Low-cost cars will begin reaching America’s shores by the end of the decade. These cars, which typically cost less than $10,000, are growing in popularity in the developing world, and they already have a considerable presence in Europe. While cheap gas in the U.S. has long blunted the demand for small cars, that era is now over.
Established OEMs can either surrender this segment to emerging OEMs, or they can attempt to profitably develop, manufacture, and sell low-cost cars. According to a recent Roland Berger study, the global low-cost car segment will approach 18 million units by 2012, up from 14 million today. In the U.S., the market for these cars should exceed 700,000 units by then. Given this growth, leading OEMs should make every effort to penetrate the low-cost car segment.
Nissan has had great success in this segment with its Dacia Logan in Europe. DaimlerChrysler is discussing an arrangement with a leading Chinese OEM to produce low-cost cars for possible sale in the U.S. and elsewhere. Other leading OEMs are also actively looking into the segment.
According to the basic laws of supply and demand, there is a market for more inexpensive cars: as the price for a unit falls, the demand for that unit will rise, all else held equal. Therefore, the question for OEMs is not how many low-cost cars they can sell, but rather, how can they sell them profitably?
Aside from developing branding and service offering strategies, established OEMs should consider seven factors to profitably sell low cost cars:
While the U.S. has seen low cost cars before, they either did not sell well or were unprofitable. On the other hand, established OEMs that consider all seven elements can develop a successful low cost car approach. Emerging OEMs will definitely enter this segment in the next few years, but established OEMs can still come away with the prize.