultra-low-cost that China should be neglected. The in overall vehicle production and,
car markets, accounting for perhaps size of the Chinese market in 2020, ultimately, to the profitable pro-
60 percent of the estimated global estimated at 2.6 million units, will duction of low-cost vehicles.
market potential. This is not to say contribute significantly to the rise

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FIGURE 1

Low-cost cars are selling in advanced and emerging markets

Low-cost car (LCC)

Advanced markets Emerging markets

Mini-car Regular low-cost car Ultra-low-cost car

Current vehicle Current vehicle Current vehicle


• Price: $7,801 to $12,000 • Price: $5,001 to $7,800 • Price: $2,500 to $5,000
• Market size: 2.5 to 3.7 million • Market size: 2.4 to 4.5 million • Market size: 2.3 to 3 million
• Also known as A-class vehicles • Uses technology and parts of mini- • Produced in high volumes with
• Achieves cost levels via cars sold in advanced markets basic trim
smaller size • Achieves cost levels via reduced • Achieves cost levels via reduced
content and by purchasing from size and content and by purchas-
local sources ing from local sources

Popular in Europe and Gaining popularity Attracting significant interest


Japan, with growing popularity in emerging markets from the automotive industry
in North America

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

Moreover, the expansive potential of this market levels—will make hard-to-come-by profits easily
is commanding the attention of manufacturers susceptible to rising commodity prices, product
and vendors worldwide, with a number of global launch missteps and market economics.
players recently announcing strategies to enter The dynamic and powerful ultra-low-cost
or compete in the sector (see figure 1). General car market is forcing manufacturers and suppli-
Motors, which produces the mini-car, Spark, in ers to decide between two strategies. The first is
India, expects to introduce another low-cost car to preserve their brand and market positions
in 2009. Hyundai and Renault S.A.–Nissan and protect them against new market entrants,
have plans to produce a car for the low-cost car current competition and future price pressures.
market, and Škoda Auto, part of the Volkswagen Established suppliers opting for this stance risk
Group, is investing in product development falling into the “low-cost trap” between manu-
and plans to expand capacity in India. Fiat facturers and their new component standards
announced in August that it would market three and lower target prices. A new set of low-cost
models in China. competitors will emerge with the potential to
It is equally indisputable that using tradi- enter mature markets and capture market share
tional design, manufacturing and distribution from the domestic suppliers, forcing existing
approaches to achieve ultra-low-cost car entry participants to protect their positions.
prices below $3,500 will be a difficult task. The other choice for manufacturers and
A low price point and razor-thin margins — suppliers is to participate to capture share in the
estimated at around 3 percent at the base model fastest growing segment of the industry and

A.T. Kearney | EXECUTIVE AGENDA 57


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Similar to Henry Ford’s 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 Invent rather than adapt. Tata encouraged
market. We believe first movers will have the its design and manufacturing suppliers to be
opportunity to capture market share and build innovative—to redesign parts for a simple and
consumer loyalty. less capital-intensive manufacturing process, and
develop new ways to sell and distribute the Nano.
In fact, suppliers were forbidden to adapt carry-
Apply a Clean-Sheet Approach over parts from other Tata vehicles for use in the
Early movers on both the manufacturer and Nano, and in some manufacturing operations,
supplier sides have demonstrated that nothing such as welding, engineers opted for cheaper
less than a clean-sheet approach to product manual processes rather than automated ones.
development and manufacturing can produce Standardize at every stage of the value
a vehicle that sells for less than $3,500. Tata chain. Similar to Henry Ford’s apocryphally attri-
Motors, for example, used this approach to buted “any-color-so-long-as-it’s-black” approach,
develop the Nano, the world’s least expensive the Nano offers consumers few options, and
automobile, by adhering to four guidelines. only a few have any impact on the manufac-
Cooperate with suppliers. Tata began the turing process.
development process with 600 closely integrated The Nano’s distribution model reflects its
suppliers; only 100 remain. Independent suppli- innovative heritage, too. The company plans to
ers provide 80 percent of the Nano’s compo- mobilize large numbers of third parties to reach
nents, and 97 percent of the vehicle is sourced remote rural consumers, tailor the products and
in India. Suppliers such as Bosch worked with services to serve their needs, and add value to
Tata and employed Indian engineers with motor- the core product or service through ancillary
cycle, rather than automobile, design experience services. For example, one plant will produce
to craft innovative low-cost components. vehicle modules that are then sent to a number
Reduce the number and complexity of of strategically positioned satellite mini-factories,
parts. By focusing on the essentials and encour- where the Nano will be assembled and then
aging creativity in making components smaller, delivered to the buyer. A central warehouse will
lighter and cheaper, Tata avoided engineering stock spare parts and accessories.
non-functional, non-essential parts. Bosch, for As demonstrated with the Nano, the
example, adapted a smaller and lighter motor- clean-sheet approach offers another signifi-
cycle starter for use in the Nano. And the car’s cant advantage: innovation in product design,
wheels are attached with only three lug nuts manufacturing and distribution. As innovative
to reduce cost. product designs make their way down the

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segment tiers, manufacturing innovations will As powerful a tool as the clean-sheet


make their way up the same tiers. For example, approach is, however, it does not assure success
anti-lock braking systems and airbags will find in the marketplace. A product designed to
their way into low-cost cars while efficiency minimums will be vulnerable to sharp increases
measures and cost improvements are transferred in commodity prices that slow the creation of
into more expensive vehicles. new parts and threaten margins. The challenge

A ULCC on Europe’s Roads? Probably.


