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Driving down cost

India’s People’s Car has set a new record for budget motoring. Now European carmakers are laying plans to launch cheaper models.
Heath Reidy investigates

Cheap cars have never really had the best of reputations. Skodas used to be the butt of numerous jokes, and who wouldn’t feel embarrassed after being dropped off by a friend driving a Lada? But all that is starting to change. Former low cost makers have moved upmarket, and the low-cost car is now entering into a segment of the market all on its own.

Cheapest of all: The People's Car

The unveiling this month of the cheapest car in the world, the £1,290 Nano People’s Car from Indian firm Tata, has led to other manufacturers revealing their plans for the cheap car market. Companies jumping on the bandwagon include Toyota, Citroen, Fiat and Ford, which has announced that it is investing $500 million in India to make a new small, low-cost car.

Richard Boot, chairman of consultancy KPMG’s Automotive Group, says: “The real attraction is the simple cost issue. If you can make a car using the benefit of low-cost production there are potentially mass markets.”

Over the last 15 years, car prices in Western Europe have fallen by approximately 12%, proving that competition in the industry has grown. This has developed partly because of the strong used car market – around three used cars are bought for every new car sold. This has forced car suppliers to lower their prices and try to develop cheaper cars that can compete with the low-cost second-hand vehicles.

But Professor Garel Rhys, of the centre for automotive industry research at Cardiff Business School, believes that prices have fallen because of more than just stiff competition. He says: “The car is becoming more of an appliance and less of an image-conscious product.”

VW is looking to develop cheaper cars in its Up! range

VW is looking to develop cheaper cars in its Up! range

Growing concerns, such as climate change, are also having an effect. Boot says: “There are environmentally-led legislations, which is forcing the size and shape of cars to change. People are very much focused on the economics of a car, and smaller cars are cheaper to run.” Customers’ tastes and needs have changed, and so firms are having to rethink their marketing strategies. Boot says: “All the executive carmakers, 10 years ago, in the main, did not want to come this far downmarket in case they would delete their image. All of that has gone out of the window.”

So, who are the major players in the low-cost market? Companies that are not new to the cheap car industry, namely Volkswagen and Renault, are hoping to lead the way.

Volkswagen first made the economy car cool, with 1960s’ models of its Beetle. Now the firm hopes to continue its success when it launches models from its Up! city car range, which have a similar design to the classic car. The vehicles have been given a target price of £4,500 and are expected to be on sale this decade.

The latest car in the line-up is the fuel-cell powered Space Up! Blue. Simple in its engineering, it offers environmentally friendly features, including a system that can monitor how much carbon dioxide the car emits. Angus Fitton, spokesman for Volkswagen UK, says: “It’s revisiting the well-known classic Beetle. We’ve always had inexpensive, simple, yet highly efficient vehicles in our range. This is the most efficient car we have produced so far.”

Renault, which has also profited well in the cheap car market, with its Romanian-origin Logan range, now plans to launch it in the UK. After being a huge success across Europe, the vehicle, which is being sold at around €5,000, will be rolled out in Britain in mid-2009.

Mike Gale, spokesman for Renault UK, says: “You are getting a brand-new car for the price of a second-hand car. You are getting a lot more space and more equipment and better quality than from a used car, for the same money.”

Coming soon: After seeing success in Europe, the Renault Logan will begin production for the UK next year

Coming soon: After seeing success in Europe, the Renault Logan will begin production for the UK next year

But not all car firms are expected to go down the cheap car road. It’s not likely to appeal to companies known for their expensive luxury cars, such as BMW and Jaguar. Boot says: “There is no point taking a BMW and stripping it down to deck chairs just to save cost. It devalues the existing model. I can see BMW making a small car, but not a low-cost one.”

Another factor that could discourage other companies from pursuing the cheap car market is the issue of safety. A cheap car is generally a small vehicle, which, because of its size, cannot include all the safety features that a larger car has, such as air bags and side-impact protection. Boot says: “Very small cars have got weight and money saving in the structure. The danger is to achieve low cost you create issues in reliability, fuel efficiency and safety.” Tata’s People’s Car is an example – issues with safety will prevent the vehicle from ever making it onto British shores.

Rhys says this is because British customers would not accept its level of spec and, more importantly, because its poor capabilities, such as a top speed of about 60mph, will make it too dangerous to drive on Britain’s roads and it will not meet highway safety standards.

But Rhys does expect Tata to follow up the vehicle with one that will be acceptable in the UK. “They won’t be rushing into this, but it can be done,” he says. “It’s been basically designed to be upgraded. It is a vehicle that can be stretched in its quality.”

And, if engineers can resolve problems of safety across other forthcoming cheap cars, then the market will open up even wider.

Boot says: “If you have a commercial response to those safety problems, then, for those people that have never had a vehicle before, it is putting it within their grasp.”

So what lies ahead for the cheap car? Is there money to be made in this industry, and will costs continue to drop? Rhys says that, although the segment will expand, the cash may not come rolling in for quite some time. “I don’t expect this to be a high profit earner for a few years yet,” he says. “We are certainly going to see the growth of this segment. The question is how will the customer respond to it? Are there people out there who want to buy low-cost cars in sufficient numbers?”

While Boot also believes that money can be made in developing cheap cars, he states that companies that pursue this direction may lose more cash because of the lower profit margin per vehicle than firms that stick to making expensive vehicles.

He says: “Unless you suddenly felt you were losing market share for your higher-price vehicles, why would you suddenly rush to flood the market with much lower-margin cars? You will get to a point where you will say, we are doing a favour for the customer, rather than ourselves.” Boot does, however, admit that for developing countries, such as India, where people cannot afford high-priced cars, this may be the only way forward.

Tata, for example, seems to be confident that cheap is where the money is. This is shown from the company’s latest announcement, involving a joint venture with Fiat, which is likely to lead to the development of more low-cost cars in the future.

As for even cheaper cars hitting the road in Britain, Rhys says that there are improvements that can be made in the design and manufacturing process of vehicles that may bring costs down further. “We are nowhere near the end of the phase where cost can be taken out,” he says. “It gets more difficult, but it can still be taken out.”

LUXURIES LEFT OUT

The typical low-cost car is, quite simply, bog standard. It has a simple design and usually only comes with vital features, such as brakes and a steering wheel, leaving out those luxuries that are not essential to drivers, such as radios and electric windows.

Cash savings are made by reducing the weight of the vehicle and avoiding costly systems. This includes anti-lock brakes and air conditioning, which are heavy and expensive units.

Instead, basic car parts are used, with a small boot, rather than large storage space, and a less powerful engine, such as 600cc, instead of 800cc.

Other ways of reducing cost include using one windscreen wiper, rather than two, and omitting the wing mirror on the passenger side.

Some companies today, however, are developing low-cost cars that do include some luxuries.

Volkswagen’s Up! range, for instance, includes slick designs and environmentally friendly features.

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Driving down cost