The Strategy for ULCC: What Works? What Doesn’t?

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I want to share this article regarding the strategies which are followed by manufacturers for Ultra Low Cost Cars, & what are the strategies which doesn't work for the ULCC.

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 requirements. 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 maximizes economies of scale, but makes it difficult to eliminate designed and built-in functionalities, along with their built-in costs. It also makes it impossible to develop radical new and innovative thinking.

 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 rapidly growing Indian market. India, the default build-and-sell location, has the greatest projected 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 primary 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 shifting paradigms from the traditional global processes to thinking creatively and meeting target market vehicle specifications and prices. The market must be sized accurately to capture adequate 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 footprints that can scale-up quickly with minimum capital outlays.

Establish targets and make trade-off decisions. Manufacturers will focus their development efforts around design-to-cost targets—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 decisions 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 manufacturer 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 segments, including vast experience in emerging markets, product innovations and cost structures. 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 emerge if any of the following scenarios occurs:

• In the next two to five years, safety and emission 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 competitors re-engineer or adapt their products and pose a credible threat in mature markets.

Benchmark the competition. Benchmarking and competitive tear-downs (cost analyses of competitors’ products) must go beyond comparing innovative ideas in the low-cost car industry to evaluating innovations in adjacent industries. In these markets, why not analyze the manufacturers of scooters and rickshaws? Focus on identifying innovative ideas and employ a systematic approach to conduct the tear-down, capture insights and inject knowledge at appropriate stages in the development cycle.

I hope you guys will like this article.