Mega Market for
Ultra-Low-Cost Cars
Focusing on customers in developing markets
As income levels rise in industrializing countries, an entirely new
category of vehicle buyers is emerging — and an enormous potential
for ultra-low-cost cars priced between $2,500 and $5,000. Is there
an opportunity for the major automakers from Renault-Nissan to
GM and Ford? Does this development also represent an opportunity
for German automakers, that have historically led the world’s premium
and luxury vehicle segments? As companies prepare for the low-cost car
market, they are planning vehicles that are priced for emerging economies but meet Western standards for safety and the environment.
The global passenger vehicle market is experiencing a revolution.
As the economies of many emerging
countries continue to develop, so
is the purchasing power of their
citizens. In the coming years, more
people than ever will desire to
become mobile and have the financial means to do so. According to
A.T. Kearney analyses, by 2020
approximately 16 million automobiles will be sold in the new lowerend segment per year — equivalent
to an annual growth rate of 24 percent (see figure 1 on the following
page). The key markets for ultralow-cost cars (ULCCs) will be India
and other markets in Southeast
Asia. Meanwhile, as income levels
in China and Russia increase, these
countries have moved beyond the
ultra-low-cost car market. Therefore,
we expect these markets to experience their highest growth rates in the
compact and medium-size vehicle
segments .
It’s the Volume that Counts
The auto industry can expect an
increase in new generations of potential vehicle buyers over the next few
decades. This is especially the case in
India. In 2005, there were approximately 208 million people in India
with incomes that theoretically enable
them to spend between $2,500 and
$5,000 on a new vehicle. By 2020,
this number will more than double
to 439 million people (see figure 2 on
the following page).
For the majority of these people,
it will be the first time they can afford
to buy a new car. The ideal vehicle will
be solid, functional and contain basic
equipment; and the owner should be
able to do most repairs on the vehicle
himself.
Apart from the cost to operate
a vehicle, which mainly consists of
fuel, the final sales price represents
a crucial purchasing factor. Manufacturers that can offer an ultra-lowcost car for $2,000 to $4,000 will
Success in the
ultra-low-cost
car sector requires
more than a solid
end product.
It will require
reviewing and
adapting the entire
business model.
benefit the most from the growth
of this new market segment (see
figure 3). The number of potential
new customers differs considerably
depending on the entry price level.
Again, using India as an example, our
analysis finds that if vehicles have an
entry price of $4,000, an estimated
270 million people will make up the
potential customer base in 2020.
FIGURE 1: Global sales forecast for ultra-low-cost cars
15.2
15
Rest of world
Africa
South America
Rest of Asia
Millions of units
• China will show slow
growth in the ULCC
segment
India
10
• India and rest of Asia
(outside China) represent
more than half the potential
market for ULCCs
China
6.3
15.6
12.4
10.0
7.1
7.6
4.8
5
3.6
2.6
2.6
2.6
1.8
0.9
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: A.T. Kearney analysis
FIGURE 2: Population by income class in India, 2005 vs. 2020
Income class*
Upper
>$10,000
Middle
$5,000 – $10,000
Target customers
Lower middle
$2,500 – $5,000
Poor
<$2,500
2005
CAGR**
2020
13%
193
million
10%
379
million
208
million
5%
439
million
771
million
–6%
321
million
31 million
93 million
Total
1.1 billion
Total
1.3 billion
*Incomes calculated in purchasing power parity, an exchange rate that equalizes the purchasing power of
different currencies in their home countries for a given basket of goods.
**CAGR = compound annual growth rate.
Sources: U.N. population studies; A.T. Kearney analysis
With an entry price of $3,000, the
market grows to 390 million people
or approximately 50 percent more
buyers. If the entry price is $2,000,
up to 530 million people will theoretically be able to afford to buy a
new ultra-low-cost car.
