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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?

T o fulfill his promise “to build a car small

enough for the individual to run and care
for, [of ] the simplest designs that modern engi-
neering can devise, [and] low in price,” Henry
Ford exploited innovative product design, ven-
dor 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.
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But this is not a history lesson that can Over the longer term, the emerging ultra-
be easily repeated. Today, all indicators point low-cost car market promises to create rich
to an automotive industry in recession, requir- opportunities—and risky challenges—for global
ing its leaders to balance the global economic auto industry participants that must decide if
crisis with future market demand. Industry they want to preserve and protect their current
consolidation and restructuring in global mar- positions or participate and prosper in the
kets will accelerate, propelled by the lack of new market. Manufacturers and suppliers must
availability to capital and consumer financing, be willing and able to partner and, more
high fuel costs and low consumer confidence. importantly, to change their traditional operat-
Undoubtedly, a new and improved automo- ing paradigms.
tive operating model will emerge from this
crisis, facilitated by innovation and low-cost
solutions to serve the demands of a broader
Preserve and Protect or
market of consumers. Perhaps the launch of Participate and Prosper?
the ultra-low-cost car marks the beginning of It is indisputable that the competitive landscape
a redefinition of the competitive landscape for has been altered dramatically and permanently
the entire industry. (see sidebar: The Market for Ultra-Low-Cost Cars).

The Market for Ultra-Low-Cost Cars

In emerging markets, there are at FIGURE: India and “rest of Asia” will make up more than half
least 10 models already selling for of sales in the low-cost car market by 20201
less than $6,000. India and the rest
17.5
of Asia (excluding China) represent 17.5 17.0
Vehicles sold per year — regular and ULCC (millions)

Rest of
the fastest growing regions. We world
15.0
project annual low-cost country 13.9 Africa
South
volumes to grow to approximately 12.5
America
17.5 million units globally by 2020 11.2
Rest of
Asia
(see figure). Although China and 10.0
8.5
India will continue to be the most 8.0
7.5 7.1
populous countries in 2020 with
5.4
1.4 billion and 1.3 billion people 5.0
India
4.0
respectively, their receptiveness 3.0 3.0 2.9
to low-cost vehicles differs. The 2.5 2.0
1.0 China
more rapid increase in disposable
0
income in China, combined with an
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

aging population and a historical

preference for larger vehicles, lead
to the conclusion that India and the
rest of Asia (excluding China) will be
the most promising ultra-low-cost
car markets, accounting for perhaps
60 percent of the estimated global
market potential. This is not to say
12007 estimates based on sales of regular low-cost cars and ultra-low-cost cars in the range of $3,100 to $7,800
(Nano + tax + distribution)
Sources: United Nations demographic studies; A.T. Kearney Global Business Policy Council population development,
infrastructure improvement and economic growth analyses
that China should be neglected. The in overall vehicle production and,
size of the Chinese market in 2020, ultimately, to the profitable pro-
estimated at 2.6 million units, will duction of low-cost vehicles.
contribute significantly to the rise

56 A nano car in every driveway?


FIGURE 1
Low-cost cars are selling in advanced and emerging markets
Low-cost car (LCC)
Advanced markets
Mini-car
Current vehicle
• Price: $7,801 to $12,000
• Market size: 2.5 to 3.7 million
• Also known as A-class vehicles
• Achieves cost levels via
smaller size
Popular in Europe and
Japan, with growing popularity
in North America
Sources: J.D. Power and Associates; A.T. Kearney analysis
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 tradi-
tional 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
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Emerging markets
Regular low-cost car Ultra-low-cost car
Current vehicle Current vehicle
• Price: $5,001 to $7,800 • Price: $2,500 to $5,000
• Market size: 2.4 to 4.5 million • Market size: 2.3 to 3 million
• Uses technology and parts of mini- • Produced in high volumes with
cars sold in advanced markets basic trim
• Achieves cost levels via reduced • Achieves cost levels via reduced
content and by purchasing from size and content and by purchas-
local sources ing from local sources
Gaining popularity Attracting significant interest
in emerging markets from the automotive industry
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 suppli-
ers 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 manu-
facturers 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
A.T. Kearney | EXECUTIVE AGENDA 57
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Similar to Henry Ford’s apocryphally attributed “any - color - so -
long - as - it ’s - bl ack ” approach , the Nano offers consumers
few options, and only a fe w have any impact on the
manufacturing process .
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 suppli-
ers provide 80 percent of the Nano’s compo-
nents, 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 encour-
aging creativity in making components smaller,
lighter and cheaper, Tata avoided engineering
non-functional, non-essential parts. Bosch, for
example, adapted a smaller and lighter motor-
cycle starter for use in the Nano. And the car’s
wheels are attached with only three lug nuts
to reduce cost.
58 A nano car in every driveway?
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 attri-
buted “any-color-so-long-as-it’s-black” approach,
the Nano offers consumers few options, and
only a few have any impact on the manufac-
turing 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 signifi-
cant advantage: innovation in product design,
manufacturing and distribution. As innovative
product designs make their way down the
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segment tiers, manufacturing innovations will As powerful a tool as the clean-sheet

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.
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

A ULCC on Europe’s Roads? Probably.

