The race to build really cheap cars

So far this year, every major carmaker has announced its own 21st century Model T project. Toyota, Volkswagen, Fiat, and Peugeot have all vowed to build cut-rate Logan-killers. General Motors Corp. intends to use its Korean subsidiary, GM Daewoo, to design a model that will sell for about $7,000. Chrysler is developing low-cost cars with Chinese manufacturer Chery. Korea's Hyundai Motor Co. is making India its global hub for small-car production and expects to double its output to 600,000 cars annually by yearend, many of them destined for Europe. "Automakers will have to live with a trend of lower-cost vehicles. It is difficult but that's where the demand is," says David Nicholas Reilly, president of GM Asia Pacific. The average retail price for many compacts will probably sink to $9,000, while minis will go for around $7,000, Reilly predicts. That's about 15 percent below current model prices.

Car manufacturers, of course, have always sought to cut costs and pack more value into each new-model generation to stay competitive. But now, emerging markets like India offer cheap engineering, inexpensive parts-sourcing, and low-cost manufacturing. For its new car, for example, Tata should be able to slash the cost of the engine to about $700, or 50 percent lower than a Western-developed equivalent, says one consultant close to the company. Combine Indian brainpower with Western innovation in design, materials, and processes, and the potential exists for a quantum leap in cost-reduction without major sacrifices in quality. Tata and Renault's Indian partner Mahindra & Mahindra Ltd. are already doing engineering work for global automakers at cut-rate prices. Tata, for example, is working on a coupe for a major Western customer.

Another new factor in the low-cost car segment is the possibility of huge volumes that can drive profits. Ultra-cheap cars historically have not sold in large numbers. In 2005, low-cost cars represented less than 1 percent of new-vehicle sales in the U.S., according to Roland Berger. By contrast, emerging markets, which held little appeal for the major car brands even 10 years ago, now offer a volume bonanza that can make even cheap cars profit spinners. In India alone, some 1.6 million motorcycle and scooter riders are likely to buy a car over the next five years, the Berger study estimates. India's auto market is set to double to 3.3 million cars by 2014, while China's will grow 140 percent over the same period, to 16.5 million cars, according to J.D. Power (MHP ) Automotive Forecasting. That kind of demand makes dirt-cheap cars viable. "The real trick and idea behind the low-cost segment is to increase volume as much as possible to bring costs down," says Alfredo Altavilla, CEO for Fiat Powertrain Technologies. (Fiat signed a technical partnership with Tata Motors in February.)

What automakers learn from experimenting with discount cars may well shape how more expensive models are made. To make a success of the Logan, Renault manufactured in low-cost Romania. It developed a design that reduced the total number of parts and made assembly a cinch.

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It stripped out sophisticated electronics, dispensed with high-tech curved windshields, and even saved $3 per vehicle by using identical rear-view mirrors on each side. The biggest breakthrough: Renault was able to eliminate expensive prototypes and the pricey tooling involved in building them. As a result, it could move directly from digital mockup to production, an innovation that saved the French car company $40 million. Now Renault has figured out how to eliminate physical prototypes for all of its models.

Toyota is working on a bottom-of-the-line car with an expected sticker price of under $7,000 that could hit emerging markets such as India and Brazil by 2009. Toyota's management is banking on breakthroughs in new materials, manufacturing, and low-cost factories. If the Japanese company's engineers do their job, the cost-saving strategies will be deployed in everything from Corollas to Lexus SUVs.

"When I asked for the low-cost development project two years ago, I wanted to see technology that would be applied to other vehicles as well," says Toyota President Katsuaki Watanabe. A prototype is expected this spring. A successful Toyota venture in this segment could "scramble all the eggs in emerging markets," says Fiat's Altavilla.

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