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Old 22nd November 2012, 23:00   #1
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Default Understanding the cost of manufacturing a car

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?
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Old 22nd November 2012, 23:20   #2
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Old 22nd November 2012, 23:29   #3
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Default re: Understanding the cost of manufacturing a car

I think this is attributable to lack of safety features on a commercial vehicle.
No ABS, Airbags, Passenger safety.
And the engine here in question is a modified version of seventies era mercedes.
Imagine a vento with a engine derived from 1.5 diesel of Amby.
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Old 22nd November 2012, 23:33   #4
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Old 22nd November 2012, 23:40   #5
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Default re: Understanding the cost of manufacturing a car

A very interesting, eye-opening thread. I am really surprised now as to why I never thought of this earlier. The only reason I can think off is what you have already pointed out that the car makers are basically making a huge amount of profit on selling cars since these are basically considered luxury items at the end.
Some amount of extra cost might be attributed to the probable better quality of the chassis, frame, paint quality etc and the cost incurred in the crash testing of the vehicle.

Last edited by drmohitg : 22nd November 2012 at 23:57. Reason: text added
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Old 22nd November 2012, 23:54   #6
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Interesting topic stemming from a nice thought Power Ranger. Sometimes it's the elementary questions that get overlooked and when discovered hiding beneath the obvious, turn out to be the some of the most baffling. This seems one of those, ain't it?! Would love to understand the intricacies here; get a feeling this is going to be quite revelatory.
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Old 23rd November 2012, 00:30   #7
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Default re: Understanding the cost of manufacturing a car

Quote:
Originally Posted by power ranger View Post
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?
The price of vehicle is not decided by the raw material cost alone. Had that been the case, all sedans, right from the Manza to the Merc use pretty much the same amount of raw material, give or take 30% at the most.

To compare your statement about the cost of the new Traveler, why does a Volvo cost 4 times that of a Tata or an AL bus?

The reason for the pricing of any commodity is multi faceted.
Its technology, positioning, RoI targets, target market, competition..the list is long.

Do car makers make more profits compared to commercial vehicle makers per vehicle/chassis sold?
Mostly yes, but not all the time.
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Old 23rd November 2012, 00:44   #8
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Default re: Understanding the cost of manufacturing a car

One of the factors pushing the cost of cars could be the excise duty that is applicable to motor vehicles, apart from other reasons like higher profit margins,target market etc.

From my understanding (please feel free to correct me if wrong), a car like Vento/Manza etc. is chargeable to duty at 27% subject to abatement, a vehicle used for transportation of more than 6 persons excluding driver, depending on the classification, may be subject to duty either at 12% or 'NIL' rate of duty.

I'm not too sure if the input costs are any less for a commercial vehicle when compared to a car.

Last edited by shashank.nk : 23rd November 2012 at 00:45.
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Old 23rd November 2012, 03:20   #9
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Default re: Understanding the cost of manufacturing a car

Not to forget the amount of cost which goes in to the R & D for the development of the product.
The manufacturer has to retrieve the costs incurred in the development of the product come what may, till the break even point is achieved.

In my opinion the main difference between the cost of a normal sedan and German big 3 or any other premium manufacturer is the cost of research for the innovations they introduce.
Next comes the quality of raw materials.
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Old 23rd November 2012, 09:40   #10
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Default re: Understanding the cost of manufacturing a car

There is a quiet a bit of taxation on cars which even today is considered as a luxury. Some of those taxes are import related, and some other are production related. Apart from this the safety equipment level in these commercial vehicles is negligible.

Apart from this i believe the precision with which parts of a car get manufactured is higher as compared to larger commercial vehicles, and this too adds up to the overall cost.
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Old 23rd November 2012, 11:13   #11
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Default re: Understanding the cost of manufacturing a car

Quote:
Originally Posted by Koenigsegg220 View Post
Not to forget the amount of cost which goes in to the R & D for the development of the product.
The manufacturer has to retrieve the costs incurred in the development of the product come what may, till the break even point is achieved.

