Two ways to take cost out of cars

We’ve got two stories today that illustrate ways of taking cost out of building cars but they come from very different parts of the auto market. One is about making high-volume, low-cost cars at Renault. The other is about high-end, low-volume electric cars from Tesla.

The Renault story comes from the Wall Street Journal (Renault Takes Low-Cost Lead, Apr 16). Renault launched  a low-cost model called the Logan in 2004 with the intention of selling it in developing markets but subsequently expanded its entry-level offerings (see the graphic) and started selling them in Western Europe. They now account for 30% of Renault’s sales and supposedly sport a profit margin more than double the margins on the rest of Renault’s line.

So how do they do it?

For one, they rely on cheap labor. The cars are built by Renault’s Romanian subsidiary Dacia. But that is not all.

Arnaud Deboeuf, the head of Renault’s entry-level program, says its approach is more complex than finding cheap labor to make no-frills cars.

“If making cars in a low-cost country were the only requirement, we’d have a lot more competition,” Mr. Deboeuf said in a recent interview at the group’s research and development center near Paris. “We start by asking ourselves how much clients are prepared to pay, for example for air conditioning, and then ask the supplier to propose a solution within a set price, including our margin.” …

Key to Renault’s entry-level-car strategy is a “design-to-cost” philosophy that requires designers and engineers to focus on choosing parts and materials for simplicity, ease of manufacture, and availability rather than for being cutting edge, Mr. Deboeuf said. A great number of important Dacia components are “carried over” from past Renault vehicle programs.

Even when Renault does consider infusing its no-frills cars with a dose of modern technology, it is careful to count the pennies. Mr. Deboeuf cites the pop-up dashboard navigation/entertainment screen on the Lodgy, its low-cost minivan. “We told LG, our supplier, that it had to have the biggest possible screen” for navigation purposes and “the possibility to use a mobile device to play music,” he said. “We left out the CD player as young people today don’t use them. They all have smartphones.”

Now variations on design-to-cost have been around for a while but I suspect that aiming for an extremely low cost (a Logan goes for €7,700) really focuses the effort. And perhaps the discipline to make hard trade offs makes this a hard strategy to copy. On the other hand, it can’t be that hard for a competitor to figure out who built what and what components were recycled from past designs. Said another way, yes, there is more than cheap labor going on here but it can’t be that hard for a competitor to design similar cars.

There is an interesting angle here on how this affects the rest of Renault’s offerings in Western Europe. According to the article, these cars have sold well because consumers know that Renault is behind them and they trust the technology. So why aren’t these vehicles just cannibalizing the sales of other models? It may be that they are sufficiently stripped down that they are unappealing to regular Renault buyers. The article suggests that these vehicles are favored by customers who would otherwise buy a used car.

That points to an interesting side note. Last spring I had a brief conversation with a Nissan exec and asked him when cars would be designed primarily for the developing world and then adapted to the US market (the implicit assumption there is that things have typically run the other way). He said that to some extent that has already happening but a hold up is the well-developed used car market in the US. Nissan offers a version of its Versa in the States for under eleven grand but it’s just not a big seller. In the US at least, many people would prefer a tricked out used car to a new econo box.

Now to Tesla. They are obviously in a very different stage of things than Renault. For them, the challenge is to stretch limited capital so they can get their cars to market.

So they have bought a used plant (Tesla banks on low factory outlays in drive to profits, Apr 14, Automotive News).

Gilbert Passin surveys the 50-year-old factory where Tesla Motors Inc. plans to make electric cars, and he sees a manufacturing bargain.

The former engineer for Toyota Motor Corp., Volvo AB’s Mack truck unit and Renault SA designed the second-hand Fremont, Calif., plant.

He equipped it with Ikea furniture and refurbished machinery to build battery-powered cars to take on the likes of BMW’s 5 Series, starting in about two months.

“The cost to set this up was very, very low compared to any new plant,” said Passin, vice president of manufacturing for Palo Alto, Calif.-based Tesla. “Everything we are doing has a very good value return.” …

With the going price to build a North American auto plant averaging $1 billion, Tesla may have spent less than a third that much to buy, renovate and equip its factory.

It paid $42 million for the plant in 2010, spent $17 million for some of its presses and machinery, and received other used equipment at a “fraction” of the original cost from parts suppliers including Tower Automotive Inc., said Passin, 51.

In cased you missed it, Fremont means NUMMI. This is the Bay Area plant that housed the GM-Toyota joint venture until it shut down a shade over two years ago. Of course, just because this had been an auto plant, that doesn’t mean that Tesla is going to do things just like NUMMI did.

Tesla’s timing was fortunate, said Michael Robinet, managing director for industry consultant IHS Automotive, in Northville, Mich. “Nummi had a relatively new paint shop, and that alone is a huge amount of cost for any factory,” Robinet said.

Tesla’s decision to design an assembly floor that can be quickly reconfigured as production patterns change is smart for the company’s relatively low production volume, Robinet said.

“They really got the benefit of not having a pre-determined build process,” he said. “It makes a lot of sense to have a very flexible space in their case. There are things you can do in a factory that’s only going to build 20,000 vehicles a year that aren’t possible in a 200,000-unit line.”

Tesla is using only about 20 percent of the factory that once built as many as 500,000 cars and pickups annually for Toyota and GM.

So among the differences are that there will be no fixed conveyor line system to pull vehicles through the process. Rather chassis will ride on automatic carriers following magnetic tape. Further, they will do stamping and injection molding on site.

This is a very interesting contrast to what Renault has done. Renault is aiming for volume and standardization while Tesla is in no position to demand a volume discount from suppliers. Hence it makes sense to do more work in house while maintaining a lot of flexibility as their production process evolves.