Retooling the Auto Industry for a Smaller (Yet Profitable) Future


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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...
Photo: Toyota

From the Nikkei (via Green Car Congress):

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.

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