chrisyano

This has been something that I've been thinking about on and off for a while now. Although the automotive industry is not the only one in which this phenomenon occurs, it is the one that I take most notice of because of my affinity for well-designed automobiles. Obviously something needs to be cut in order to appear to "match" a higher-level competitor at a lower price point.

I say "match", because you simply cannot put out an equal product for a lower price unless you're willing to take a smaller profit for your efforts. For example, sheet metal could be of a lower quality (and therefore cost) and be machined using some shortcuts that would not be apparent to the casual observer. I have very little actual knowledge about the manufacture of automobiles, so this is just an example pulled out of air.

I do have experience in trying to design products that people want yet they expect to pay little as possible for luxurious-looking products. Shortcuts have to be made in order to bring asking prices down, be it in labor time, production time, production costs, or material quality. Honestly, I give the automakers a lot of credit for their efforts. Their plight is not an easy one.

The development costs must be massive just to roll out any sort of prototype in their field. And then the tooling and manufacture, not to mention marketing and retailing. I'm sure I'm missing many huge expenses but you get the point. Yet the public continually wants more for less money and government regulations require more and more expensive hardware that you can't really charge the end user for.

Bottom line is manufacturers constantly need to search for ways to lower their costs. This is more apparent in some industries than others. Matchbox cars were much better when I was a kid. I don't know if they are more expensive now relative to inflation, but let's assume they cost the same amount of 1980/2010 dollars. Current Matchbox cars look and feel so cheap and have no weight to them.

So where does the cost-cutting truly come from? I've heard and have my own complaints about interior materials and sheet metal seems to get really thin on certain models. I know first-hand that eliminating as much labor cost as possible is the best thing you can do. But the automotive industry needs a lot of expensive labor that is only getting more expensive with time. Seems like a legitimate problem to me.

And finally, I bring up the economy-priced offerings that seem to shout out to the heavens that they are just as good as cars priced thousands more than theirs. The Korean makers seem to be particularly good at that at this moment in time. But when they have to tack on Luxury car items onto their more economy offerings, do they need to cut back even further? Where?

Thanks for reading and I would love to hear any thoughts.

LexFather

Good question and its very complicated to answer it. One thing helping the Koreans now is the exchange rate. So they can price their exports cheaper just based on that. Also lets not forget Hyundai is a HUGE shipping company, not just involved with cars. They can spread the costs around and move money from one department to another. They are a huge multi-billion dollar corp. Toyoyta/Nissan/Honda had the same advantage when they rolled out Lexus, Infinit, Acura initially.

Another point is car companies have to share parts or they will die. They have to spread the costs among multiple vehicles. A great example is the initial Nissan/INfiniti's starting in the early 2000s. All used the same platforms and engines with the worst interiors around. They figured people would buy the cars for power, price and style over substance and quality. It did attract those people and it worked for them. VW owns tons of brands, cutting costs by sharing everything in VW, Skoda, SEAT, Audi etc.

Porsche is a very expensive brand who has only elevated their interiors and product. So how do they do it? Porsche has to sell more VOLUME. Like 150k and SOON. So another point of cutting costs is if you have the volume you should be able to hold costs. VW is hell bent on increasing volume to cut costs. We saw Toyota chase volume to cut costs and well, look where that led them. So its also a fine line.

Another part of cost cutting is trying not to make it to obvious. Toyota/Lexus does a good job of cutting costs without it being so blatant in most cases (there are bad cases like the Camry two generations ago and recent models with quality issues). Take the rear spoiler/tail on the 2RX. Its a huge black plastic piece. It looks great, no one complains about it. Well its a lot cheaper than if they made it part of the metal body.

chrisyano

Thanks for the excellent reply. It is a complicated topic and you raise some very good points that help me tremendously. Since Hyundai/Kia is such a great example today, I'll use them.

It makes sense that Hyundai has the backing of a huge corporation. I see a similarity to the way Japanese automakers pressure their suppliers/subsidiaries to take losses so they don't have to. Also, didn't the Japanese gain American marketshare by selling cars at little to no profit early on? Is this sort of what you meant?

Parts and platform sharing, combined with volume are huge. I can see that. I also see lower-quality materials all over today's cars as another cost-cutting method. I guess the trick is to make it look good enough (or not obvious) and I feel this is huge in this discussion.

With all of the above, is it really possible to create an equal product and sell it for so much less than their chosen competitors? I always envision pretty pieces that are meant to look good (i.e. faceplate) but lower quality/cost wiring or components behind them. Make it seem like it is the same and many will believe it is the same as something better. Is there any truth to that?

jaseman

Yes, it is possible, to some extent, to do this. It all really depends on what function the part plays, and how it's importance is perceived by the end user.

