ULCC brings new philosophy, new electronics demand trend

Gasgoo.com: Accoring to your recent forecast, the ultra low-cost and low-cost cars (ULCCs and LCCs) would account for 20 percent of global production volumes by 2015, so what's the percentage now and is there a clear definition for ULCC and LCC---as we know price of low-cost car differs from regions?

Ian Riches: We are expecting global production of ultra low-cost and low-cost cars at around 11 percent of present total light vehicle volumes.  While there are many regional distinctions, we have split the market in two, between:

●the ULCC sector that represent models sold in the emerging markets, like the Tata Nano and the Chery QQ, whose priority is to sell at a very low price, as low as 18,000 yuan (US$2,500), with less emphasis on additional safety and comfort features.  The aim of the car maker is to expand the market to entice motorcycle owners into buying their first car and thus it has to be priced low enough for these new consumers to afford them.  As such, the fact that occupants are enclosed in a car body means that the ultra low-cost car already offers greater protection than a motorcycle despite the lack of safety and comfort features that larger models take for granted;

●The LCC sector that represents higher cost models that are sometimes also sold in mature markets, like the Smart ForTwo and the Suzuki Wagon R, whose priority is to offer a second car that can be used for short distant and frequent journeys, say for shopping or dropping off kids at school.  As such, these vehicles have to be more economical than the household's main vehicle, which could be a large saloon, estate car or 4x4.  These low-cost vehicles still retain the safety and comfort features of the main vehicle, but are smaller and more fuel efficient, sold at a lower price of around 70,000 yuan (US$10,000). 

The main reason for the growth in ULCCs is the continuing economic growth in the emerging markets and the emergence of a new kind of car consumer.  The rising fuel prices and stricter emission mandates are not the reasons why consumers are moving towards the sector, but they have the potential to force car makers to rethink their strategies in designing their cars, particularly in the challenging ULCC sector, given that the design has to reach a competitively low price. 

Gasgoo.com: What kind of ULCCs could be changing into-stripping out all the features like Nano, or small cars that run on alternative energy, or being equipped with  newly-designed electronic components?

Ian Riches: While stripping out unnecessary features is a required tactic in a ULCC design to reduce its retail price, the resulting design may not be flexible enough to meet new consumer demands for greater comfort features and legislative demands for stricter emission and fuel economy in the future.  This is why suppliers offer modular systems that enable car makers to future proof their ULCC models, whose product cycle may not synchronize that with changing laws and trends.  One example is the "Tiger" platform, used in the supply of in-car audio systems, supplied by Yanfeng Visteon.  This platform uses a basic radio tuner and USB connection, but is flexible to run with digital or analog systems and offers other audio features such as attaching it to a CD drive or an iPod connector.  Such a system has been modified for current deployment in Latin America.

Sophisticated electronic components will be essential to offer this additional functionality from the start.  Bosch supplies the ValueMotronic engine management system to the Tata Nano, running on a 32-bit microcontroller as opposed to the usual 16-bit microcontrollers that normally run engines of a similar displacement.  That way, the Nano is able to meet Euro-4 emission standards despite current Indian requirements for Euro-2.  Further requirements for sophisticated electronic components include enhancing the reliability of the design, particularly for local car makers that have yet attained a brand reputation, and to raise the possibility of exporting cars to mature markets.

As for cars running on alternative energy, the main focus in China, ULCCs and LCCs could potentially be micro hybrid vehicles, with stop-start technology.. The micro hybrid version could save between 15~20 percent in fuel consumption in urban use, but just cost several hundred dollars more. More sophisticated mild and full hybrid systems are unlikely to be achievable at the low price points of ULCCs and LCCs.

Gasgoo.com: Nissan Renault is focusing on low-cost production centers like India and Morocco to shore up margins and cut production costs. Also Chrysler has entered alliances with Tata Motors and Chery Auto. We can see big automakers are looking for low-cost market for growth. How could they differentiate their low-cost vehicle brands?

Ian Riches: While car markets in developed countries are currently stagnating, global car makers are taking an interest in the ULCC sector to maintain growth in sales.

However, previous transfer of production to emerging market centers was originally conceived to reduce labor costs, but rising inflation worldwide and the strengthening Yuan has threatened this philosophy. As can be seen from the strategic emphasis led by Toyota's chief executive, Katsuaki Watanabe, the ULCC sector has also enabled global car makers to look into ways of reducing production costs right across the company, given the price rises in energy and raw materials that are currently squeezing profit margins. By adopting a ULCC strategy to design all models, the car maker would potentially be better placed to maintain profit margins.

Global car makers would have the advantage in selling their models over their local rivals given their brand reputation.  But local car makers will have edge in knowing the local consumer better, the target market of the ULCC.  Local development will be important in designing a ULCC model and its components.  However, motorcycle makers are also developing ULCC models, given their experience in developing the small engines used to power ULCCs.  The growing level of competition and resulting low prices means that quality will be an important factor in ULCC purchasing decisions.

