Case Study:
Cheap, Cheaper, Cheapest: The Assignment The Logan is a case study in driving down costs. Drivers switch on the ignition with an “old fashioned” manual key; there is no cruise control. The windshield glass is nearly flat, which makes it less expensive to produce. The left and right outside mirrors are identical; the ashtrays are exactly the same as the ones used in another Renault model, the Espace. Similarly, Logan shares an engine and gearbox with Renault’s Clio subcompact; for these and other components, high manufacturing volumes translate into economies of scale. Production of the first Logan models began in Romania in 2004. The choice of a production site was dictated by simple economics: France’s high labor rates and payroll taxes translate into an additional €1,000 ($1,400) cost per vehicle. The Logan was launched in India in April 2007 with a sticker price of about $10,000; the vehicle was manufactured by a joint venture between Renault and Mahindra & Mahindra (M&M), one of India’s best-known industrial conglomerates. After a dispute between the partners, the joint venture was dissolved. Mahindra & Mahindra now produces Logans under a licensing agreement. In 2008 a hatchback model, the Sandero, was introduced. This was followed in 2009 by the Duster sport utility vehicle. In 2010, Renault sold a record 2.63 million vehicles; 25 percent—680,000 in all—were low-cost models. Sales were about evenly split between the Logan and entry-level Renault models; even so, the unit sales figures were short of the target of 1 million vehicles. As it turned out, the geographic distribution of sales indicated that Renault’s strategy was in trouble. Although the Logan was targeted at emerging markets, it was a big hit with consumers in affluent European countries. How did this happen? Enterprising independent distributors bought Logans that were manufactured in Romania and exported them to France and other countries in Western Europe. This coincided with a shift in consumer attitudes; in light of the financial crisis, it is not surprising that many young Europeans were of the opinion that cutting back on spending was a sensible thing to do. Indeed, surveys showed that a high proportion of twenty-something Europeans were “interested” or “very interested” in buying a low-cost car. Even as Renault continued to refine its low-cost car strategy, some in the industry were asking a tantalizing question: Could the auto companies come up with the optimal value proposition—small, no-frills, four-door cars that are safe to drive, stylish enough to appeal to the aspirations of first-time buyers, and yet sell for half the price of a Logan (or less)? Under the best of circumstances, creating such a vehicle would test the prowess of the world’s best automotive engineers. However, the challenge is especially daunting in a business environment characterized by record prices for steel, resin, and other commodities and components. As the general manager for a sourcing and procuring company noted, “There are so many legacy costs built into a design, and trying to engineer those out is difficult. It’s better to start with a clean sheet of paper and engineer low costs in.” In 2009, India’s Tata Motors launched the Nano, a radical new design with a rock-bottom sticker price of 1 Lakh (equivalent to 100,000 rupees, or $2,500). The Nano has a rear-mounted, 2-cylinder engine that delivers 33 horsepower. The top speed is 60 miles per hour, and it delivers 50 miles per gallon of gas. The instrument panel is clustered in the middle of the dashboard so that Tata can offer both right- and left-hand drive versions for export. Tata’s target market is consumers in emerging markets who currently travel by scooter. Some environmentalists have warned about the negative impact of hundreds of thousands of new vehicles on India’s already congested roads. However, as Chairman Ratan Tata noted, low-income families should be given access to the freedom that a car provides. “Should they be denied the right to independent transport?” he asked. After an initial flurry of industry interest and positive press, the Nano program fell victim to bad luck and changing attitudes. For one thing, protesters objected to the location of the first assembly plant. After production finally began, there were several well-publicized incidents in which cars caught fire. Many car buyers shopped the competition; one best-selling model was the $6,200 Maruti Suzuki Alto. It seemed that the market had spoken: very few people wanted to be seen driving “the world’s cheapest car.” As Hormazd Sorabjee, editor of India Autoweek, noted, “The bottom of the pyramid continues to be where the action is, but the aspirations of people are moving up. People want to jump into something more substantial.”
Q1. What is the key to the Logan’s low price?
Q2. What are the environmental implications of millions of middle-class consumers in emerging markets buying their first automobile?
Q3. Do you think Tata will be able to save the Nano? What steps should the company take?
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.