Sometimes it's something as simple as using plastic clips, where your competitor may use metal ones. A 2 cent difference per part adds up when you multiply that by 30 clips over a range of millions of units sold. But it's not really that simple, as the knowledgeable consumer sees the metal clips as being more durable, hence, of a higher quality.

Then there is the 'parts bin' way of shaving cost, as mmarshal pointed out. If you can use the same part, say a fuse block, across a wide range of vehicles (only wiring to the plugs you need), where your competitor can't, you can cut costs in the big picture. GM is most notable for doing this, but it has also bitten them the worst in buyer perception. Customers may not notice a shared part hidden underneath the dash, but when you climb into a Corvette and notice that your window switches, climate controls, and steering wheel are all the same as your neighbors Cobalt, you may feel a little ripped off.

Then there is also brand perception. While my Kawasaki is every bit as good as a Harley Davidson, and more technologically advanced, it will never command the price of one. The American public simply sees the HD brand as the epitome of what a motorcycle should be. Sure, enthusiasts will flock to what meets their needs, rides a certain way, or has certain features, to the layman, it's still not an HD. So even though the two are very comparable, except for price, there is always the perceived value of any given product. Hyundai will be facing this exact problem, should they decide to truly enter into the luxury market. No matter how good it is (at any price) the public will have a hard time considering it as an equal to the likes of Lexus, Mercedes, or BMW...

chrisyano

Thanks, jaseman. Your input really helps me put some focus on the answer I've been searching for. Between what you and 1SICKLEX have posted, it's all starting to come together for me.

I can see how if you can shave cost on each of a car's parts it adds up to big savings for the manufacturer--but I guess what I'm thinking is that the end user must be getting fleeced here. I mean, they are sold a car that "is just as good as a luxury car but for half the price" and they expect a luxury car, not one that looks and feels like one but is made of lesser parts.

I think that brand perception plays a huge part of the equation that I'm trying to piece together in my head. I also think that this is the reason why it doesn't compute for me. Newcomers seem to struggle to get respect, unless they offer some sort of game-changing alternative to the established brands. Hyundai seems to be pushing really hard to give this impression--"hidden cameras" capture everyday Americans falling in love with the car, flipping out over the price, or saying they regretted wasting money on their Mercedes (true story). They previously appealed to everyday Americans' plight during the market crash with "we'll take it back if you lose your job".

Seems like they are trying to establish themselves with the blue-collar and working-class crowd, sort of like Miller High Life is doing right now but without the mockery. It also seems like the perceived importance of cheaper parts is rather low in the target market.

This fits with observations I've made about consumers in other industries. A pretty face is often enough to cover up glaring shortcomings as long as the price is nice enough.

Fulorian

There are no hidden cameras catching everyday American's impressions of the new Hyundai's. Those videos are taken inside of a stationary 'camera car' at these Hyundai driving events in which participants record their thoughts, after signing a waiver for the use of their likeness and commentary in advertising. It's not like they're 'peeking' into people's private conversations.

Also, regarding the Hyundai chaebol - the Hyundai Group was dismantled in the late '90s. While the former member companies may still enjoy a beneficial relationship with one another, each is an independent company - Hyundai Motor is not directly related to Hyundai Heavy Industries or Hyundai Logistics. However, they do own Hyundai Steel - which gives them the ability to manufacture a great deal of their components in-house, at cost. A tight vertically integrated supply chain is, as those who have studied business know, a very strong advantage to any company with diverse abilities. For one that is very narrow in it's skillset - say, Porsche - vertical integration makes far less sense.

Regardless, this gives them a pricing advantage over other countries. Korea's won has been, as noted above, very weak over the last few years. This means that anything produced and exported has a strong competitive advantage against those from nations with strong currencies. In essence, everything they make costs less than it does in a strong-currency country like Japan. It's not manipulation when you can simply manufacture an identical product for 80% of the cost.

And to an extent, there is the support of the Korean government. Korean citizens pay a very high price for Korean cars, and the Korean government has effectively protected their industry. A lot of the profits for Hyundai/Kia have historically come from the domestic market, with those profits used to fund the volume expansion internationally. Which, to be frank, is essentially what General Motors is doing in China as well.

The biggest issue is the exchange rate, though. They can literally make a widget for 75 cents on the dollar, while Japan can only make that widget for 1.15 on the dollar. Not accurate numbers, of course - but this is why Japanese cars are getting so expensive for what they are. It's the equivalent of what American manufacturing was in the 1970s - burdensome, inefficient, and disadvantaged. Hence why everything went to Asia at that time.

jaseman

Don't assume, though, that the Hyundai will be every bit as good as, say, a Mercedes, though. Now, let me qualify this - I am NOT saying it is or isn't, as I have not driven one - just don't make an assumption on it one way or another.

