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Old 24th November 2012, 20:30   #31
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by Warwithwheels View Post
Gemi, I wonder even if my friendly neighborhood Kirana Shop operates that way. But am sure that Car dealerships work in a completely different fashion.
2 or 3 crores is just pittance. It would not even suffice for a week's operation of a TATA or Maruti dealership.

BTW... Which manufacturer pays a company to start a showroom? I may be interested in such a deal?
That was just an example mentioned. No actual values are true. Please re read it again. the way it was put was just to explain things. when i said some 2-3 cr, the difference between 2 and 3 crores is huge. Isnt it?

Also i havent mentioned the loans that the showroom takes from banks. that amount should again needs to be added to the investment amount right?
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Old 24th November 2012, 21:07   #32
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Default Re: Understanding the cost of manufacturing a car

Aerodynamics is a big part of all passenger cars, and that is why u see a lot of cars with a different designs and this costs money. All commercial vehicles are more or less boxes on wheels which relatively costs less money. In the case of cars making it lighter, efficient and more powerful is a big challenge which requires huge R&D investment, whereas commercial vehicles can get away with any amount of weight. Finally the skewed tax system and miscellaneous charges - ads, dealerships etc add to the costs.
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Old 29th November 2012, 12:25   #33
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by power ranger View Post
Today I was reading the launch of Force Traveller 26, the new 26 seater from Force motors.
The specs are mind blowing with Mercedes engine and gear box, monocoque chasis, dual mass flywheel, all 4 disc brakes, electronic indicators for wear and tear of brake pads, LCRV etc
Now, the question to auto experts is as follows :
This vehicle has an ex-showroom price of 10.87 lakhs. Compare to something like the Vento.
Now, how are these commercial vehicles with all these features priced so low ? Doesn't it need more metal, glass, bigger air conditioner, painting and so on to manufacture.
Whereas, sedans like manza cost so much. If somebody says sedans have better engine, gear box etc, I am confused as this has Mercedes-Benz engine and these vehicles far outlive the sedans.
So why do cars cost so much ? Although the raw materials itself look more for these vehicles... Imagine 26 seats cost....
Are cars overpriced both by government and manufacturers just to exploit as a luxury item ?
Can somebody explain?

1. A lot is dependent upon the specifications of the parts used. For eg., a starter motor spec to last 25000 cycles in low cost cars, can go up to 80000 cycles in high end cars. AC Compressor switch also has similar specifications. Alloy wheels have metallurgical specs - material density and strength used.
Heck, even engine parts have different specs from different vehicles. I have heard that for a car to perform at sub-zero temperatures optimally, engine part specs, and not just the engine oil, needs to be changed. An Audi, BMW, Merc, Honda, VW generally use higher specs since there is no R&D in India and they are simply provided the specs by the parent company. Suzuki, Hyundai, GM generally make lower spec cars in India when compared with Rest of the World. If the chrome parts of a vehicle are speced to last 5 years in humid/coastal environments, vs 3 yrs for first appearance of rust, the cost of chrome parts DOUBLES. Simply - wheel nuts that are normal steel finish cost 1/4th that of wheels nuts with high quality chrome finish (see wheel nuts on BMW/Merc/Honda/Toyota/VW vs the wheel nuts on Hyundai/Suzuki/Skoda, and you'll understand)

For eg. for a fact I know that Suzuki Swift exported from India is a much higher quality car with higher spec parts than the one that is sold in Indian dealerships, albeit at a premium.

Same corollary applies to Commercial vehicles. Specs of most cosmetic parts in commercial vehicles are much lower which make them cost lower. However, suspension, chassis (if not a monocoque build), steering are over engineered to help them better ward of abusive usage/overload. Paint finish is also of a lower spec in commercial vehicles (Solid paint < Teflon Finish paint < Metallic Paint < Pearl Finish Paint in quality+cost).

That's why a Scorpio will cost less than a Hyundai Verna inspite of more metal, heavier built and larger engine. Specifications of parts/automotive systems/paint changes all equations.

2. A monocoque chassis car is inherently cheaper to produce by fully automotive assemble lines, however investment for robotic welders is massively capital intensive. Vis-a-vis a body-on-chassis build like a Bolero/Sumo can make do with manual labour assembly with simple machines. To break-even costs therefore, a Tata Manza may be pitched at a higher cost as compared to a Tata Sumo to recover the capital invested during a product's lifetime.

3. Market Segmentation and positioning forces a company to price a product in a particular range inspite of pressures on bottom-end, and maybe even losses. Team-Bhp has a thread on how Fiat Uno was sold at a loss to position Fiat as a brand in the market, however now Fiat has been pulled up for excise-duty evasion. Similarly, Honda in Jazz, which is in all other countries as costly as the City, had to offer huge discounts for selling it in India, and finally even reposition to get in line with market pricing for the premium hatchback segment. I was told Jazz is as costly, if not more, to manufacture as the City, so that would mean extremely low margins or a loss to basically build a brand or maintain presence in a segment.


