Proton MPi Malaysian Styling Japanese Engineering and European Pricing

Richard Lynch*

Doreen and Shem felt criminal as they sidled into the second-hand car dealer's showroom. For years they had bought a new Rover every four years, but this time, after carefully reading the Which? Guide to Ne<a> and Used Cars, they were thinking of buying a second-hand ear for the first time. Shem loved the smell and feel of a new car, and he could afford one, but the numbers just did not add up. As Doreen and he looked round the dealer's, he caught himself humming an old Bruce Springsteen song: 'Now mister, the day the lottery 1 win, 1 ain't ever gonna ride in no used car again.' 'Well,' thought Shem, 'I haven't won the lottery. So here we are.'

Just then he felt a glow, lie noticed Doreen looking at the new cars also sold by the dealer. Quite a nice-looking car, but with an unfamiliar name. A Proton MPi and from a far-away place too - Malaysia! Still the price looked reasonable and the label said .Japanese engineering. 'Maybe we needn't buy a used car after all.' suggested Doreen. 'Maybe not,' replied Shem. "We could also look at a Skoda,' he said, swallowing hard. 'They're not expensive and now they're made by VW or something.' The Proton salesperson overheard them. 'Lovely cars, aren't they?'he said. 'We can give you a good deal too.'

It was late 1994 and Proton, the Malaysian maker of economical small ears, had an opportunity. Proton cars were manufactured in Malaysia using Japanese car engineering and some ear parts. They were then shipped to the United Kingdom for sale. Proton had a chance to seize an increased share of the market in the United Kingdom, its biggest export market. Sales of new cars to private buyers were plunging. Not because of lack of money or lack of consumer confidence, but because of discontent with high prices, fast depreciation and the knowledge that the price of cars in the UK was higher than in the United States and some neighbouring European countries. Evidence suggested that private buyers, like Doreen and Shem, who once bought new cars, were now buying two- or three-year-old, second-hand ones

" Richard Lynch is managing director of Aldersgate Consultancy Ltd. This case is largely based, with permission, on 'European car pricing' from his booh Cases in European Afarfeetmg (London: Kogan Page, 1993).

instead. The buyers found that the second-hand cars were problem-free and a bargain after two or three years of depreciation. Statistics from the Society of Motor Manufacturers and Traders showed that sales of all new cars rose 8,5 per cent in the first ten months of 1994 compared with the same period in .1.993, but private sales were only up 2.2 per cent.

The private car buyers were, til last, getting their own back on the fleet buyers whom they bad subsidized for years. Car makers' fleet-first policy in the United Kingdom meant that the average price ol a medium-sized family car was £2,000 higher than it would otherwise be. In the United Kingdom, fleet buyers include car-hire companies and ears bought as additional remuneration for professional employees. As a result the fleet buyers, accounting for 60 per cent of the market, were very influential and powerful buyers. Director of the National Franchisee! Dealers Association, Alan Pulham, explained why the private buyer had to pay so much:

• Dealers need to fund the discounts, free servicing and other inducements that are usually given to fleet buyers who have bargaining power. Private buyers, with little bargaining power, rarely get these perks but subsidize the fleet buyer by paying close to the list price.

• Cars in the United Kingdom are usually equipped to a high specification because that is what the fleet buyers want. The equipment was more than the private buyer often wanted or could afford, but that is what there was.

This price discrimination gave Proton a market opportunity. Although the United Kingdom had few British-owned car companies, fleet buyers followed a made-in-Britain policy (Ford, Rover or GM) or, increasingly, made in the European Union. They also bought from the big dealers representing the market leaders. Proton was neither, so its price to private buyers did not have to subsidize fleet sales. Proton had a choice. It could cut prices to gain market share or charge moderate prices but keep the comfortable margins that the current prices gave them.

Background

According to the UK Monopolies and Mergers Commission's 1992 study of small cars in Europe, there are considerable variations in price between EU countries. These cannot be explained by currency differences, tax variations or extra equipment supplied on some models. They originate with the manufacturers themselves and their ability to maintain higher prices in some EU countries, principally the United Kingdom.

On larger cars in Europe and taking into account the same factors, the study found that there was no significant difference in price levels between the countries. With the coming of the single European market, should Proton and the other ear manufacturers set the same prices across the EU? Should there be a pan-European pricing policy?

