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On Strategy: The Low-Cost Car Challenge

Low-cost cars will begin reaching America’s shores by the end of the decade.

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:

  1. Market selection:
    OEMs should focus on markets with high-potential for low-cost cars, expanding their sales coverage gradually
  2. Local adaptation:
    OEMs must account for the local preferences of each region they consider for low cost car introduction—an entry level car in China has far different requirements than one in the U.S.
  3. High levels of re-use and commonization:
    Low-cost cars should not only have a high level of common components across regions, but also with other models in an OEM’s portfolio
  4. Global platforms:
    In addition to common components, global platforms that low-cost cars can share with other models will further enhance their profitability
  5. Production in low cost countries:
    Optimal low-cost car production will have minimal exposure to unions and high wage countries
  6. Efficient/common production processes:
    Using global platforms, low-cost cars should share production processes with other models, and have key performance indicators that can be measured and improved
  7. Global/local sourcing strategies:
    Low-cost car production in low-cost countries can source specialized components globally and other components locally, balancing quality and cost.

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. 

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