On North America’s Roads? Probably Not.
It’s an obvious question: Will the FIGURE: Price of ultra-low-cost cars can rise
ULCC segment target consumers in developed markets
in the world’s two most affluent
Higher-end cars (ultra-low-cost or low-cost)
markets, Europe and North America? $515 $9,107
$244 $210 $8,591
The answer—two answers, actu- $1,000 $388
$750
ally—is not so obvious. We believe $1,000
$5,000
European consumers can expect to
see an ultra-low-cost car entry, but
not soon. North American consum-
ers will probably not see any. The
costs of regulatory compliance and
distribution could drive the sale Tata Nano base model $228 $4,034
$105 $108 $93 $3,806
$125
price up 60 to 90 percent. $500
$375

Three overarching factors will $2,500

shape the ultra-low-cost car’s future

in both markets:
Emission standards. Western
Europe, Japan and North America Base Conver- Logistics Market- Manu- Dealer- Import Expected Sales Total
price sion cost ing facturer ship tariffs1 MSRP2 tax cost
established emissions standards profit profit

more than a decade ago. Emerging
markets such as China and India
are adopting European standards,
1For countries with normal trade relation status
2Manufacturer suggested retail price
Sources: Automotive News Data Center; Global Auto Insider; U.S. Department of Transportation Federal Motor
Vehicle Safety Standards; A.T. Kearney analysis

but with a five- to seven-year lag.

Autos in the lightweight low-cost car
segment, with their small engines
and modest fuel consumption, will
meet current emissions standards. tinue to establish higher standards,
Safety regulations. North
America and Europe have similar
government-developed safety regu-
lations with respect to seat belts,
rollover and rear-, side- and frontal-
protection standards. In developing
countries, the standards are lower,
and ultra-low-cost cars will encoun-
ter few, if any difficulties, in meeting
those standards. As European and
North American governments con-
there will be compliance issues.
Distribution. Bringing a
ULCC to the North American or
European market will result in a sig-
nificant price increase (see figure).
The $2,500 target base price of the
Nano, for example, could jump to
more than $4,000, with conversions
to meet government regulations.
With logistics, marketing and pro-
motions, manufacturer-dealer prof-
its, tariffs, account destination fees,
and taxes bumping the final cost up
even further. Applying the same per-
centage increases to an ultra-low-
cost car at the highest price point
in the category—$5,000—results
in a North American or European
sales price of more than $9,000.

A.T. Kearney | EXECUTIVE AGENDA 59

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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
on page 59).
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 require-
ments. 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 maxi-
mizes economies of scale, but makes it difficult
to eliminate designed and built-in functional-
ities, along with their built-in costs. It also
60 A nano car in every driveway?
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 seg-
ment 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 rap-
idly growing Indian market. India, the default
build-and-sell location, has the greatest pro-
jected 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 pri-
mary 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 shift-
ing paradigms from the traditional global pro-
cesses to thinking creatively and meeting target
market vehicle specifications and prices. The
market must be sized accurately to capture ade-
quate 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 foot-
prints that can scale-up quickly with minimum
capital outlays.
Establish targets and make trade-off
decisions. Manufacturers will focus their devel-
opment efforts around design-to-cost targets—
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FIGURE 2

Five key operating dimensions for the ultra-low-cost car market

Compare manufacturers within the low- Determine strategies for market entry,
cost car industry and analyze relevant export, product development, branding,
products outside the industry, to discover sales channels and distribution.
innovative ideas in products, services and
warranties. Knowledge transfer is key. Benchmarking Entrance and
and cost analysis development
strategies

ULCC
Preservation Cost and pricing
Defend market position against targets and Develop new cost-cutting approaches
emerging low-cost manufacturers and and protection for manufacturing, distribution and
trade-off
suppliers that are targeting established decisions procuring components; create pricing
markets. policies to address margin erosion,
dealer margins and inventory.
Cross-functional
alignment and
collaboration

Form internal cross-functional teams and join

Source: A.T. Kearney with suppliers and distributors to reduce costs.

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 deci-
sions 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 manu-
facturer 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 seg-
ments, including vast experience in emerging
markets, product innovations and cost struc-
tures. 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

A.T. Kearney | EXECUTIVE AGENDA 61

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emerge if any of the following scenarios occurs:
• In the next two to five years, safety and emis-
sion 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 com-
petitors re-engineer or adapt their products and
pose a credible threat in mature markets.
Benchmark the competition. Benchmark-
ing and competitive tear-downs (cost analyses of
competitors’ products) must go beyond compar-
ing innovative ideas in the low-cost car industry
to evaluating innovations in adjacent industries.
In these markets, why not analyze the manu-
facturers of scooters and rickshaws? Focus on
identifying innovative ideas and employ a sys-
tematic approach to conduct the tear-down,
capture insights and inject knowledge at appro-
priate 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 dan.oxyer@atkearney.com.

Graeme Deans is a partner based in the Toronto office. He can be reached

at graeme.deans@atkearney.com.

Shiv Shivaraman is a principal based in the Southfield office. He can be reached

at shiv.shivaraman@atkearney.com.

Sudipta Ghosh is a manager based in the Southfield office. He can be reached

at sudipta.ghosh@atkearney.com.

Ruediger Pleines is a manager based in the Munich office. He can be reached

at ruediger.pleines@atkearney.com.

62 A nano car in every driveway?