As far as global car makers developing unique brands for selling ULCCs, this does not seem to be likely to happen on a widespread basis at present.

Gasgoo.com: what kind of impact could the low-cost car trend bring onto OEMs' design philosophies in electronic system and components?

Ian Riches: As well modular designs and sophisticated electronics, other key trends in automotive design will be system simplification, such as reducing the number of parts used, and the greater use of different materials, such as plastics and aluminum alloy, to overcome the rising price of steel. 

ULCC designs will bring about further economies of scale and large production volumes, more efficient production processes and a reduction in the number of suppliers.

Gasgoo.com:  GM's OnStar subsidiary, the industry leader in vehicle safety, security and information services could be introduced to China in 2009; Ford Sync in-car communication and entertainment system designed by Ford and Microsoft has positively impacted Ford vehicle sales in North America. Is it feasible to introduce these to emerging market like China at the moment? Are these infotainment systems suitable for low-cost cars?

Ian Riches: OnStar and Sync are two rather different products - at least in their current North American market form. 

Strategy Analytics is very optimistic about the growth of entertainment and communication-focused systems such as Ford Sync in regions such as China.  Chinese consumers already have access to world-class consumer electronics, such as cell phones and portable media players.  Their desire to access this in the vehicle will be just the same as for any other consumer.  Makers of small, ultra low cost and low cost cars will also need to provide a range of attractive optional features to help boost profit margins, which are likely to be wafer-thin on base models.  Strategy Analytics believes systems like Ford Sync could be very profitable in this context.

Systems such as GM OnStar are currently more safety-oriented, and as such are not seen as so applicable to the ULCC and LCC market, which typically cuts back on safety features that are not required by legislation, in order to meet the tight cost targets.  In addition, car buyers typically are more willing to spend money on optional extras that entertain them or increase their comfort, rather than safety features.

Gasgoo.com: Automotive MCU slims down body electronics; With more and more application of MCU on the vehicles, could there be some new & non-traditional automotive suppliers to design intelligent electronics? How are the future automotive microcontrollers changing?

Ian Riches: The automotive industry already has a wide variety of microcontrollers available to it from numerous semiconductor vendors.  These typically cover a suitable performance and price range for body electronics in ULCC and LCC vehicle types.  Innovation is more likely to occur at the module maker. The ULCC sector will require local development in order to develop the right product to suit local requirements.  While many global suppliers have set up systems development centers in China, vendors such as Bosch, Lear and Visteon have gone further to develop electronic control units in the country.  These companies have the experience and the technical capabilities to supply such modules, like the new Basic Function Controller (BFC) supplied to Geely by Continental in Shanghai.  However, this has not stopped local players like Shenzhen Hangsheng and Jiangsu AWA from competing in this growing market.

The BFC is one such example of a sophisticated electronic component that has been slimmed down to accommodate the ULCC low price point. Only functions that are found on at least 80 percent of low-cost cars are integrated as software modules for the system.  Requirements for flexibility have also been met as standard features can be modified to the system or that further features can be added by fitting connectable components to the base platform.  As well as offering a sophisticated product, the vendor also offers a quality service to the car maker.  Continental boasts a rapid 12-month turnaround development period in order to meet the shorter model development cycles found today.

Gasgoo.com: What's you suggestion for the Chinese OEMs and suppliers as for the automotive electronics application?

Ian Riches: Chinese OEMs are already developing low-cost models, albeit mainly using the tried and tested route in bringing economies of scale to force the price point down to around 30,000 yuan (US$4,000). 

Strategy Analytics suggests that Chinese car makers should try to design their models, not just in the low-cost segments, from scratch.  This will enable the OEMs to realize both a greater differentiation in an increasingly competitive Chinese market (as well as avoiding copyright infringement) and to maintain low price points without compromising on quality.  Concepts displayed at the Auto China Show this year had marked a genuine shift towards innovation. In the past, Japanese and Korean automakers were similarly inspired by existing models, but they soon improved their designing capability and covered the gap. Now they have their own characteristics. People in the mature markets would typically rather not drive what they perceive as being a copycat car.

Many foreign suppliers are beginning to move away from joint venture operations to become more efficiently-run wholly-owned subsidiaries, specialized in a certain application area.  It is preferable for Chinese vendors to consolidate, as the car makers have now realized, rather than trying to offer a wide range of sub-standard products.  Further help would also come from a simplified shareholding structure in order to entice more investment, cooperation with OEM customers in developing new technologies, improved customer service and analyzing synergies and savings within the organization to enhance overall competitiveness.

Also many Chinese companies, both OEMs and suppliers, are state owned enterprises.  These players display characteristics such as poor management, inefficient plant and low salaries that have affected their ability to invest in new technology and attract skilled engineers. As with British companies in the 1980s, privatization will enable SOEs to bring in good commercial practice and attract inward investment for R&D.