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‘Over-designing increases car costs’

‘Over-designing increases car costs’
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First Published: Tue, Jan 08 2008. 12 14 AM IST

Cost-conscious: Bajaj lists reducing car size, limiting its performance and a breakthrough in technology as the factors that reduce costs. (India Today Group)
Cost-conscious: Bajaj lists reducing car size, limiting its performance and a breakthrough in technology as the factors that reduce costs. (India Today Group)
The theme for the auto exposition that kicks off this week in the Capital could well be small cars, a concept that has captured the imagination of car makers, local and global. Tata Motors Ltd announced its programme to make a car priced at Rs1 lakh a few years ago, but the company’s project has been hush-hush and the car itself will be showcased to the world only on Thursday. The first to unveil a small car, however, won’t be Tata, but India’s second largest two-wheeler maker by volume, Bajaj Auto Ltd. Pune-based Bajaj, which has developed its own small car, has signed a pact with the Renault-Nissan combine to possibly make cars together, which are frugally engineered and affordably priced. In an interview with Mint, Bajaj Auto’s managing director Rajiv Bajaj spoke about the making of his small car, and more importantly, what it takes to make one: on how it is important to manage costs in a small car to make it affordable to the consumer and lucrative for the car maker. Edited excerpts:
What’s the moment you said, I want to make a car—here you are, primarily a two-wheeler maker and a three-wheeler maker...
I don’t think there was any one moment. Our general mood at Bajaj, particularly in the (19)80s and (19)90s, was while we may have grown quantitatively, qualitatively the company didn’t move ahead. And the first focus of that effort was to move, putting it simplistically, from cheap run-of-the-mill scooters to, for want of a better term, a world-class motorbike. And over the last so many years we have done that. In terms of a two-wheeler portfolio it’s very international now. Then, there is the three-wheeler side of the business, which we did not prioritize because there was less competition there and we had to get our act together on the two-wheelers so we had to focus on that. And then, in the last three-four years, we have been asking ourselves, what do we do with the three-wheeler? Because, while there is no doubt that it plays a great role in low-cost transportation, it has got to evolve into something superior in every way, and secondly, increasingly everyone has been getting into the three-wheeler market and it will not remain as exclusive and as profitable as it has been so far. And, as a combination of these two thoughts, we felt that instead of spending time and effort developing three-wheelers, we should try to look at an all-new platform, and why not a four-wheeler platform as a natural evolution of the three-wheeler business? So, it’s the whole concept of the light four-wheeler.
Of late, one has become more aware that there are other driving forces. We are clearly seeing huge global warming issues and oil at a $100 is not academic any more. And, traffic congestion is not academic any more… Maybe, the world needs more sensible individual transportation. There is a role for mass transportation and that role will be fulfilled by the government to the best of their ability, but ultimately people need individual transportation and perhaps making a car that weighs 2 tonnes with a 2-litre engine and costs $20,000 is not the most sensible way to move a 70kg individual 20km a day.
We committed ourselves to this development about three years back and we said that except for some marginal work, we won’t do any(thing) more as far as the three-wheeler is concerned. As a product concept, it belongs to the (19)60s. In the short term, in the next three years, it may well happen that we may lose some share (market share) and, consequently, it may have some impact on our profitability. But that’s a small price to pay and a good example of sacrificing the short term for the long term, because no company is big enough to do everything at the same time.
So, after you decided on this, you went to your core team and said, get to the drawing board?
We were clear about a couple of things. We learnt the hard way in our motorcycle experience with Kawasaki that although for 15 years from 1982 to (19)97, Kawasaki taught us everything they could teach us, since we relied so heavily upon them we were never really successful in motorcycles. It’s only when we invested in knowledge ourselves, in terms of design and development and manufacturing, that we actually had some success. So we knew that we were never going to go and make somebody else’s car for them—we would try and develop our own. And we were very clear that we didn’t have the capability in every sense to compete in the mainstream car and truck market. We have to leverage our own skills, in terms of design and supply chain and the products that we put out should be based on a common foundation.
And you said, here is a stack of money I’m giving you guys, go build this?
Cost-conscious: Bajaj lists reducing car size, limiting its performance and a breakthrough in technology as the factors that reduce costs. (India Today Group)
Yeah. There is a way to articulate the product plans and put the budget together and that’s very mechanical...our research methodology is pretty robust and so that’s what we did. We researched and we have some clear idea as to where there might exist the right space—a blue ocean space between a two-wheeler and a three-wheeler and a second-hand car and truck market and the mainstream car and truck market. How can we create the space between these two, not only in the context of the Indian market because that would be silly and limiting, but the global market as well? Today, half of our three-wheelers are exported to Sri Lanka and Bangladesh, but increasingly also to the Middle East and Africa. We think this form of transportation can be very relevant to such markets.
How much did you set aside as a budget ?
The development budget is confidential, so I can’t tell you that. In terms of manufacturing, we don’t know yet. Now, with Renault and Nissan, we have to redefine the car, take into account their requirements and the final capacity, and then only will we put a budget to it—which will happen in the next 6-12 months, so, that, even I don’t know. With the development budget, I can only say that because it’s being done from a two-wheeler mindset, it’s a very competitive budget. Because, when people talk in terms of developing cars they talk about half-a-billion dollars to $2 billion and it can’t be, (that high) if a small vehicle has to be competitively priced.
And you had a core team that did just this? What was the development task?
