ATSUGI, Japan — At a topsecret session on car designs at a Nissan Motor Co. technical center, chief product strategist Carlos Tavares recited the company's ambitious new mission: to sell an expensive-looking small car for the price of nofrills models - and somehow make a profit on it.
Engineers, grappling with this task for a year, presented seven drawing-board variations of asmall car with a stylish, rocketshaped body and oval headlights reminiscent of marquis-cut diamonds. But the designs just weren't inexpensive enough to make, Tavares said.
"All of this is costly," he grumbled. "We still have a lot of work to do."
Small, low-cost cars have abruptly become the next frontier for the global auto industry, after almost 20 years in which major carmakers dismissed such vehicles as a low-profit afterthought. As gasoline prices keep rising, consumer tastes around the world are shifting toward smaller, more fuel-efficient cars. In the United States, drivers are trading in sport utility vehicles like the Nissan Armada for smaller models, even for subcompacts like the Honda Fit. In developing markets, where sales are exploding, first-time drivers are starting out with the smallest, lowest-price cars.
Global demand for small cars is expected to grow by 30 percent to 27 million vehicles by 2013, with the growth coming mostly from developing markets, according to auto-research firm CSM Worldwide Inc. Demand for big SUVs during that time is expected to drop 4 percent, to 10 million vehicles.
Toyota Motor Corp. recently said it may launch a car that costs about $7,000 as early as 2010, aimed at large developing countries such as Brazil, Russia, India and China. Chrysler LLC is tying up with China's Chery Automobile Co. to make small cars for export worldwide, including the U.S. Small cars are expected to dominate many automakers' displays at the Tokyo Motor Show opening Wednesday.
The industry's shift poses a challenge that no carmaker has managed yet to meet: how to make decent profits. Trucks and SUVs earn 10 percent to 20 percent margins, which for many popular models can mean $2,500 to $5,000 profit per vehicle. Even the best-selling smallcars like Honda Motor Co.'s Fit and Toyota's Yaris subcompact earn margins for manufacturers of just 2 percent to 3 percent - about $300 per car. In emerging markets, the cars are sold with fewer profit-boosting features, so carmakers earn even less.
"Most carmakers are considered to be doing well if they break even on small cars," said Takaki Nakanishi, a Tokyo-based analyst at J.P. Morgan.
Tokyo-based Nissan, 44percent-owned by Renault SA of France, has embarked on a particularly aggressive strategy. Nissan, whose fortunes surged on its SUVs and high-performance sports cars, now is trying to reinvent itself as a maker of low-price "entry cars" aimed at the developing world's hordes of first-time drivers. Far behind the market leaders in China, Nissan is trying to forge ahead in India and other emerging markets, where it says it plans to offer a stylish car for $7,000 to $10,000 as early as 2010 and then try to get its starter price down to $5,000. It is even exploring a venture with a maker of electric rickshaws to make a $3,000 car.
Tavares, 49, is leading the charge for Nissan. The intense Portuguese executive, described by colleagues as having "gasoline in his veins," races singleseat cars for fun and decorates his sparse office with framed pictures of race cars. For his current mission, he has assigned Nissan engineers to study Renault's boxy, basic Logan model, produced by the company's Dacia affiliate in Romania, for costcutting inspiration. Yet Tavares also insists that a new low-cost car retains what he calls the "emotive" design of more upscale vehicles. It is important that an entry car not be seen as the "emerging-market car," Tavares said, but rather something that makes owners feel like they have entered the middle class.
TOUGH GOALS
Nissan's plan to get below $7,000 has spurred some debate, said Ashvin Chotai, head of Asian auto-industry research at consulting firm Global Insight Inc. "Lots of people say the cost structure is just not feasible." But Nissan managers say Tavares sets tough goals and sticks to them.
"Just when you think cost is under control, he'll flip to another topic and say the quality is a problem or 'I'm concerned about roominess,'" said Thomas Lane, corporate vice president of product planning.
Every little thing counts, said Tavares, who calls building profitable small cars "the most demanding exercise for an auto company."
Tavares' success is crucial for Nissan and 53-year-old CEO Carlos Ghosn. When Ghosn took over in 1999, the carmaker, hampered by management mishaps and a string of unattractive models, was on the brink of bankruptcy with an operatingprofit margin of just 1 percent.Ghosn's turnaround relied on big models with wide margins. That sputtered in the past year, leading to Nissan's first annualprofit decline in seven years in the year ended March 31.
What is more, while Nissan focused on boosting profit margins and gaining U.S. market share, it fell behind in the world's fastest-growing markets. Nissan entered China nearly two decades after Volkswagen AG, the market leader there by passenger-car sales, and five years after No. 2 General Motors Corp. Ford Motor Co. already produces and sells several small cars in India, while Suzuki Motor Corp. and Hyundai Motor Co. are Nos. 1 and 2 by sales volume there. Nissan last year offered just one model in India and sold a total of 199 cars, forcing a determined game of catch-up.
"We have to imagine different ways of making low-cost cars," said Ghosn, who also heads Renault.
In 1998 Ghosn, then Renault's head of manufacturing and engineering, put Tavares in charge of Renault's most crucial line of compact cars, the Megane andScenic series. Ghosn, a Brazilian-born Frenchman, and Tavares are both native Portuguese speakers, though they typically communicate in French and English. The engineer had demonstrated his small-car savvy while working on Renault's tiny Clio II subcompact and other models. Under his leadership, the Megane and Scenic got sportier, aerodynamic grills and curvier trunks, and became Renault's most popular line, accounting for more than one-third of the company's auto revenue in 2002. In 2004, Ghosn sent Tavares to work on midsize cars at Nissan, where he soon became an executive vice president and a member of the board of directors.
