BUSINESS

PRICED TO MOVE!

BARBARA RIGHTON March 3 2008
BUSINESS

PRICED TO MOVE!

BARBARA RIGHTON March 3 2008

PRICED TO MOVE!

2008 AUTO REPORT

Tiny, ultra-cheap cars may be the industry's next big weapons

BARBARA RIGHTON

It has been cheered as a modern-day Model T and excoriated as a blight on the environment. Inarguably, the new “people’s car,” the Tata Nano from billionaire Indian businessman Ratan Tata, has changed the way the world’s second most populous country looks at the automobile. Suddenly, an impossible dream is within reach.

It doesn’t matter that the Nano is ridiculously tiny (at less than 600 kg, it makes a Honda Civic feel like a limo), or wildly underpowered (the two-cylinder, 624-cc engine is capable of 100 km/hr, tops). It has zero amenities—no airbags, no heater, no radio, no ABS brakes, no automatic transmission and only one windshield wiper. Worse, Tata’s plans to sell 250,000 of the gas-powered car next year will do nothing to help clear the air in India’s polluted city centres. But the most astonishing detail about the Nano—its US$2,500 price tag—has caught the imagination of consumers on this side of the world too. Speculation immediately buzzed about whether the Nano could soon arrive on North America’s streets (answer: not likely). Drivers here have simply grown too attached to comfort and safety, never mind speed. But that doesn’t mean the launch of the Nano doesn’t matter. Just the opposite, in fact.

“The world is really dividing into two markets,” says General Motors spokesman Dee Allen in Detroit. “The developed markets are rich and can afford safety and low emissions; the other markets can’t.” GM should know. It sold 516,435 micro-cars in China last year for US$3,200 apiece,

but its cheapest North American-built car, the Chevrolet Aveo, sells in Canada for $12,995. Shrugs Allen, “Your money buys what your money buys.”

What the launch of the world’s cheapest car has really done is focus attention on a highly competitive, but seldom discussed, bottom end of the auto market. And as the world’s major automakers come to grips with the implications of the demand for super-cheap cars, that segment may just change the complexion of the global auto biz—not only for the millions of relatively poor workers in emerging markets who suddenly find themselves able to afford a b arebones car, but for pampered North Americans too. According to auto industry figures, momentum in small-car sales is already outpacing overall industry growth worldwide. Can the traditional powers of the auto business in Detroit and Tokyo compete? Well, it turns out that question is just the beginning.

Days after the Nano was unveiled in New Delhi on Jan. 10, heavyweight carmakers announced billions of dollars worth of investments in India. Japan’s Nissan, for example, with its French partner Renault, promised to speed up production of an ultra low-cost micro-mini. Hyundai, the Korean manufacturer that introduced the $5,795 Pony to Canada nearly 25 years ago, also weighed in with plans for a “public car,” while German

carmaker Volkswagen promised a mini-hatchback. Ford, too, plans a $500-million investment. But the demands in India are far different than in North America. “In the markets we are talking about, you are moving people from foot or two-wheelers or vehicles pulled by water buffalo,” Allen says, “and putting a roof over their heads.”

Still, somewhere between the haves and the have-nots, things are beginning to change. China is the world’s third-largest auto producer behind the U.S. and Japan. And while GM and others are rapidly ramping up their business in that country, competition is coming in the other direction too. Last year at the North American International Auto Show in Detroit, only Changfeng Motor showed its cumbersome Liebao SUV and a distinctly odd-looking three-wheeler. This past January in Detroit, there were five companies from China, all promising to enter the U.S. and Canada soon. One of them, Chamco, says its SUVs and pickups will be ready for the U.S. by the end of the year. They won’t be cheap, says chairman Bill Pollack of Parsipanny, N.J. But at US$14,500, they will offer more amenities than vehicles priced at US$17,400.

In Detroit, the Chinese were treated politely this year, and talk of the Nano drew respectful reactions from car execs. John Parker, a Ford vice-president for Asia Pacific and Africa, told the press, “They are going to create a whole new market. They’re going to break

through the paradigms.” His remarks could have encompassed the Chinese, as well. Says Bruce Belzowski, assistant research scientist at the University of Michigan Transportation Research Institute, “The car market in China is very hot. They had 20 per cent growth from ’06 to ’07, but it is a competitive market. Here

the competition is even fiercer." Belzowski wasn't impressed with the cars he saw.