If your talking about any class of car, it's still hard to drastically undercut your competitors without sacrificing something. Just to use the Mercedes comparison as an example...

Will the leather interior be of the same quality? If so, will it still be after 5 or 10 years?
Will the motor be as powerful, or pull as smoothly? Will it still after 50,000 miles?
Does it offer all the same techno-gadgets? And do they work as intuitively?
Does it have all those little extras like rear AC vents, extra sound deadening for the cabin, an emergency kit (I was amazed to see a first aid package in my IS's trunk)?

While name and status play a big factor, there are a whole host of things that you may not notice at first, that set different classes (and price) of cars apart. Many are not immediately perceptible. Sometimes it takes living with a vehicle for a while to notice those things.

This is where I believe Hyundai's current "hidden camera" commercials are a bit misleading. "This car is so much better than my xxx...." doesn't work for me. A brand new car, with no knocks or rattles from 3 years of potholes, no stains from where a toddler spilled a sippy cup, and no wear on the controls from an hour commute daily for a few years is always gonna excite most people compared to their current daily driver. We really like things that are new and fresh. Old and comfortable is great when it comes to your favorite pair of jeans, but there's something about that new car smell.....

TRDFantasy

Where are the cost cuts? They occur in a variety of places, most of them unseen to the consumer at least initially, but many of these cost cuts become apparent after owning the vehicle for several years.

One example is thinner sheet metal as you stated. It's not something a customer usually notices, but over a long period of time it could become quite apparent to the owner of a vehicle that it has thin sheet metal.

Another example would be something like less layers of corrosion protection over and in between the layers of paint, or less layers of paint in general. More expensive brands typically use multiple layers of paint along with multiple layers of corrosion protection, while a cheaper brand aiming at these more expensive brands would not have as many layers. This is very hard for a customer to tell when the car is new, but over years of ownership the car with less layers is more likely to develop paint chips or have rust problems.

Further examples include using less clips in the interior and exterior to hold panels together, or using clips in some places where more expensive brands would use metal screws. Other examples would be thinner interior plastic, or using lower grades of plastic.

There is also the expression of "over-engineering". Some expensive brands "over-engineer" parts of their cars, which means some of the parts can withstand use or perform above listed specifications, or the tasks they were designed for. Cheaper cars/brands are usually engineered to a minimum specification, and are less likely to have over-engineered parts.

Other examples I can think of are just little details. This includes things like seat comfort during very long drives, how the car performs and operates when filled with maximum occupants and cargo, how refined and smooth are interior buttons when you press them, how far do the seats slide/recline, are there any armrests and how far do they adjust, and the list goes on and on. Cheaper cars that aim at more expensive cars typically have less of these little details.

That is all I can think of for now, but I'm sure there are more examples.

chrisyano

Thanks for the great input. I took the liberty of trimming the quotes for space reasons only.

For sure it's staged. That's why I called it the "hidden camera" commercial campaign. There were some driving shots, though, as I seem to remember the Mercedes comment made while driving but that's really beside the point.

I did not know that much about Hyundai before this, so it's good to know more about their particular situation. Now with beneficial partnerships, government support, and exchange rate on your side, I can start to see how they are making ground on the other makers.

This is the elephant in the room. Just because they can produce the same quality as their target (whichever class level it may be) for 75-80% of normal cost, will they? It's a fair question, I think.

Another great point. My '07 IS350 is the best car I have had the priviledge to own. It is the first "luxury" car I have had. I was thrilled to have it at first, of course. The car is rock solid where it counts, but after the honeymoon eye glaze wore off I started to notice the parts that are obvious cost cuts.

Brand new cars do not show their weaknesses unless you go in and search them out. Who really does that on a five-minute test drive? I agree with you about the comments in the commercial being tinted.

This seems to be somewhat of a consensus when it comes to the new Hyndai offerings. There's a lot of "let's see if it lasts" and I'm guilty of that as well I guess.

Interesting. I am unfamiliar with the term, but I am familiar with the concept. That sounds like a feasible way to cut costs without being obvious to the end user: design to minimum specifications instead of over-engineering heavy traffic areas, etc.

You gave some great examples there. These are things that may go overlooked during a test drive. You're distracted by the new smell and the shiny paint and already picturing yourself no longer having to drive that old and dirty car. You don't notice the little things until much later. I would stipulate that every car maker is guilty of taking advantage of you in that state though.