Car companies are incredibly complex entities, and when they’re in trouble, it can sometimes be difficult for outsiders to see what’s going on.
They may post financial losses even as some of their models hover near the top of the sales charts, while start-up companies may struggle or fail despite having huge amounts of money invested in them.
How does it happen?
There are many factors, but a primary one is economy of scale: making enough vehicles to bring down each one’s cost and turn a profit.
That’s the case with any product, from T-shirts to toothpicks, but it’s even tougher with cars, which contain thousands of parts, and must meet safety and environmental standards.
The parts in a car
As with other big-ticket items such as motorcycles, boats, and even houses, customers buy infrequently, while competition comes not just from other automakers, but from the huge secondhand market. Canadians bought 1.67 million new vehicles last year, but that’s spread out over some 35 million of us.
Costs start mounting years before the first car is even built. Parts must be designed and then validated, which includes making prototypes and, in the case of structural components, crash-testing.
Capital costs such as presses can be used over and over for various models, but the new part will require a unique and expensive die to go into the press.
Simpler parts will have a smaller start-up cost, but developing a brand-new engine or transmission entirely from scratch could be as much as $500 million to $1 billion.
The scale business
Amortizing such a whack of cash involves not just selling as many identical copies as possible, but using that basic architecture in as many different applications as possible.
“From a powertrain perspective, companies make their best efforts to plan ahead and leverage as many variations as possible from a single investment,” says Patrick Kinsie, the executive director of global business development at Ontario-based parts supplier Multimatic Inc.
Many of the parts his company manufactures, such as door hinges and suspension components, end up in numerous vehicles. For parts that don’t differentiate the brand, such as window motors or trunk struts, most automakers will use generic parts to save money.
Those savings can help offset the higher cost of powertrain and design elements that define the brand or the model.
Competing manufacturers may even work jointly to develop common architecture, which they will then modify to differentiate their brands, such as the “world engines” designed by Chrysler, Mitsubishi and Hyundai, or the battery technology being developed by BMW and Toyota. This spreads out the enormous initial costs.
“If you think of the traditional car companies at the beginning, they were full-on vertically-integrated organizations,” Kinsie says. “Ford made its own steel. Their expertise was all the way through the supply chain, but at some point, that becomes impractical.”
When business is bad…
Economy of scale applies to independent suppliers as well. When General Motors and Chrysler were in crisis a few years ago, many thought that other automakers would be glad to see them fail, since it would eliminate competition for new-car sales.
In reality, the loss of orders for millions of parts would have raised the per-unit price on them, and put some suppliers out of business. The remaining automakers would pay more for their parts, if they could get them at all.
Automakers plan for amortization, and on an engine or transmission, they may be looking ahead some 15 years. The unit will be modified over that span, but these changes will build on the initial design.
With a vehicle platform, the goal is to create a design that can spin off as many variants as possible. Car companies are also thinking globally, creating architecture that can be adapted for as many markets as possible.
If the break-even point occurs, the car then basically comes down to its raw materials, labour costs, and plant overhead. In some cases, a car that’s too old for showrooms in one market can still turn a profit, such as with the last Ford Crown Victoria fleet-only models, or the final original Volkswagen Beetles, made in Mexico for domestic sales.
But there are times when new designs don’t break even, and that’s when trouble starts. If a model doesn’t sell enough copies, the per-unit cost is so high that the company loses money on each one.
And while globalization can help to amortize the price of initial development, there are large costs for the modifications required for each market. Global designs brought to Canada must meet federal safety standards, include metric instruments, and have bilingual labels and owners’ manuals.
Unable to spread this over its low sales volume here, Suzuki will continue to build cars for other markets, but will be leaving Canada.
It is possible to make low-volume cars and turn a profit on them, but their price tags will be high, as any Lamborghini or Rolls-Royce owner will tell you.
Even then, these brands use some parts and designs that you’ll also find in the higher-volume, lower-priced vehicles that their parent companies produce.
When it comes to the huge cost of making a car, saving even a little money on each one is the key to success.