And nowhere is the impact of frugal engineering and its necessity more evident than in the race to build small cars at prices of $2500-3,000 profitably—something car makers have doubted, even as they wait for the next big thing in car making that will help keep cash registers ringing.
Car sales in the world’s largest markets, such as the US, Japan and in Europe, are either dipping or rising at under 5%, compared with double-digit growth in the emerging markets, according to statistics from the Organisation Internationale des Constructeurs d’Automobiles, an international grouping of auto makers.
Meanwhile, the passenger car market in India has grown at an average of 14% a year over the past three years.
“Frugal engineering is not about cutting corners to give a shoddy product,” said Rajat Dhawan, who consults on automobiles for McKinsey and Co. “About two-thirds of it is tailoring a product to the local market.”
This is what has helped a company such as Maruti Suzuki, which sells fuel-efficient, low-cost cars, and helped it retain a 50% market share.
“India’s car market, in which every seven of 10 cars sold are small cars to woo the majority first-time buyers, has grown at double digit rates to reach 1.4 million units in 2006-07. With oil prices touching $100 a barrel and SUV buyers trading in their gas guzzlers for more compact vehicles, worldwide demand for small cars is likely to grow by 30% to 27 million vehicles by 2013,” according to auto research firm CSM Worldwide Inc.
“Global companies who have entered India want to participate in the country’s growth and use it as a base for exports,” said Abdul Majeed, who consults on automobiles for PricewaterhouseCoopers.
While the first company to showcase a road-ready car was Tata Motors with its Tata Nano, others are also walking that path now. Bajaj Auto unveiled its small car prototype earlier this week, though with the caveat that the final car may look different when it hits the road in some four years.
Others, such as Toyota Motor Corp. and Chrysler Llc., have announced their intentions to build their cheapest cars ever as they try to increase market share in developing markets such as China and Thailand.
“People are now developing products for emerging markets, where the target cost is low,” said Manish Mathur, who consults on automobiles for AT Kearney and Co. “You have to figure out how to develop products for price-concious consumers.
Only seven of every 1,000 adults in India own cars compared with 12 in neighbouring Pakistan. Most of the customers are price conscious buyers looking for small vehicles with easy manoeuvrability and fuel efficiency.
One of Bajaj’s key focuses is on engine technology, where it hopes to apply techniques from its experience in two-wheeler manufacturing. The company hopes to make engines which are twice as fuel efficient than the vehicle that offers the maximum mileage today.
“The main issue is, how do you get the product to be smarter,” said Rajiv Bajaj, managing director of Bajaj Auto, in a recent interview. “Making a car that weighs two tonnes with a 2-litre engine and costs $20,000 is not the most sensible way to move a 70kg individual 20km a day.”