In 1990 the EU car market was larger than that in the United States. Sales in the EU were 12.4 million cars in T990, with the United Kingdom entering a period of decline, but Germany, and to a lesser degree other EU countries, still showing significant growth. Exhibit 16.1 estimates annual registrations for countries. Then, in late 1992, the EU market produced its first real drop in volume.

For many years, some European car companies, such as American-owned Ford, have manufactured cars on a pan-European basis. For example, its small car, named the 'Fiesta', combined parts produced in the United Kingdom.

Cu.se if,: Proton MPi 711

EXHIBIT 16.1 CAR OWNERSHIP ACROSS THE EUROPEAN UNION

TYPICAL

GDP

CARS PER

% OF .SENIOR

ANNUAL CAR

PER HEAD

1,000 OF

MANAGERS WITH

REGISTRATIONS

IN 1992

POPULATION" IN'

COMPANY CARS

(MILLION'S)

($000)

1992

1991

Germany

2.9

15

469

80

Italy

2.3

9

457

75

France

2.4

11

420

53

United Kingdom

2.0

9

387

95

Belgium/

Luxembourg

0.5

10

401

n.a.

Netherlands

0.4

10

374

85

Denmark

0.1

12

309

n.a.

Spain

1.1

5

419

50

Ireland

0.1

7

242

n.a.

Portugal

0.3

3

163

n.a.

Greece

0.2

3

178

n.a.

SOURCES: Panortniui of RUhidiistry (New York: World Bank, 1941/2), pp. 1.1-21; various OK01) Sfatistios, Paris; and Aldersgate Consultancy estimates.

SOURCES: Panortniui of RUhidiistry (New York: World Bank, 1941/2), pp. 1.1-21; various OK01) Sfatistios, Paris; and Aldersgate Consultancy estimates.

Germany and Spain in the finished model. Other companies essentially produced one model in one location. For example, Germany's Volkswagen always produced its medium-sized Polo at Wolt'sburg, Germany. The care were then shipped across the EU.

The RU car market is not truly pan-European in the sense that any model can be readily sold in any other country. There are detailed car and legal regulations in each EU country - yellow headlights in France and car emission standards in Germany, for instance - that effectively stopped this happening. However, it was for precisely this reason that the Single Market Act 1986 was enacted: over time, it was envisaged that, apart from some obvious differences such as the British and Irish driving on the left, car market standards would become the same. At this time, if not before, prices could also surely become the same across Europe.

Car Prices twross Europe

As champions of the European car customer, the Bureau Europeenne des Unions des Consommateurs (BEUC) has been campaigning for many years to bring down car prices in the expensive countries in Europe. BEUC is made up of the national consumer associations of most EU member countries. It produces surveys of car prices such as that shown in Exhibit 16.2. From that survey there would appear to be large differences between prices in different countries. BEUC reported that average new car prices varied by 70 per cent between the lowest and highest countries net of tax. The difference including taxes was as much as 128 per cent. Since EU rules lay down that the maximum difference should only be 18 per cent, some concern was expressed. It should be noted that the EU rules specifically exclude those countries with exceptionally high national taxes, such as Denmark and Greece. The price differences stimulated parallel imports, despite the process being complicated and risky. Two hundred thousand cars had been bought by UK residents between 1980 and 1985 from outside the United Kingdom, mainly from Belgium. The car manufacturers complained that this undermined their profitability.

EXHIBIT 16.2 NEW CAR PRICES ACROSS EUROPE (ECU)

CAR

DENMARK

GERMANY

FRANCE

UNITED KINGDOM

BMW 316i

8,926

10,919

11,071

13,218

Citroen CX 22TRS

8,982

13,012

12,361

14,282'

Fiat Tipo 1400

5,416

7,359

7,081

9,143

Ford Orion 1400

-

8.197

7,837

10,799

Renault 19

6,390

9,543"

9,493

11,310

"With catalytic converter.

NOTE: All prices per model, per country, net of taxes at June 1989. SOURCE: BEUC.

"With catalytic converter.

NOTE: All prices per model, per country, net of taxes at June 1989. SOURCE: BEUC.