On North America’s Roads? Probably Not.
It’s an obvious question: Will the FIGURE: Price of ultra-low-cost cars can rise
ULCC segment target consumers in developed markets
in the world’s two most affluent
Higher-end cars (ultra-low-cost or low-cost)
markets, Europe and North America? $515 $9,107
$244 $210 $8,591
The answer—two answers, actu- $1,000 $388
$750
ally—is not so obvious. We believe $1,000
$5,000
European consumers can expect to
see an ultra-low-cost car entry, but
not soon. North American consum-
ers will probably not see any. The
costs of regulatory compliance and
distribution could drive the sale Tata Nano base model $228 $4,034
$105 $108 $93 $3,806
$125
price up 60 to 90 percent. $500
$375

Three overarching factors will $2,500

shape the ultra-low-cost car’s future


in both markets:
Emission standards. Western
Europe, Japan and North America Base Conver- Logistics Market- Manu- Dealer- Import Expected Sales Total
price sion cost ing facturer ship tariffs1 MSRP2 tax cost
established emissions standards profit profit

more than a decade ago. Emerging 1For countries with normal trade relation status
2Manufacturer suggested retail price
markets such as China and India
Sources: Automotive News Data Center; Global Auto Insider; U.S. Department of Transportation Federal Motor
are adopting European standards, Vehicle Safety Standards; A.T. Kearney analysis

but with a five- to seven-year lag.


Autos in the lightweight low-cost car ter few, if any difficulties, in meeting to meet government regulations.
segment, with their small engines those standards. As European and With logistics, marketing and pro-
and modest fuel consumption, will North American governments con- motions, manufacturer-dealer prof-
meet current emissions standards. tinue to establish higher standards, its, tariffs, account destination fees,
Safety regulations. North there will be compliance issues. and taxes bumping the final cost up
America and Europe have similar Distribution. Bringing a even further. Applying the same per-
government-developed safety regu- ULCC to the North American or centage increases to an ultra-low-
lations with respect to seat belts, European market will result in a sig- cost car at the highest price point
rollover and rear-, side- and frontal- nificant price increase (see figure). in the category—$5,000—results
protection standards. In developing The $2,500 target base price of the in a North American or European
countries, the standards are lower, Nano, for example, could jump to sales price of more than $9,000.
and ultra-low-cost cars will encoun- more than $4,000, with conversions

A.T. Kearney | EXECUTIVE AGENDA 59


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will be to further reduce the cost of a product makes it impossible to develop radical new and
when there is very little wiggle room to do so. innovative thinking.
Success will be volume dependent, with In addition to Tata’s clean-sheet approach,
margins held to the low single-digit range. we believe success in the ultra-low-cost car seg-
And that presents the inevitable question: ment requires the following (see figure 2):
Will ultra-low-cost car manufacturers enter the Create entrance and growth strategies.
European and North American markets in an So far, most entrance and growth strategies have
effort to increase volume? We believe the been similar as a multitude of manufacturers
answer is yes to Europe and no to North rush to gain first-mover advantage in the rap-
America—but not soon and not at the ULCC idly growing Indian market. India, the default
price (see sidebar: A ULCC on Europe’s Roads? build-and-sell location, has the greatest pro-
Probably. On North America’s Roads? Probably Not jected market growth in the Asia-Pacific region.
on page 59). Now, manufacturers are developing plans to
expand their production footprints beyond
India, with Thailand as one of the early target
The Strategy: What Works? locations. Southeast Asia will remain the pri-
What Doesn’t? mary export market for new models, and the
Tata’s model is a case study in what to do right Middle Eastern and African markets are in line
and stands in vivid contrast to less effective for subsequent growth.
strategies. Some manufacturers, for example, A consistent design strategy is emerging
introduce older models into the market to based on a clean-sheet approach rather than
take advantage of their fully paid-up base of pulling from reusable vehicle architectures or
equipment and tools. The Buick Regal was pre-populated product shelves.
among the first entrants in China. While this Entry into this market segment will not
approach provides rapid entry into a new come without risk, however. It will require shift-
market, it does so at a cost: The cars often do ing paradigms from the traditional global pro-
not meet specific customer needs and are at cesses to thinking creatively and meeting target
a competitive disadvantage in relation to locally market vehicle specifications and prices. The
tailored products. market must be sized accurately to capture ade-
Other car manufacturers streamline existing quate volume and thus recover investments.
models to fit low-cost prerequisites or redesign What’s more, all strategies and tactics focus
select parts to meet specific market require- on avoiding cannibalization of current market
ments. While this provides an opportunity to portfolios, deploying already scarce resources,
offer some customization, it limits the potential establishing robust supplier partnerships (design-
for cost reduction. to-cost targets, truly collaborative engineering,
Finally, some manufacturers design a “new” volume commitments and lifetime contracts,
car within a design-to-cost framework, but for example), and building manufacturing foot-
reuse a significant number of existing parts. prints that can scale-up quickly with minimum
This minimizes engineering costs and maxi- capital outlays.
mizes economies of scale, but makes it difficult Establish targets and make trade-off
to eliminate designed and built-in functional- decisions. Manufacturers will focus their devel-
ities, along with their built-in costs. It also opment 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 low- Determine strategies for market entry,
cost car industry and analyze relevant export, product development, branding,
products outside the industry, to discover sales channels and distribution.
innovative ideas in products, services and
warranties. Knowledge transfer is key. Benchmarking Entrance and
and cost analysis development
strategies

