Sales target for car manufacturers

They need to sell at least 200,000 units over five years to make profit

PETALING JAYA: Automotive companies that manufacture their own vehicles need to sell at least 200,000 units over a five-year period to be able to reap reasonable profits.

Frost & Sullivan partner and automotive and transportation practice head for Asia-Pacific Kavan Mukhtyar said that a typical car manufacturer needed to be able to recoup its high development cost by the end of the vehicle's product life cycle or risk making losses.

“Vehicle model development cost in lower cost economies is roughly RM500mil to RM600mil. Typically a vehicle model has a life of around five years. To be reasonably profitable the model needs to achieve cumulative volumes of at least 200,000 units over a five-year period,” he told StarBiz.

Proton Inspira sedans being assembled at Proton’s factory in Shah Alam.

According to him, the product development cost per unit should be around RM2,500 to RM3,000, assuming that the development cost is RM500mil and the target is to at least sell 200,000 units within a five-year period.

“However, in certain segments where the model volumes are just 100,000 units (over five years it would mean 20,000 units a year), then model development cost per unit shoots up to RM5,000 to RM6,000,” Kavan said.

“At this point the OEM (original equipment manufacturer) would become uncompetitive (and) they could be forced to lower their prices (to be competitive) but in the process make losses,” he added.

Kavan said that with lower volume models, such as the Proton Inspira, a collaboration between Proton Holdings Bhd and Mitsubishi Motors Corp, using a strategic alliance to source the platform could have a positive impact on the company's profitability.

Proton group managing director Datuk Syed Zainal Abidin Syed Mohamed Tahir has reportedly said that it would cost Proton as much as RM700mil to develop a new car from the ground up but only half the amount via its collaboration with Mitsubishi Motors.

An analyst from a local bank-backed brokerage said platform sharing was a unique way for car manufacturers to launch a new model but at the same time save costs on research and development (R&D).“It's a shortcut to the latest technology and design,” he said.

“Apart from cutting down on R&D costs, Proton also gets to sell the car at a much lower price,” the analyst said, adding that Inspira started from RM78,999, over RM40,000 cheaper than the Mitsubishi Lancer GT, the platform that the Inspira is based on. Given that profitability and sustainability are the key goals of any automotive company, Kavan believes that Proton's tie-up with Mitsubishi for the Inspira is a smart move.

“Proton's primary target segment is the A, B, C segment. They need to develop their own models for these primary segments. However, for the other segments, their volumes in the home market are not large enough. Hence selectively using alliances and platform sharing is financially the right move. “In our analysis Proton's net margins from the Inspira should be a lot healthier than other models. Proton needs these profits to fund future model development in its primary customer segments,” he said.

Globally, Kavan said, other OEMs were also using platform sharing and product licensing as a strategy to widen their portfolio of offerings with focus on profitability. He cited Toyota Avanza and Daihatsu Xenia in Indonesia, PSA and Citroen, and Nissan and Renault. From Mitsubishi's standpoint, it provided an upside revenue opportunity in the Malaysian market where it has limited penetration, Kavan said.

Mitsubishi Motors Malaysia chief executive officer Tetsuya Oda, in a statement, said that while the Inspira was modelled after the MitsubishiLancer, it differed in a number of ways with both having its own unique traits, allowing each respective vehicle to differentiate itself in the marketplace.

“Each brand also caters to a different group of customer segments with a different set of driving desires and expectations,” Oda said.

Kavan, however, said that it was critical for a company to use the “platform sharing strategy selectively and “with the right partner.”

Source: The Star, 8 Feb 2011