According to BEUC, the main reason for these price differences was that the manufacturers were taking advantage of a system of exclusive dealerships in EU countries. These meant that manufacturers could stop shipping cars to any dealer who sold the cars to anyone resident in a country different from the dealer's own. The manufacturers argued a number of other essential reasons for the differences in price between EU countries: different tax systems, exchange rate variations, different car specifications, different dealer discounts. They said it was not a question of 'what the market would bear'.

In 1984 the European Commission agreed a Block Exemption Regulation to exempt the passenger car industry from the Treaty of Rome rules on competition. It allowed the motor trade to operate a system of exclusive distributor franchises so that the manufacturer controlled the market supply in an area. The reason the Commission gave for allowing the exemption was that motor vehicles are complex products and require a high level of after-sales service, which would be best served by allowing dealers to have exclusive rights in a geographical area.

With the exemption coming up for review in 1994 and the single European market becoming more established, the manufacturers had to decide whether to seek a continuation of this policy. They said they would like to keep the special arrangement and, to the chagrin of many consumer movements, the European Commission agreed.

Reasons for Differing Car Prices Across Europe

The real question is whether the reasons for the differences across Europe were sufficient to justify the absence of a pan-European pricing policy. The evidence comes under four headings: customers, tax variations, dealer arrangements and other areas.

Customers

As Exhibit 16.1 shows, car ownership across the EU follows wealth to a limited extent. It is distorted by the availability of public service transport, the level of car sales taxes and the likelihood of obtaining a car as part of a work pay and remuneration package. The provision of company cars has distorted car prices. Company fleet buyers purchase in large quantities, and they are therefore able to get price discounts not available to private buyers. To maintain their profits, car companies charge private buyers high prices.

Tax Variations

Exhibit 16.3 shows substantial variations across the EU in the tax on cars. When car manufacturers complained about price comparisons made by the consumer groups, their responses often concerned this area.

EXHIBIT 16.3 VAT AND ADDITIONAL SALES TAXES ON NEW CARS IN 1992

COUNTRY

CAR TAX

Belgium

Denmark

France

Germany

Greece

Italy

Luxembourg Portugal

Ireland

Spain

United Kingdom

None

105% up to Dkr19,750 180% on the rest None None

Between 45% and 400%, depending upon engine size

None None

Esc95-l,700 per cc on an increasing scale 21. 7% up to 2,016 cc 24.7% above None 10%

SOURCE: Monopolies and Mergers study, UK, 1992.

Across Europe, ear manufacturers have agreements with dealers in a geographical area for the sale of their product ranges. There arc a number of restrictions placed on the dealers, which:

• Limit the dealer's ability to advertise outside its franchise area.

• Stop the dealer from acquiring or holding dealerships outside the existing area from other suppliers.

• Prevent the dealer acquiring or holding other dealerships except on a distinct and separate site.

• Restrict the ability of the dealer to sell other products, such as secondhand cars or car parts from other manufacturers.

• Limit the dealer to selling a maximum quantity of cars in a given period and a maximum percentage of the total cars from the manufacturer in one year.

While these restrictions limit dealer freedom, the ear manufacturers say that they do make it more likely that car service levels are of the highest quality. Moreover. European car companies are engaged in a fiercely competitive battle in each EU country, so that the EU has accepted that these dealer restrictions are acceptable in terms of the EU Block Exemption Regulation.

Data have been published on the number of dealers that each of the main EU car manufacturers has in each country. In general terms in 1991, manufacturers tended to have rather more dealers in the main country of manufacture, e.g. Renault in France, Rover in the United Kingdom. The Japanese car companies had rather fewer dealers, but this would be consistent with their overall share of the European car market at around 9 per cent in 1989. The US multinationals, Ford and General Motors (trading as Opel in

EXHIBIT 16.4 WAGE COSTS IN SOME CAR-PRODUCING COUNTRIES

DEUTSCHMAKKS PER HOUR ]991

TYPICAL PRODUCERS

Germany

United States

Japan

Italy

Spain

France

United Kingdom Malaysia

SEAT (Volkswagen/Audi group)

Volkswagen and BMW GM and Ford Toyota and Nissan Fiat

Renault Rover Proton

SOURCES: German Auto Industry Association and AhJersgate Consultancy Ltd estimates.

Germany and Vauxhall in the United Kingdom), were well represented in numbers of dealerships across Europe, reflecting their market share of 21 per cent. However, the number of dealers provides no indication of their quality in terms of location, size, trained staff, workshop facilities and so forth. Proton dealers were almost exclusively confined to the United Kingdom.