Price of the car also needs to recover input costs like Research, Development, Testing, Homologation, Above-the-line Marketing (huge TV/Print Ad Costs) for a particular model during its lifetime since in a Profit-Loss statement of a model, all the above are expense heads and only the sale price of the car is in revenue head!

Here goes, a detailed MBA-like case study answer for an innocuous seeming simple question! Hope this suffices as a general answer! All are welcome to add-in further as & how they feel.
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Old 29th November 2012, 16:31   #34
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by power ranger View Post
Are cars overpriced both by government and manufacturers just to exploit as a luxury item ?
Can somebody explain?
Adding my 0.02$ to the topic. Though the scenario I explained is not of an automobile industry, the explanation would/should hold good for it.

I was part of a large conglomerate for close to 5 years in their product development division. Now if you see, the department itself is divided into sub-departments to cover the end to end of product development needs. Starting with Market research, it comprises various departments like R&D, Design, Purchasing/Sourcing, Marketing and life cycle management.

We had two differnent types of products. One for the commercial segment (CS) and other for the personal segment (PS). Let me give you a fair idea of what the differences in processes between these two segments is.

1) Market research plays an equally important role in both these segments. However, the number of sub-segments within a PS are quite large. Lots of analysis is required to zero in on a product that would appeal to a particular sub-segment within the PS.

2) When it comes to R&D, PS products need atleast 150 to 200% more investment than for for a CS product. This is because a PS consumer is much more informed and looks at many standards, options and features than his CS counterpart. When a blue-print is layed out for a product to be developed, many more parameters are considered for a PS product than a CS product.

3) Design for a PS product plays a very vital role in the overall success of the project. While in our case CS designers work with 2D softwares, PS designers worked with advanced 3D softwares that could even simulate the stresses and failure modes. Each 3D s/w license costs atleast 6-7 times more than that of the 2D s/w license. Even the tooling design is vastly different with much tighter tolerances for the PS products.

4) PS product vendors have much more high tech facilities than their CS counterparts. This is required in order to manufacture the components within tight tolerances and standards. The cost of tooling for the PS products are typically 150% higher than those of CS products.

5) As explained in various posts before mine, marketing and life cycle management (showrooms/service centres) costs of PS products are huge. This would also add to the cost differential between the two.

I have explained only some of the scenarios above. But we can conclude from them that the cars that we drive are engineered much better than the lorries/vans/trucks that we see. Hence their higher costs.
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Old 30th November 2012, 16:03   #35
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by spinfreak View Post
1. A lot is dependent upon the specifications of the parts used. For eg., a starter motor spec to last 25000 cycles in low cost cars, can go up to 80000 cycles in high end cars.
Thanks for such an elaborate and eye-opening explanation.
I completely agree that the specs are responsible for wide variation in costs.

Last edited by bblost : 9th December 2012 at 22:48. Reason: Please avoid quoting a post in full. Thanks.
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Old 30th November 2012, 17:07   #36
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by GTO View Post
The "cost + margin" pricing model in the auto industry is long, long gone. When strategists are finalising the ex-factory price of a car, it is rarely influenced by cost. Rather, the question is : How much is the customer willing to pay?

At an 8 lakh price, our projections are 3,000 units a month
At a 7 lakh price, our projections are 3,500 units a month

Which do we choose?
+100. In the current market, I dont any manufacturer is following the cost + margin method.

Market acceptance of pricing Vs the volume it can generate at that price point will become the major for manufacturers.

If the buyers accept the Alto 800 at 5 lakhs why will Maruti not sell it at that price, even if they lose a couple of thousand units. (say from 26000 to 24000)
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Old 3rd December 2012, 15:20   #37
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Default Re: Understanding the cost of manufacturing a car

Cost of products and its parts are nowadays predominantly driven by "What goes where". You would know this if you compare the cost and throughput of AC in a car and window/split. I don't think there is any great technical advancements other than the materials that needs to withstand the high temperatures but they cost higher always in a car.
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Old 3rd December 2012, 19:19   #38
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Default Re: Understanding the cost of manufacturing a car

Now another analogy from the I.T industry.
I work with a large company whose one of the services is to develop and implement SAP solutions (both inside the company and for clients.)

Now here is the difference. The internal SAP guys are part of shared services and get paid about 35k - 40k/ month. The quality of the implementation (we have more than 1.7L employees worldwide.) is pretty damn decent, and in some cases actually better than what the Consultants develop for external clients. These guys get paid almost 3 times more than the S.S guys for developing/implementing the exact same piece of software. Now this is just one example(factor) for the total cost.
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Old 4th December 2012, 02:24   #39
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Default Re: Understanding the cost of manufacturing a car

I think the difference between commercial and personal are significant; marketing comes to mind, branding costs would be significantly less for commercial, look at the ad budgets of most automakers, they are huge.

People expect a lot more from their cars than commercial buyers do from their vehicles, so there is a cost of designing and building for that.

But still in India we are being overcharged more often than not.

The usual argument is taxes and volume. The fact is western countries have taxes too, stringent regulations, high cost of business and labour, and yet car makers are able to make a profit at sometimes half the cost that they sell here!

