The demand in emerging markets for safe, modern, cheap cars has created a new market segment. It was founded by the Fiat Palio, and has since been joined by the Honda City and Toyota Soluna.
This 'emergent' segment is characterized by sturdier, cheaper cars, developed by a global manufacturer specifically for emerging markets. The cars themselves are not sold in the home market.
Traditionally, automakers served these markets by sending tooling for cars taken out of production in the home market. For example, Volkswagen still has its old Beetle in production in Mexico, and Opel is moving tools for the old Astra to its new factory in Poland.
Now they are developing hybrids especially for the emerging markets.
Fiat Auto started the trend two years ago with its Palio range code-named 178. 'You cannot satisfy growing demand in expanding markets by offering old models from established markets,' said Roberto Testore, president of Fiat Auto SpA, in a review of the project.
These emergent cars are engineered to be safe and durable, even with bad roads and dirty fuel.
'A world car won't necessarily have a wishbone suspension or a rear-window defroster; these aren't needed in a hot climate with bad roads where you can't drive very fast anyway like China,' said Ashvin Chotai, an analyst specializing in the Asian market at Standard & Poor's DRI in London. 'But the car will have a better air conditioner than in Europe and a suspension that can take those roads.'
Future industry growth depends on the immature markets. The challenge, said Opel Chairman David Herman, 'is to make money on those cars. We would not produce one on which we couldn't.'
GM has two cars
Opel plans to join the segment with two cars: the micro van nicknamed O-car being developed with Suzuki in eastern Europe; and the Blue Macaw project in Brazil using the Corsa in an ultra-lean factory.
The Corsa-based car will be simpler to build than the model sold in Europe, but it will not skimp on safety. In the early 1990s, GM tried to sell a Corsa in Brazil that lacked safety equipment available in Europe.
'Questions started to get raised like, 1/8Is a Brazilian life worth as much as a European?'' said Stephen Reitman, an analyst with Merrill Lynch in London. 'There was a severe backlash against GM.'
This time, GM is rethinking its production process to build a good car that can be sold cheaply. GM says the cost of rugged components will be more than offset by dropping some features and using cheaper labor.
'You look at the features you can take out like west European bumpers,' said Herman. 'You
wouldn't have side airbags bags for Thailand or a passenger airbag in Russia or Ukraine.'
The Blue Macaw factory will be laid out for modular assembly and key suppliers will produce components in adjoining factories. Production begins in late 1999. Full capacity will be 120,000 units annually, using 2,000 workers in two shifts.
In Poland, GM will build the Astra Classic for several years, beginning this fall. It will add an all-new small micro van to compete with the Polish-produced Fiat Seicento. The new GM minicar will be based on a Suzuki model that Suzuki will build in Hungary. It will cost about 10 percent less than the Corsa, so 'it won't attack our current customer base,' said Herman.
Ford in Brazil
Ford's strategy is like GM's in Brazil. Ford is developing one or two derivatives of its Fiesta in Brazil, as the Amazon project.
The Amazon will be built in a new modular factory in the same Rio Grande do Sul region of Brazil as the GM plant. The Amazon is scheduled to arrive no later than 2002.
Ford executives wouldn't discuss the project.
Ford is still suffering from a decision two years ago to open a new
$1.1 billion assembly line in its existing factory in Brazil to make the European Fiesta using European assembly techniques and expensive robots.
The investment is nearly as high as Fiat's entire spending on the 178 project, the launch was delayed, and the Fiesta has been recalled twice for quality problems.
Even small Renault is considering a second brand based on the Clio for emerging markets. Renault says production costs have to be 25 percent less than its European-made Clio for the project to make money.
Japanese in the market
'The Japanese have up and running what the Europeans and Americans are trying to do,' said Chotai.
Honda's City is based on the Civic but positioned under it. Fine tuning was done in Honda's r&d center in Thailand. 'The City is not a traditional formula for Southeast Asia. It has a high level of local content and early on in the project, Honda identified those suppliers who would support it,' said Chotai.
The City was introduced at the end of 1996 and is built in Thailand and several other Southeast Asian markets. Because of the Asian crisis, it is difficult to assess its profitability. Last year sales in Thailand were only 17,000 units, and they are expected to decline to under 9,000 this year.
Honda recently launched the City in India, where it raced ahead of the Opel Astra and the Ford Escort in May with sales of 859 units. The car already has a reputation for fuel efficiency and could be a serious threat to the Maruti Esteem, the mid-sized car segment leader in India. In May, 1,725 Esteems were sold.
Toyota's Soluna is similarly positioned and powered. It is based on the Tercel platform and sells in Southeast Asian markets including Thailand, Indonesia and Malaysia. Last year in Thailand, Toyota sold 27,000 Solunas. In 1998, sales are forecast to drop to 8,700 units.
Fiat is the leader
'For emerging markets, one vehicle is required to do a number of jobs,' said Arthur Maher, an analyst with JD Power-LMC in London. 'The prime focus is not to be a small city vehicle in these markets but closer in size to the Fiat Punto, rather than the Fiat Panda - and that is what the Palio is.'
Launched as the Palio three- and five-door in April 1996, the range has grown to five models including the Palio Weekend station wagon and Fiat Siena sedan. A pickup version will be introduced in Brazil this summer, and a van will go into production in the first half of next year.
Versions of the 178 are already being produced in Brazil, Argentina, Venezuela, Poland and Morocco. The Palio and Siena will replace the Uno in Fiat's Turkish factory this fall, and next year 178 production will begin in South Africa and India. Fiat plans to build the Siena and Palio Weekend in a joint venture with Russia's GAZ in 1999, and negotiations for other 178 projects are underway in China, Thailand and Vietnam.
The project has sold one million units, and break-even was 600,000 units, said Fiat. Fiat anticipates sales of one million units per year, beginning in 2001.
The world turns
The phenomenon of the emergent class of cars is temporary. As emerging markets mature, there will be more demand for world cars that hardly differ between markets.
Instead of sending hand-me-downs to emerging markets, automakers will adapt their simply constructed emergent cars for home use. Already, Fiat sells its Palio Weekend in Europe. And eventually, it plans to put its European-built Punto and the 178 vehicles on the same platform, for a true world car.