Other Areas

As will be generally true in all pricing decisions, the costs of ear production need to be reflected in the prices; there would be no point in pricing below marginal costs. In fact, such a pricing policy is illegal in some EU countries. While European car manufacturers do not publish detailed comparative cost data for competitive reasons, outline data on wage costs by country are summarized in Exhibit 16.4.

Other areas that would need to be considered include the extra items added to some cars as standard, such as electric windows, in-ear stereo systems and fuel injection. European car manufacturers have commented that this is the area that has made UK ears more expensive,

Reasons for National Price Differences

To assist understanding of how prices are constructed and explain why some national prices arc higher than others, the European car manufacturer General Motors commissioned a study of comparative prices in 1991 (see Exhibit 16,S), The detailed study shows that significant price differences exist for what is basically the same ear.

Proton's Pricing

Given a system which meant that the price of Dorecn and Shcm's car would subsidize fleet purchases, it seemed sensible for them to think about buying a 'second-hand new car'. In that way the private buyer benefits from fleet buyers absorbing the heavy depreciation in the first few years of a car's life. Will the car manufacturers ever recapture the private-buyer market again? Car industry expert Garel Rhys thinks not until 'prices of new cars in Europe ... come down in real terms to American levels'. He continues, 'That's when the fur will fly. There are simply too many car makers in Europe and they can't all survive.'

As a low-cost supplier of cars to the EU without a vested interest in fleet buyers and expensive dealerships, Proton could start the 'fur flying'. Should it, or should it not cut prices to gain market share? What would happen if it

EXHIBIT 16.5 COMPARATIVE CAR PRICES, 1991 ($)

UK

GERMANY

FRANCE

ASTRA

KADETT

KADETT

QL1.4

GL1.4

GLI.4

5- DOOR

5-DOOR

. 5-DOOR

NON-CATALYTIC

CATALYTIC

NON-CATALYTIC

List price inc. tax

8,749

7,407

7,764

List excluding tax

7,023

6,497

7,764

Equipment

adjustments (EA)

-

482

257

EA list price

excluding tax

7,02,1

6,979

6,468

Disci units

dealer (96)

13.7

7.1

2.8

On-road costs

350

152

314

On-road price

ex tax

5,411

6,636

6,601

Financing support

672

160

-

On-the-road

with finance

5,739

6,578

6,601

SOURCE: GMVauxhaU 1991 sun*ey.

SOURCE: GMVauxhaU 1991 sun*ey.

did? Would the European manufacturers fight back, or would the European Commission step in to limit Proton's access to the market? Charging a lower price would help Doreen and Shem, and many other private customers, but would it, in the long run, help Proton? Maybe Proton would do better to accept the high margins that the European car industry forces upon them.

QUESTIONS

1. Is Shcm justified in his concern about being charged too much for new cars in the United Kingdom?

2. What explains the big difference between EU and US car prices? Does the price demand function vary from country to country in Europe and is that in the United States completely different?

3. How should Proton price its cars? Should it keep its list prices high, reduce them or give big discounts to buyers?

4. Why might giving discounts be better than lowering the list price?

5. What is likely to happen if Proton cuts its prices to gain market share?

6. Clearly there is currently no pan-European price, but should that ever exist across the EU? Should the car companies continue with what are essentially national policies?

SOURCES: Song extract from Bruco Springsteen, 'Used cars', on Nebraska (CBS 25100, 1982); other sources are Monopolies and Mergers Commission, Ncia Motor Cars (London: flilSO, 1992); Y. Doz, Strategic Management in Multinational Companies (Oxford: Fer£amon, 1986): John Griffith, 'Bad dreams return to the motor trade', Financial Times (10 May 1992), p. ii; John Griffith, 'Market distorted liy use of uompany cars as perks,' Financial Ttrnes (f> Kcbruary l')92), p. 6; European Commission, Panorama of EC Industry 1991/92 (Luxembourg: OPEGE. 1991), pp. 30-8; D, Fisher, "Time to become lean and mean'. Financial 7Ymtn (2,1 June 1992), p. 18; John Griffiths, 'Price is wrong for some motorists', Financial Times (26-7 November 1994), p. 9.

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