In my opinion the main difference between the cost of a normal sedan and German big 3 or any other premium manufacturer is the cost of research for the innovations they introduce.
Next comes the quality of raw materials.
Ok, not very convincing because of the following :

R&D cost : I presume even Force Motors has R & D cost associated to develop the traveller.
Now, the cost of research and innovations. I have worked with Robert Bosch for 7 years and beleive me most of the innovations like ABS, Air bags, ESP, Traction control etc are all innovations by Bosch and not by car manufacturers. Ofcourse, the manufacturers need to pay royalty to Bosch for using the technology. Here again, I feel the cost per manufacturer should come down given that Ford, Toyota, Tata, Hyundai etc all share the cost. Also, note that we are talking about bare basic version of Manza which necessarily does not have any safety and also not crash certified to increase the cost. What R&D does something like Manza boast of : the engine and gear box is from Fiat, the common rail is from Bosch, steering from Raane. What do they do on R & D? Just produce a shell which is not crash certified anyway ?

Now, coming to the quality of raw materials used, here again it is not convincing because, I have travelled in the earlier Force Traveller. Beleive me they are abused more and they live up well. A typical traveller covers 300 KMs per day ferrying most of the company employees etc in a city like Bangalore. I have seen drivers directly starting with second gear with 17 people on board. Wonder how a sedan will shudder and switch off. Not to mention the bad roads. The Traveller is very comfortable even on bad roads including rolling and pitching way below the sedans. Wonder what good higher technology does for sedans

Also, the traveller has a huge air conditioner compared to the minisicule ones in sedans. So you see every way the part costs are higher and they far outlive the abuse in a much better fashion. To add salt to the wound, the servicing cost : the modern sedans recommend synthetic oil costing over 1200 rs / litre and the funny bit is Manza recommends oil change every 7500 Kms now . The travellers drivers abuse the vehicle with mineral oil and drive well close to 10,000 KMS. Again, your logic is true, better innovation better quality of raw materials should lead to better product with lower running costs.

Now lets go to the illogical part. Recently I was in Malaysia and was speaking to a friend. The Fortuner costs about 80000 Ringe, which works to around 12 lacs INR. Now, here we beg and pray Toyota to give us this vehicle for more than 25 lacs !!. The only factor everybody quotes in the legendary reliability, which again I dont understand given that my own Safari has not broken down even once in my 80,000 KMS coverage so far. The point is what are we paying for ?

I was in Germany from Bosch close to 1.5 years and coming to your big 3, a BMW 3 series costs 30,000 Euro in Germany. It works to around 20 lac INR. Here we pay close to 40 Lacs. Believe me the ones sold there are much superior given the weather, special accessories like snow tires, better engine specs etc.

So, the conclusion now, until somebody from the manufacturer explains me the cost break down, I fail to understand the higher costs for cars. Also, when we say that the raw material cost is not the only factor, then how do we get something like the traveller which uses more raw materials, safety is also no different from bare basic cars for much lesser ?

Now, coming to the safety bit, as I said working in Bosch I can say that ABS and air bags does not add more than 1 lac. This itself is on the higher side. Note that first of all these are not offered on most cars under 10 Lacs.

Now what do I forsee, this thread getting closed without any deep thoughts and we will continue to be fleeced by manufacturers like toyota in the name of legendary reliability.

Unitil, the public boycott the products with high price, which happened to the already troubled Tata Motors in the case of Aria, we will go and buy sub standard products paying double the price than anywhere globally, without basic safety ( remember Fortuner does not even come with all disc brakes ) and pleading them to give the car after waiting for 6 months !!

Last edited by GTO : 24th November 2012 at 10:57. Reason: Poor readability and excessive dots. PM coming up
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Old 23rd November 2012, 11:41   #12
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Default re: Understanding the cost of manufacturing a car

Am not completely ruling out chalking out our money in the name of brand, snob value etc.

But there are other reasons also which could create the difference in price.
One such factor is the importance given to details. For eg, building up a luxury car involves so much physical attention(which we say, hand made kind of) , whereas a mass produced car will be mostly 'churned out'.