This April, he effectively became Ghosn's No. 2 in Tokyo - just after the company reported its profit decline. Tavares concluded that Nissan should focus a lot more on emerging markets to boost stagnating worldwide sales. But competition was already heating up. Rival Toyota, for instance, outsold Nissan by more than 40 percent in markets outside North America, Europe and Japan, with 1.2 million sales to Nissan's 850,000.
THE CONQUISTADOR CAR
Nissan had one secret weapon: the no-frills Logan, packed with little tricks that lowered its production costs to just half of Renault's other small cars. Known within the company as the "conquistador car," it has helped Renault enter more than 50 markets and is built in seven countries including Iran, Morocco and Colombia.
"This is a simple car that can be produced everywhere in the world," said program director Gerard Detourbet. At $7,000 to $10,800, the boxy car is one ofthe best-selling models in the developing world.
Tavares urged Nissan engineers and product designers - used to designing more expensive cars loaded with features for the U.S. and Japan - to memorize everything about the lowly Logan, down to how costs were trimmed for each part and how much each part costs to ship. For instance, the Logan has a bumper and grill that are one continuous part, which Renault says can cut the cost of the front end by roughly half, though it raises the price of repairing front-end damage. Rear-view mirrors on the right and left side of the car are almost exactly the same, and the windshield is less curved than other models, also cutting costs by about half because the parts are simpler to develop and produce, Renault says.
Nissan is applying some of those benchmarks to its pearshaped Tiida subcompact, currently its best-selling compact car worldwide, and known as the Versa in the U.S., where it starts at $12,630. On a visit to a factory in Thailand last year, Tavares noticed that the complex shape of the Tiida's door panels meant that half as many Tiida doors as Logan doors could be stacked in a shipping container. His product planners said the costlier Tiida needs more complex doors than the Logan, he recounted, but "I told them, 'Let's be serious,'" Tavares said. He told them to start "making sure, when you design a part, that they can be piled together."
Finding cost cuts on the Tiida has helped product planners apply the change in thinking to new models, he said; they are focusing on details such as how much a certain kind of speedometer or door handle will add to production costs. Japanese automakers also have been in aheated race to build the roomiest small cars, and Nissan engineers are working on ways to comfortably fit luggage and five passengers without making the car bigger and heavier overall.
THE BATTLE FOR INDIA
Tavares hopes for a big payoff in India, where just eight of every 1,000 adults owns a car and car sales are growing by about 18 percent a year. Analysts estimate about 80 percent of 1.3 million cars sold last year were small cars.
Nissan plans to build entry cars for India and nearby emerging markets in a new factory to be jointly owned with Renault and Indian jeep maker Mahindra & Mahindra Ltd. Some would eventually be exported to developed markets in Europe andelsewhere, though those would have to comply with tighter safety and environmental standards. Nissan says it could ultimately produce and sell a car in India for as little as $5,000, and it has started working with partners Renault and Indian electric-rickshaw and motorcycle maker Bajaj Auto Ltd. to try to come up with a $3,000 car.
India's Tata Motors Ltd. already plans a "people's car" next year that it says will cost 100,000 rupees, or about $2,500. Analysts and competitors say massive scale would be needed to turn a profit, and Tata's initial sales target is two million units over the first five years. Tata will give few details about the car, but a spokesman said it will have four doors, four to five seats and a 660 cubic-centimeter rear engine, similar to the size used in "minicars" sold in Japan.
There also has long been a $5,000 car in India, built by Suzuki and its Indian partner, Maruti Udyog Ltd., whose joint venture holds more than half the entire Indian car market. The Maruti 800 lacks the pizazz Nissan seeks. Its rudimentary design is basically unchanged since it was introduced in 1983. It took around 10 years to become profitable, eventually accounting for nearly 80 percent of cars sold annually in India by the mid-1990s, but its peak may have passed. Last year, Maruti Suzuki's slightly more upscale new model, the Alto, which sells for $700 more, was twice as popular.
Nissan hopes its down-market strategy will eventually increase profits by building brand loyalty, so entry-car consumers will eventually trade up to a fatter-margin Nissan model. By contrast, rival Honda doesn't want to compromise its brand image by selling a model cheaper than its $17,000 City subcompact in India. Honda can count on its motorcycle sales to build its identity in developing countries.
"We believe people will pay a premium for our cars," said Takanobu Ito, Honda's chief operating officer of automobile operations. Likewise, Toyota pushes its Corolla in emerging markets. But it acknowledges that its $23,000 price tag is too high, and it is looking at changing tack with a low-cost car. "Maybe we're behind" on that trend, a company spokesman said.
Nissan also is moving production to low-cost areas and using more local suppliers in place of longtime Japanese suppliers. This year at its Thailand plant, Nissan cut its parts imported from Japan to 10 percent from an alreadylow 30 percent. It also is soliciting more local staff and input instead of relying on designers and engineers in Japan: Nissan and Renault plan a joint business center in Madras, India, in early 2008. Tavares said he hopes local input will help designers cut costs and generate sales by offering only features consumers want in each country.
At a recent corporate-strategy meeting to discuss the company's plans in India, Nissan executives spoke determinedly about turning India into a global small-car hub. But when people within Nissan challenge Tavares on his plans, he said he reminds them what Renault did with the Logan.
"Any time you need to achieve a cost breakthrough, people will tell you that it's not possible," Tavares said.
Business, Pages 87, 90 on 10/28/2007