ULCC
Preservation Cost and pricing
Defend market position against targets and Develop new cost-cutting approaches
emerging low-cost manufacturers and and protection for manufacturing, distribution and
trade-off
suppliers that are targeting established decisions procuring components; create pricing
markets. policies to address margin erosion,
dealer margins and inventory.
Cross-functional
alignment and
collaboration

Form internal cross-functional teams and join


Source: A.T. Kearney with suppliers and distributors to reduce costs.

collaborating with key suppliers to redesign The only way for the ultra-low-cost car manu-
interfacing components and sub-systems to facturer to accomplish this is by:
keep costs low while also meeting mass-market • Forming new organizations dedicated to the
production targets. A variety of trade-off deci- creation of an ultra-low-cost car
sions must be made: • Redesigning processes and policies so the
• Engineering. Should it be X or Y? Redesign entire team works toward common goals
or reuse components? Define new technical • Revamping incentive structures to manage
specifications for materials and performance? conflicts and balance trade-off decisions
• Manufacturing. Where and what type of • Expanding supplier-selection criteria to include
site? What production processes? What degree innovation and product diversification
of automation? • Partnering with suppliers early in the design,
• Sourcing. How much local content versus manufacturing, engineering and assembly
how much imported? processes
• Pricing. Lower price and higher volume? Protect and preserve market position
Higher prices for export units? What is the and profits. Success in this market will require
best approach to pricing and bundling manufacturers and suppliers to employ their
optional accessories? know-how in the higher-cost vehicle seg-
Align across functions and collaborate ments, including vast experience in emerging
with suppliers. To deliver a car priced between markets, product innovations and cost struc-
$2,500 and $3,500 and to meet local market tures. Those that decide not to participate
specifications, emissions and safety standards in the ultra-low-cost car segment must protect
will force use of fewer carry-over parts, which and preserve their current brands, market
will necessitate major new product innovations. positions and profit margins. Real risks will

A.T. Kearney | EXECUTIVE AGENDA 61


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emerge if any of the following scenarios occurs: competitors’ products) must go beyond compar-
• In the next two to five years, safety and emis- ing innovative ideas in the low-cost car industry
sion standards are met and ultra-low-cost to evaluating innovations in adjacent industries.
cars are exported and distributed to mature In these markets, why not analyze the manu-
markets facturers of scooters and rickshaws? Focus on
• Manufacturers adopt a new set of target prices identifying innovative ideas and employ a sys-
from ultra-low-cost car product innovations tematic approach to conduct the tear-down,
and expect competing suppliers to comply capture insights and inject knowledge at appro-
• A manufacturer or supplier enters the market priate stages in the development cycle.
but cannibalizes its existing portfolio
• The competition generates “know-how” that
gives them an early-mover advantage in the
A Measure of Cooperation,
market Creativity and Innovation
Regardless of which scenario plays out, or We believe success in the ultra-low-cost car
if they all do, the risks will be considerable. market can be achieved and will be measured by
The mantra will be to identify competitors— cooperation, creativity and innovation. There is
their capabilities, product plans, partnerships a certain and unknown amount of risk, but
and target costs. Equally important is to have this market is destined to change the industry
a flawless launch cycle and sustain volumes to landscape, much like the Model T changed
maximize returns. It is essential to know how auto manufacturing and the world’s sense of
much time is left before emerging-market com- mobility. While ultra-low-cost cars may not be
petitors re-engineer or adapt their products and available on every continent, the innovative
pose a credible threat in mature markets. ideas and techniques generated for this market
Benchmark the competition. Benchmark- will have a long-lasting impact on the entire
ing and competitive tear-downs (cost analyses of 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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