In the now running 'Super Cars' series, we get to see how much painstakingly close, each part of the car is made, inspected and corrected by hand. I think, this will have some huge impact on costs as skilled manual labor costs far high compared to mechanically or robotically skilled labor.

Plus as others said, safety features, 'quality' of raw materials used etc, which could add up.
Read somewhere that a paper published on Nano shows the huge savings they could make by reducing the wiper blades to one, wheel bolts from four to three etc. So, all these small things add up big time.
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Old 23rd November 2012, 11:53   #13
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Default re: Understanding the cost of manufacturing a car

One major reason why cars cost more in our country is our tax structure. Import duties, excise duties, state sales tax, road tax etc... all are ultimately loaded on to the car buyer.

If you feel TATA Motors is making too much profit on passenger cars, it would be a good idea to study their annual report for break up on segment wise profits. AFAIK the commercial vehicle segment is more profitable for them than passenger car sales.

Last edited by Santoshbhat : 23rd November 2012 at 11:56.
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Old 23rd November 2012, 15:21   #14
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Default re: Understanding the cost of manufacturing a car

I'm not too sure if the the HUGE Ad spend by passenger car makers could be a contributory factor for the price difference.

VW definitely spends at least 10x the ad spend of Force Motors. Moreover passenger car makers focus more on customer service and satisfaction which translates to a higher spend on Customer Amenities in Showrooms, Sales Promotions etc

It would be great if we could have the sales chart of these CV makers so that we can understand their costing better.
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Old 23rd November 2012, 15:39   #15
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Hmmm.... An interesting thread indeed.

Some of the reasons which i feel are as follows.

=> Cars are made light weight. Engine is finely tuned when compared to those corase truck engines.
=> Engines are small, powerful, Light and easy to repair when compared to those big engines of these commercial vehicles.
=> More components are added in the form of Clutch master, slaves, ABS, EBD, Power window rotors, Immobilizer with rolling codes, Seat height adjustments, Steering mounted controls, Head light adjustment rotors, Demisters (which again needs R&D), Plush Chairs (which are much better than those of Commercial vehicles). These will not be added in the commercial vehicles. Ofcourse, at the cost of two rotors, a lot of glass could be bought and be used for all windows.
=> Steel is not a matter. Commercial vehicles use big sheets with normal welding. where as the cars use smaller sheets laser welded for precision. Much better paint quality in cars.
=>Warranty is another big point which adds significant cost. These cars are made with precision and if anything goes wrong, the cost is huge. This will not happen in case of commercial vehicles as they are not buit to precision in many cases, rather they are designed to handle all sorts of situations.
=> Cars take more time and money in the name of R&D. Cars sell only if they are beautiful. Lot of money would be spent for looks.
=> Cars are advertized heavily, Many posters, Ads, Campaigns So the marketing cost shoots up the roof. Commercial vehicles are bought based on their reliability and feedback. Their spares are much cheaper.
=> For a company, Ensuring the best availability of spares is one of the biggest problem. For this, they have to give huge amount of margins to the shop keepers, which again would be a burden on the manufacturer.
=> Significant margin to the dealers. The dealer is supposed to sell more in volumes, so he should be given a better price. The cost at which a customer purchases a car is not the actual cost of the car. The dealer makes a significant profit. this profit is significant even after paying 30-40 sales men + couple of managers + couple of accountants, cleaners + inventory cost + hugeeeee real estate price in the centre of the city. Who is going to pay?
=> The real estate used for service is another factor, All the money for the service centre comes from where ? From the profits of showroom. The service centre is mandatory. and it would give returns down the line.
=> The cost of holding huge pile of inventory again, its a significant cost. Please note that commercial vehicles are stored around 50 KM out of city.
=> Taxes are less for Commercial vehicles. where as for cars, Luxury tax comes into picture.
=> Plastics for commercial vehicles are built inhouse. They are rough edged. where as for cars, most of them are outsourced to those who supply better quality. So margins of suppliers.
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