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 This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Graeme Deans is a partner based in the Toronto office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Shiv Shivaraman is a principal based in the Southfield office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Sudipta Ghosh is a manager based in the Southfield office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Ruediger Pleines is a manager based in the Munich office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .