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Making money on $2,500 car

Making money on $2,500 car
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First Published: Wed, May 14 2008. 11 21 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, May 14 2008. 11 21 PM IST
Carlos Ghosn has a manga character named in his honour in Japan. But some seven years after he made it into the cult comic books for turning around Nissan Motor Co., Ghosn has this week forecast the first profit decline for the car maker in nine years because of a slowdown in its key markets, a strong yen and higher input costs.
Illustration: Jayachandran / Mint
Ghosn has a plan. And his rescuers are sitting halfway across the globe — the engineers employed by partner Bajaj Auto Ltd. They have been asked to come up with an ultra-cheap car that can be made for $2,500, or Rs1 lakh, and sold for a tad more. Bajaj Auto, Nissan and Renault SA will jointly manufacture this car. Ghosn has been big on frugality. He expects Indian manufacturing skills will help him out.
In January, Tata Motors Ltd showed the way with the world’s cheapest car that will cost consumers $2,500. And now the three auto makers are trying an encore. It is not without significant risks.
With inflation pushing up input costs and pushing down purchasing power, selling a car at a bit more than Rs1 lakh is possible, but perhaps not too profitable.
Setting nice-looking targets at the cost of profit has several dangers to all the companies involved. Ghosn has already sounded the death knell for mature markets and said all future “growth is coming from the emerging markets”. So, it’s clearly imperative that his firm should make fast-selling vehicles on which they can make money; or they risks losing the investors they have collected so far.
For Bajaj Auto, losing their high-end two-wheeler commuters or profitable three- wheeler customers to ultra-cheap cars could mean the end of business as the company knows it.
So, it too?has every?reason to move with its customers. But by Bajaj Auto’s own admission, the firm is about making vehicles profitably. In the past, the chief of the firm has openly said he wants to ease customers out of the cheapest bike segment, by far their biggest seller by volume, to more expensive bikes because it’s hard to make any money off these cheap little numbers.
Trouble is, in the latest project of ultra-cheap cars, Bajaj along with the Franco-Japanese alliance seems to be walking straight back into the rut that they all should be walking away from — cheap products with wafer-thin margins, or none at all, in which external shocks such as sharp commodity price spikes will give them no room to manoeuvre.
Can the $2,500 car be sold at a profit? Write to us at views@livemint.com
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First Published: Wed, May 14 2008. 11 21 PM IST