Frugal engineering. It is easily one of the biggest challenges to hit the automobile industry globally and is fast shaping up as the most promising high-number segment for carmakers. Low-cost cars, primarily a result of cheap sourcing and intelligent engineering to produce vehicles at breakthrough budget prices, can be called the latest fad in the industry with automakers in India and abroad looking at the yet-to-mature segment as their next big catalyst.
While Renault has already tasted success with its ?no-frills? ?Logan?, other carmakers are not far behind and seem to be working aggressively on their own plans to gain a foothold in the segment. And going by the sheer gigantic size and potential for such low-cost vehicles, India is set to emerge as one of the biggest countries for testing and launch of such vehicles.
?The Renault Logan has stimulated immense interest in the low-cost car sector, and the next five years will see a variety of competitors, ranging from Tata to Toyota enter the market with similar products,? says a study by PricewaterhouseCoopers (PwC).
India will be the main test ground for low-cost cars with almost all automakers planning to launch their offerings to entice the vast untapped market. Already, Tata Motors has created a stir in the automotive circles globally by announcing a never-before Rs 1 lakh ($2,500) car that it plans to roll out in 2008.
As it nears the end of its ambitious task, the car-maker is finding that it is not alone in the pursuit, with others like Renault-Nissan also looking at the segment, apart from other Indian companies like Bajaj and Hero.
?Low-cost vehicle programmes will enable automakers to develop new cost-reduction techniques and technologies which can be implemented across their entire product range.
Automakers have realised that they cannot afford to neglect the potential of this segment and hence almost all major automakers have announced plans to introduce their versions of the low-cost cars,? PwC says.
And pointing to the high-potential for such vehicles in Asia-Pacific, it states that by 2014, every other low-cost vehicle will be assembled in the region, with India and China each accounting for 34% and 11% respectively of global output. Analogous to the potential impact of the $100 PC to the computer industry, low-cost cars will enable millions across the globe to afford a new car, the report said. PwC estimated that about 3.5 million low-cost vehicles, spanning different size segments ranging from sub-compacts to larger MPVs, will be sold annually by 2014.
But why the rush for low-cost cars? Stagnant or shrinking sales in developed markets across the globe have automakers scouting for new growth opportunities. While economic expansion in countries like China and India drive sales, some automakers are betting heavily on low-cost vehicles to accelerate this process by offering new consumers a more affordable point of entry.
PwC says that just as they motorise global masses, low-cost vehicle programmes are expected to add four million units over the next five years. ?Mature automakers will compete head-to-head with the likes of Chery and Tata to capture those consumers transitioning from two wheels to four,? it said.
However, it points out a flip side to the whole rosy growth numbers. ?Such an influx of vehicles will likely expose the drastically deficient infrastructure and socio-economic disparity in these markets, ultimately acting to counter-balance full growth potential,? it said.
Speaking about the vehicles, the report said against aging technology or re-badge engineering done earlier, today?s low-cost vehicle are priced aggressively due to their design. ?They are the result of a cost-conscious engineering effort to lower the entry-price barriers of the market segments that they compete in while upholding safety and quality standards,? it said, giving the example of Renault Logan designed as a global low-cost vehicle form the very beginning.
?Having witnessed the success of the Logan, almost every major automaker across the globe is planning to introduce a low cost car in the near future,? PwC said, adding that the vehicle proved to be an ?industry change catalyst? by addressing primal mass transportation needs as a low cost vehicle.
?Skepticisms about the Logan programmes, have been lifted and competitors, as often, are trying to emulate their own versions of the programme,? it said, adding that while most manufacturers intended to replicate the Logan model, a few were aiming at going beyond. ?The next automotive revolution might originate from India,? it said, importantly.
Delving into the Rs 1 lakh car of the Tatas, the report said it will be the first economic and safe alternative to family transport for the vast majority of Indians. ?India?s two wheeler customers, about eight million last year alone, offer a huge addressable market for the Rs 1 lakh car. The target consumer demographic is the fastest growing segment in the Indian income pyramid,? it said, listing out the proposed vehicles strengths.
However, PwC also noted the weakness and threats to the vehicles. Among these it listed multiple product offerings in the same price segments. Also, potential threats could come from introduction of government-mandated safety regulations, increase in the raw materials prices and also heavy reliance on the Indian market that could expose the programme to market cyclicality.
Abdul Majeed, Partner at Pricewaterhouse who tracks the auto sector, says that sub-Rs 1.5 lakh could well emerge as one of the new, and perhaps strongest, segment in the Indian car market. ?No doubt, a new segment is set to emerge in the market and big numbers would mean more competition for the Tatas,? he says.
However, he adds that success of the segment depends on how appealing the proposed cars would be and their fuel efficiency and safety features. ?It is a big challenge and even industry players are divided on the chances of its viability and success. It is certainly a gamble and hinges on the volumes a company can get,? Majeed says.