Low-Cost Cars and the Price of Success

OEMs usually aren't shy when it comes to boasting about how their vehicles stack up in terms of fuel efficiency, performance and luxury amenities. But there has been a distinct tendency to avoid any real discussion of price. That's normally been dealer territory.

Part of it is undoubtedly psychological. U.S. customers have a habit of conflating "inexpensive" with "cheap," and no company wants to be known for selling cheap vehicles. Manufacturers also hesitate to cut MSRPs too low on cars or trucks, because that eliminates opportunities for haggling. The fact of the matter is that despite occasional discussion about changing the industry's selling model, along with the rise of no-haggle dealerships, the general public prefers to negotiate with dealers about pricing.

The most recent proof of this was the failure of the General Motors "value pricing" plan of a few years back. This was the strategy of lowering MSRPs by cutting out the built-in negotiation cushion. The overall idea was to show what a great value GM products were by positioning them as offering great quality, performance, features, etc., etc., at MSRPs that were lower than the competition. But that required potential customers to accept that GM's MSRPs represented the "real" price of the vehicles, along with a decision by other OEMs to use similar strategies so that customers wouldn't be fooled by apparent discounts.

Unfortunately, the program was a complete flop, garnering support from neither customers nor other automakers.

But as we've seen in other parts of the post-meltdown industry, the "zeroing out" effect '” the way customers' perception gaps have narrowed with the discovery that all OEMs were equally incompetent enough to be equally affected by the disaster '” may be starting to affect pricing.

A case in point: the news that Hyundai is cutting some $1,800 of the MSRP of its base Elantra Touring model (the five-door hatchback) for 2010. This is a fascinating move, as Hyundai is one of the prime beneficiaries of the zeroing-out effect. Pre-meltdown, Hyundai was known for producing vehicles that were the epitome of cheap in the most negative sense. But by making big improvements in quality at a time when customer perceptions were open to change, the Korean OEM has become a viable alternative for a big chunk of the auto-buying public.

It's recent sales have truly stood out from the crowd, and it continues to add to its increasingly impressive lineup, which already features the 2009 Autotropolis Car of the Year (the Hyundai Genesis), with vehicles like the lux-level Equus, scheduled to hit the U.S. for 2011.

In other words, the company is carving out a successful niche as a low-cost '” not cheap '” OEM that is ready to battle it out over price at the company level '” not the dealer level.

Then there are the "Bare Necessities" car and truck concepts from GM, which sort of debuted at GM's recent preview event. These purportedly represented the first results of GM's new move to engage customers more in finding out what they "really" want in a vehicle. But it's telling that the first fruits of this program have to do with the lower limits of what people would want '” and pay for '” in a low-cost car or truck.

And thanks to the media buzz around the Tata Nano, more and more companies are also dipping their corporate toes into the shallowest end of the price pool with proposals for ultra low-cost vehicles. Players include GM (via a Chinese joint-venture partner), Hyundai, the Indian OEM Bajaj Auto (with some help from Renault) and Toyota (which is testing the waters with its iQ minicar).

When you consider that most low-cost vehicles would necessarily be on the light side in terms of both curb weight and engine displacement, they would also offer an inexpensive route for automakers to take to reach the new CAFE regulations. Even if we stick to vehicles at the level of Elantra Touring, we're talking about a car that gets a combined 26 mpg in EPA testing.

IMHO, whichever OEM hits the sweet spot somewhere between the two '” above a Nano but below the Hyundai '” is going to have a hit on its hands. Yes, it may be a single instead of a home run, but there's a reason guys like Tony Gwynn and Rod Carew are in the Hall of Fame with all those sluggers.