Our first task was to develop the engine which draws completely upon our experience on two-wheeler engines—so that could be done by our in-house R&D (research and development). So, we are developing both the gasoline and diesel engines, so that effort is under way with the people we already have. On the vehicle side, we are just actually putting our team together. So far, we have been working with some people from various countries like Japan, Korea and Europe and Italy, more specifically. The work in that area has been largely outsourced because we didn’t have the experience ourselves and that’s where as I said before, the Renault, Nissan tie-up will be very interesting and we will be relying significantly on them to contribute towards the development of the car
So, your engines have been in the works since?
Since 2005.
What point did Renault come into the picture and you said, hey I could go with these guys?
I think we made contact with them sometime in May and so we’ve been in touch for about nine months, and specifically we had an important meeting in September with Mr Ghosn (Carlos Ghosn, the Nissan and Renault CEO) where he basically gave his approval for the feasibility study between Renault-Nissan and Bajaj because he wants this to be an exclusive global three-way alliance. So, now there’s the feasibility study until the end of January and eight different study groups were formed in different aspects like the engine, the vehicle, the regulation, the cost structure, the marketing strategies—so that has been going on. So, we have been engaged significantly for the last two months, but in touch for eight-nine months.
So, they are aware of the prototype you have developed independently that you are going to show at the auto expo? They’ve seen it?
Yeah, yeah (they know). No, they haven’t seen it.
And, you think they will work off it?
It’s hard to say, because I think they will take a look at it and give us an opinion because we only just put it together, so after the show we will sit down with the details.
There could be a high chance that what comes out of that could be a completely different car?
Yes and no. In terms of external appearance it might well be, but clearly in terms of intent it really cannot be because ultimately it has to be a small car engineered to meet a certain price point, which in his (Ghosn) words he refers to as frugal engineering. What we have is pretty frugal and pretty well-engineered, so I can’t see the substance of it changing that much, but it might be tweaked a little here and there. Almost certainly it won’t look like it looks right now.
This whole game about frugal engineering—where are you extracting the costs? I know you have previously equated low-cost with cost of ownership, but I mean cost of manufacturing.
I really don’t think its important whether a car costs a lakh of rupees, or Rs1.5 lakh because the cost of the car contributes to only a third of (cost of) ownership… On the one hand some issues like emission must be met and there should be no dilution to those terms. But, say, norms like crash norms... I don’t understand the logic as to why the same rule should apply to a little car, like say, the Maruti 800, in terms of cars, when it can’t go at more than a 100km an hour as should apply to an S-class (Mercedes) or a 7-series (BMW) that does 300km an hour.
The small car just gets over-designed if it has the same norms as the big car. And, when it gets over-designed it costs that much more and that’s what makes cars expensive.
How do you not over-design a car and take out the costs?
You can do that by three things. One, clearly in terms of the size of the car, because size determines weight and weight determines cost to a large extent. So, for example, if the Maruti is typically 630kg; if you designed a car for 500kg..., you have taken 20% weight off and by and large you can assume you have taken 20% cost off.
The second important aspect is in terms of limiting the performance of the car. For example, a three-wheeler will really groan beyond 60km an hour. A Maruti (800) is supposed to do 120km, but typically, (it can’t do over) 100km. If you were to limit top speed to, say, 80km an hour, then the engine, the transmission, the brakes, the suspension, the steering—all these elements that have to do with moving and controlling the car, can obviously become smaller and lighter because the forces acting on the performance of the car are lower, so that’s the second aspect of downsizing. Consequently, one can say, for example, that such a car should not be allowed on the expressways. If it doesn’t meet all the safety regulations that a full-fledged car does, then don’t go everywhere. Fair enough. On the Pune expressway for example, two- and three-wheelers are not allowed and that’s fine.
And the third and the final one can be in terms of some breakthrough in technology. In our case, we are betting heavily on some potential breakthrough in engine technology. Ratan Tata (the chairman of Tata Motors Ltd) has talked of some breakthrough in terms of panels, welding and so on. So, there are the three broad areas. Downsize the engine, downsize the vehicle and if you are lucky you can pull off some technological breakthrough that reduces cost while performing the same function. With these three things together, without any other government subsidy or external sops, you should be able to do that. This is in terms of the product.
Now, there are other cost elements which can be looked at. Transportation is a big cost. If you move a car across the country, it costs you Rs10,000-15,000. What you end up having in your cost structure in terms of sales and service in terms of dealer commissions etc. is also a large component of the overall cost to the customer.
...When you put cars in a truck, you just put one row of cars there; in a three-wheeler you put two rows. It (a three-wheeler) doesn’t have a roof, it only has a windscreen and that’s bolted on and when we send it to the dealer, he bolts that on.... So Rs15,000 becomes Rs7,500. Now I know you can’t directly do that to a car that has doors and a roof, but you can be clever about it.
Similarly, how your network is structured in terms of sales and service is important. Because, if you sell your car...(in) grand showrooms and huge bays and guys in suits trying to sell cars—(earning) Rs40,000 a month in terms of their own salaries...then that adds to the cost also. Whereas, if you are able to redefine the distribution network to be, say, more simple like a two-wheeler maker, more humble—that can take a lot of cost out of the system. But I would say these are more peripheral. The main issue is how do you get the product to be smarter. This is how you can make frugal engineering work, I think.
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First Published: Tue, Jan 08 2008. 12 14 AM IST