Western countries will probably be around 20-25 percent tax while we are at 40-42 percent but still the actual gap in pricing is large.

Then come volumes, they way I see it cars like CRV, Accord, Camry are priced 25 plus lakhs OTR here and have pathetic volumes. They are priced at $24-30k in the US and have good volumes, however what happens to those volumes if Honda/Toyota decide to price it at $50k like they are doing here?

You can't say there is no demand at sensible prices, the XUV and Duster aren't cheap and are doing fantastic volumes with both manufacturers unable to keep up. Why should a $22k Jetta 2.0 TDI DSG be 20 lakhs plus here?

You can't overprice and then crib about volume, volume is a function of price. One can't help feeling there is a lot of profiteering and sharp practice going on.

For westerners this is a fraction of their annual income, for us not so, not at these inflated prices. One can say but that's the cost. Fair enough, but labour is a significant cost in any business, labour costs are at least 5 times more in the west, you are paying less for labour in India.

These folks in turn have less purchasing power, so where is the difference going? Wouldn't it be fairer to pay more or price less? This creates an imbalance of higher margins, purchasing power concentrating in a few hands, which doesn't really help the economy. Sure it helps the luxury economy, but this cannot support equitable growth.

Last edited by raul : 4th December 2012 at 02:42.
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Old 4th December 2012, 20:28   #40
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by spinfreak View Post
1. A lot is dependent upon the specifications of the parts used. For eg., a starter motor spec to last 25000 cycles in low cost cars, can go up to 80000 cycles in high end cars.........
Do you have data support your case. Your argument suggests that higher cost cars have more durable parts hence are expensive. We have abused state transport buses carrying hundreds of people for 10 lack kilometers in bumper to bumper to traffic without a failure. And another end we have fancy german cars with "higher spec" parts failing on thier way from the showroom to thier rich owners home.
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Old 7th December 2012, 18:25   #41
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Originally Posted by JediKnight

Do you have data support your case. Your argument suggests that higher cost cars have more durable parts hence are expensive. We have abused state transport buses carrying hundreds of people for 10 lack kilometers in bumper to bumper to traffic without a failure. And another end we have fancy german cars with "higher spec" parts failing on thier way from the showroom to thier rich owners home.
I mentioned parts like suspension, chassis and wheels tend to be over engineered for Commercial vehicles in that same post, pl go through again. sometimes even door hinges are overengineered for those hanging people pics that one sees on the net.

and why even compare buses in this equation which cost in many multiple lacs for chassis and cowl even without bodywork. point was, on one hand 6 lacs fetch you a DZire diesel and on the other hand a Genio/Sumo Gold : much bigger and heavier and with more material - how.

ability to deal with abuse/Overload is not same as reliability, durability and refinement. drive an A4 in rural potholed kutcha road for a year, it'll give way before a mahindra or tata uv.

and data, lol you sound like bosses in an analytics company. believe me or not, specs and tolerances for passenger vehicles are much tighter. how many blown starter motors.on 10 yr old santro's/800's vs on a 10 yr old city or a corolla, team bhp users can provide the data

as mentioned ^ even vendors incur higher costs for setting up better mfg facilities and tooling. see panel gaps in a Toyota Corolla and compare with same in Tata 207 for an extreme eg. :-D
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Old 9th December 2012, 22:34   #42
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Can any manufacturer offer cars directly online, bypassing dealers?

And for service appoint multi car stations like carnation.

It may be win win for customers and car companies.
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Old 10th December 2012, 00:15   #43
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Can any manufacturer offer cars directly online, bypassing dealers?

And for service appoint multi car stations like carnation.

It may be win win for customers and car companies.
this doesn't come in cost of mfg. but are you thinking on the lines that dealer margins being passed on to customers thru that? debatable point!
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Old 10th December 2012, 02:49   #44
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Default Re: Understanding the cost of manufacturing a car

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Can any manufacturer offer cars directly online, bypassing dealers?

And for service appoint multi car stations like carnation.

It may be win win for customers and car companies.
All Cars will requires regular service hence dealers/ some agency needs to be there to service the vehicles at regular interval. Mind you manufactures make quite a lot of money from recurring service, hence why will they forgo this revenue to third party.
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Old 10th December 2012, 07:05   #45
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Mind you manufactures make quite a lot of money from recurring service, hence why will they forgo this revenue to third party.
correction : dealers make a lot of money. mfg make money through sales, accessories & spares only. dealers earn through margins and insane labour charges in service, esp. accidental or paint work. my fav. mechanic said got paid a paltry 7000 at a maruti a$$, plus some inventive, but at his own bodyshop he earns like 5-10 lacs a month with around 15 employees.

also, car is a big costly product , how would the mfg manage deliveries to end customers at locations all across India? difficult for maruti to deliver 1 lac cars each month without dealers. and they wouldn't want to compromise on experience being delivered to customers..eg a Toyota or a VW would want to deal with customers at point of sales/service in a more standard way compared to what the brand stands for. so they would not compromise in a jugaadu place like India.
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