A low-cost strategy for the car industry?

I think we are really entering an era of low cost for the automobile industry.

Though it’s not a similar low cost scenario as we’ve seen in other industries (such as travel or financial services, when the internet disrupted the distribution channels, hence dropping prices as well) but a one that will increase the margins and profitability of the car makers, and a one that will hardly translate into a drastic price dropping (except for the expected price fluctuation that any particular market/segment could experience following the classic demand / supply model).

Why do I see a low cost industry that will hardly lead to a low price market? for a number of reasons.

In order to make my thoughts clearer I will use the help of the five forces acting and defining the competitiveness on a market or industry, and during the analysis of them we’ll go through the different aspects that led me to that conclusion.

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The threats of new entrants to the industry: It’s too difficult to enter the global automobile industry with relevant global scale and presence.

  • Supply side’ economies of scale. There are two trends establishing themselves as the next standard: 1) car maker holdings in which more and more brands under their structure (VW group has 12 different brands as of today), and 2) car maker increasingly share with each other their R+D to launch faster and explore product lines that couldn’t do independently (Ford KA and Fiat 500 where developed on the same shared factory, as well as Peugeot 108, Citroen C1 and Toyota Aygo, and BMW uses Kymco motors)
  • Demand side’ economies of scale. The importance of known and big companies that can provide pre-sales and post-sales services is crucial, and on this aspect we are seeing an increasing concentration of the sales on the same players, also for the 2014 figures.
  • Capital requirements. though is true that apparently strong newcomers are entering the market with lots of innovations (Google, Tesla), it is really difficult for me to think that those new solutions will cross the chasm to mass market anytime soon.
  • Unequal access to the distribution channels. Newcomers should ensure the satisfactory distribution of their products and the associated services to it, and the car industry is more and more a global market move by local consumers with local flavors.

Influence of the existing providers. It’s also important to take into consideration the influence of existing providers that “need to ensure” that changes in the industry are incremental and not exponential, in order not to be disrupted and survive… Additionally they could jeopardize their own existence if moving towards significant cost drops.

Influence of the existent buyers and substitutive products. These two forces are pushing the global market on different directions at the same time. At one end the people now accessing the middle class on developing markets, then there are the governments decisions to eradicate the cars from the cities (at least down to a certain degree) on developed markets, and at last new trends such as second hand car buying and sharing economy’ solutions. My opinion is that those forces combined will continue to lead the market grow in volume, as in recent years (even though car makers would eventually dedicate more resources to post-sale as the fleets get older, instead of focusing on selling new cars).

Rivalry among existing competitors. As we’ve seen, the backend of the industry is not a one of rivalry but a one of collaboration to growth the industry itself. This being said, the competence is fierce and tough in terms of marketing and sales. I see an increasing effort of the brands (not the car maker groups) for differentiating themselves quick on the new trends (low emissions, electric, smart, etc) and here is the biggest area where I see price fluctuations. But at the end, the low cost industry will eventually translate into more profitable classical pricing structure.

Conclusion

My opinion is that we are not going to enter into a low price market because of the growth in margins for the players on it, even though the industry itself is changing step by step into a low cost one.

But this is my opinion… what is yours?? feel free to share it!

Disclaimer:

1- This post was motivated by Marcel Planellas and the article in El País about the empire of low-cost cars. Thank you @marcelplanellas for pushing us out of our comfort zone! =)

2- These are my opinions and my ideas, and do not reflect the view of my employer whatsoever.

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