“If they bring them over exactly as they are in China, they would be inexpensive, but they would not fare well,” he says. Still, he allows, “There will always be people who are willing to buy a new car at a low price.”

Price, fuel economy and a certain novelty were the appeal of the last wave of small cars to hit North America in the 1970s and ’80s, when Japanese and Korean imports began to challenge the Big Three. While they were nimble, early Datsuns and Hondas developed a reputation for rusting in harsh winter road conditions. The most famous supposed failure of that era, the Pony, is still denigrated by car experts. But John Vernile, Hyundai Canada’s vice-president of sales and marketing, defends the little car. “From a technology standpoint, it certainly wasn’t best of class,” he admits. “In fact, the original Pony had a manual choke.” But the Pony bested both the Ford Tempo and the Plymouth Reliant to become the bestselling car in Canada in 1985, with 56,000 units. Relative to the quality of most cars then, Vernile says, it held its own. Belzowski agrees. “U.S. cars weren’t much better,” he says. “Remember the Vega and the Pinto?”

In the years since, car consultants say, manufacturers who sell in the demanding North American market simply learned how to build better cars. “These days, the market here is much more competitive,” says Erich Merkle,

an auto analyst for the consulting firm IRN Inc. in Grand Rapids, Mich. “The Japanese have had a lot of success and the Big Three are much more competitive too.” The market now is too developed, he says, for upstarts to flourish without a reliable product, backed up by warranties and a large dealer network. People have long memories.

Experts like Merkle scoff at the likelihood Chinese cars are coming to North America at all. “Look,” he says, “the car today is not just a one-time transaction. You want the manufacturer to honour the warranty and you want to know you can get parts and also, that the car will have some kind of resale value. Those are all question marks with the Chinese vehicles.” Plus, says Merkle, “It’s not that easy to come here and just start taking up market share because you have a car that is priced at $2,000 or $3,000 below the competition.” But Pollack is unfazed. “We are three years beyond testing the waters.” With the Chinese manufacturer, Hebei Zhongxing Automobile, Pollack adds, “We chose cars we knew would not need major work to sell in the U.S.”

As for the Nano, says Canadian auto analyst Dennis DesRosiers in Richmond Hill, Ont., there is no way it could sell in North America. “As soon as it would pass the regulatory hurdles, the manufacturer would have to add on $5,000 to $8,000,” he says. “Then it would have to add the cost of distribution. Plus, dealers in India may be willing to make a profit of $10 to $15 a car; in Canada, it’s more like $2,000 to survive.” Furthermore, the CAW would never allow it. “In China, they pay their workers 10 cents an hour,” DesRosiers says. “Do you think Buzz Hargrove would let his workers make $1,000 a year?” Still, at Volkswagen Canada in Ajax, Ont., spokesman Patrick Saint-Pierre takes a different tack. “People laughed at the Japanese and the Hyundai Pony, but it’s evolution,” he says. Volkswagen, for one, is aware that more and more consumers, especially in Canada, want to drive economical cars. Since 2007, VW has offered a car called the City Golf for about $15,000, but it may have plans to bring in a cheaper and smaller model called the UP. “It would not quite be the drastic cost of a Nano,” Saint-Pierre says. “But it would be priced well below what we have now.” It will have plenty of competition: Toyota sold over 34,000 of its subcompact, the Yaris, in Canada last year, while Hyundai was number three in the segment with more than 16,000 Accents, its lowest-priced car at $ 13,595. Honda Civic, the best-selling car in Canada, starts at just $16,990.

It’s all about getting a fair product for a fair price, says GM’s Allen, and that’s why he thinks carmakers like the Chinese or Tata won’t sell cars here any time soon. “If you go out and ask somebody, ‘Hey, listen. Would you drive one of these cars? It’s $2,500. You could use it as a commuter car,’ they’ll all say, ‘Yes.’ And then when they are faced with an opportunity to buy it, they won’t want it.” To those who persist in saying the Nano, or something very like it, will be available for maybe $6,000 in the very near future, DesRosiers adds, “This industry has a bad habit of over-hyping things and getting people’s expectations way out of order.” If you want something cheap, he says, something that has real value for the money, there’s a better solution: buy a Canary or an Accord, an Elantra or a Malibu, used. M

EXPERTS SAY THESE CARS ‘ARE GOING TO CREATE A WHOLE NEW MARKET’