Knowledge of Local Market
Requirements
Because of their knowledge of local
markets, vehicle manufacturers from
emerging markets currently enjoy
a clear strategic advantage within
the rapidly growing ultra-low-cost
car segment. This is mainly because
market requirements within the various industrializing countries differ
significantly from developed countries
and because customers’ needs are
foremost when designing and marketing ultra-low-cost cars.
Local manufacturers often have
a leg up on established manufacturers, with some exceptions, because
they know the realistic selling prices
in their home markets and key purchasing criteria. These automakers
base their product concepts entirely
on the ultra-low-cost idea. They
design products that are cheaper to
build, assemble and sell than those
designed by Western engineers, who
until now have primarily worked on
slimming down existing vehicles. The
numbers speak volumes. Over the
past four years, the average growth
rate in vehicles sold (in all segments)
was roughly 8 percent per year for
emerging manufacturers, while sales
of the established global players grew
by roughly 4 percent.
Currently, Tata Motors can be
considered the leader in the ultralow-cost car market in India with the
introduction of the Nano in January
2008. This so-called “peoples car”
will be available in a few months for
FIGURE 3: Number of potential ULCC customers by vehicle price
600
Number of
potential
customers
Price
per
vehicle
500
530
$2,000
390
$3,000
270
$4,000
Millions
400
300
200
100
0
2006
2008
2010
2012
2014
2016
2018
2020
Source: A.T. Kearney analysis
roughly $2,500 in India.1 A strategic
cooperation between Tata Motors and
Fiat Auto suggests that this or a similar vehicle might be marketed outside
of India soon. Similar cooperative
agreements, such as the one between
Mahindra & Mahindra and RenaultNissan, indicate that others might
follow soon.
ULCCs Require New
Thinking
Manufacturers recognize that success
in the ultra-low-cost car sector
requires more than a solid end product. In most cases the entire business
model is being reviewed and adapted
as necessary. For established automakers that are considering getting
into the ULCC market, launching
a new brand specifically for their
ultra-low-cost cars will ensure a clear
differentiation from existing brands.
Renault followed a similar approach
when it acquired the Romanian carmaker Dacia to position a new lowend product below its own product
portfolio in Europe.
1
2
The configuration of ultra-lowcost vehicles is standardized as much
as possible to reduce manufacturing
complexity and therefore production costs, and the vehicles are best
manufactured (with low factor costs)
in low-cost country locations such
as India. For the established larger
market players, this means setting
up production facilities specifically
to build these vehicles in their
target regions. We can expect to see
manufacturers setting up one highproductivity manufacturing plant per
region, from where the vehicles are
shipped to a small number of regional
distribution centers.
In terms of the dealer network,
a large and expensive network is neither necessary nor financially viable.
Instead, the standard version of the
ULCC is likely to be sold through a
small number of regional outlets where
the customer comes to the vehicle
rather than the vehicle to the customer.
This is a trend that has occurred in
other industries for low-cost products.
In the furniture industry, for example,
Price before distribution and taxes.
“Q&A: India’s Tata Motors Chief Ratan Tata,” Edmunds AutoObserver, 11 January 2008.
the traditional showroom was replaced
by large outlets such as Ikea, where
customers select a product and take it
home with them.
The Internet is also a well suited
alternative sales channel for ULCCs.
After an online purchase, customers
can pick up the standardized finished
vehicle from the distribution center;
the automaker does not have to offer
any additional expensive services.
(Authorized workshops for maintenance and repairs would be the
exception.) ULCCs are designed and
constructed so they can be repaired
either by local mechanics or the
owner, while spare parts are ordered
from central warehouses.
Safety, the Environment and
a No-Frills Standard
Because of the specific functional
requirements of this new customer
group, we expect ultra-low-cost cars
to be marketed not only as threedoor station wagons but also as
pickup trucks.
Safety issues are becoming
increasingly important in emerging
markets. In fact, Ratan Tata, chairman of Tata Motors, says he started
work on ULCCs because of safety.
