Retooling the Auto Industry for a Smaller (Yet Profitable) Future
Photo: Flickr, CC
If Small Cars Become More Profitable, We'll Have Better Small Cars
Toyota announced something interesting: The company is restructuring and retooling so that it can make more profits on small cars (more details below). To some this might sound like just some cost-cutting caused by the recession and massive drop in car sales, but I don't think that's all there is to it (or at least, I hope not). In fact, I think this is probably the way out (or at least the least bad option in the short-term) for the auto industry. Allow me to explain...
The leading automaker has long relied heavily on large and luxury vehicles to drive its profit growth, but demand for small and eco-friendly cars is set to expand significantly as a result of the global recession. The company will thus rework its profit structure substantially so that it can earn high profits even on small models [mostly by sharing common parts and platforms]. This would also enable the company to aggressively cultivate demand in emerging markets.
This means a ¥100 billion (US$1 billion) cut in costs on top of the ¥800 billion reduction this year (doubled from the previous ¥300-400 billion target.
Toyota is just an example of this, but it applies to the whole auto industry, and especially to Detroit.
Old Days: Printing Money with SUVs...
In the old days (a few years ago), small cars - even when they sold well - didn't generate that much profit compared to big SUVs and luxury vehicles because from an automaker's perspective, it's almost as expensive to develop and build a small car as a big one. There's almost as many moving parts, you still need a huge expensive factory and many workers, and you have to pass a bunch of safety and emissions tests.
So for example (made up numbers), if it costs $10,000 to make a compact car that you can sell for $15,000 and $15,000 to make a SUV that you can sell for $30,000, you have a big incentive to make SUVs (and try to convince people, through marketing, that they need one). This is all explained in great detail in the book High & Mighty: The Dangerous Rise of the SUV.