“I saw families of three or four riding
on scooters,” says Tata. He then
learned that traffic deaths on twowheelers were three or four times that
of cars.2 Safety features for ULCCs
will want to comply with local standards (such as those issued by the
U.S. National Highway Traffic Safety
Administration or the European
Enhanced Vehicle Safety Committee).
With respect to pollution and
environmental standards — for
instance, regarding fuel consumption
and CO2 emissions—we expect the
vehicles to satisfy the international
Euro III and even Euro IV standards.
The tailpipe emissions for the Nano,
for example, beat regulatory requirements, have a lower pollution level
than two-wheelers being manufactured in India today, and the Nano
is capable of achieving 50 miles per
gallon. The standard engine could
be a three- or even two-cylinder
gasoline unit with 450 cubic centimeter displacement and roughly 33
horsepower output combined with a
manual four-speed transmission. And
according to the Economic Times, Tata
is planning electric, hybrid and hydrogen-powered cars for the mass market
that could be available by 2011.3
Vehicle costs will vary depending on the additional equipment and
features added to tailor the vehicles to
various target markets. The interior of
basic vehicles will have simple instruments and seat belts. For India and
other Asian countries, our analysis
of the 2020 market is based on the
latest vehicle configuration calculated
on the basis of minimum costs being
$3,200; only in Africa are the costs
slightly lower at $3,100. The lowest
cost estimate for Russia is $3,370,
while China is closer to $3,680. These
costs include a distribution and marketing premium of about 15 percent
of production costs.
With respect to pricing and margins, traditional markups of around 25
percent of production costs to cover
marketing expenses alone will not be
achievable in this market. Instead
of a classic two-level model with
wholesale and retail, companies will
want to use a form of the direct sales
concept—whereby the organization is
based on a small number of sales and
distribution centers that are owned
and operated by the manufacturer.
With such a lean distribution strategy,
manufacturers could achieve a 10 percent gross sales margin. This margin
can then be improved through the
sale of spare parts and accessories sold
over the Internet and through existing
retailers at the distribution centers.
New Financing Models
Financing is another topic of interest
to potential car buyers. Considering
the importance of mobility to an
entire family, our forecasts suggest
that many families will jointly raise
the money required to buy a vehicle
that an individual alone would not be
able to purchase. Despite this “family
effect,” there will still be a need for
new and innovative financing models.
Financing can be solved with one of
two models: the “Grameen model,”
which is a form of microfinance
specifically adapted to local needs
and requirements, and a so-called
“mobility model” in which the vehicle
remains the property of a manufacturer that then charges fees to those
sharing the vehicle based on their
actual usage. Both models are highly
regarded among microenterprise
lending programs around the world
as powerful tools to help raise people
out of poverty.
The Outlook
The ultra-low-cost car segment will
experience rapid growth between now
and 2020. Even if local manufacturers
currently enjoy distinct competitive
advantages because of their detailed
knowledge of local markets and customer requirements, the established
automakers will most certainly not
want to miss out on this market segment—24 percent annual growth
rates are too attractive to ignore.
Automakers can also learn to develop
new low-cost approaches to stay competitive in established segments.
To operate successfully in this
market, many established players
are moving now to cooperate with
local players to develop such low-cost
products from scratch. If manufacturers succeed in rethinking product
design, defining the right business
model, and in taking the “design to
cost” principle seriously, it will certainly be feasible for them to achieve
acceptable rates of return from selling ultra-low-cost cars—especially if
they remember the two areas where
absolutely no compromises should
be made for long-term success: safety
and environmental standards.
Authors: Stephan Mayer is a vice president in the Stuttgart office, and can be reached at [email protected].
Ruediger Pleines is a consultant in the Munich office, and can be reached at [email protected].
3
“Tata Plans Hybrid Indica, Buses as Part of ‘Go Green’ Drive,” Economic Times, 10 February 2008.
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