Déjà vu All Over Again

Some of our older readers probably remember a time in the 1980s when entrepreneur Malcolm Bricklin decided to introduce one of the smallest and least impressive production vehicles ever designed to the American automobile market. Called the Yugo because it was being manufactured on license in what was then Yugoslavia, the car was actually a license-build version of a Fiat design that Fiat had abandoned years earlier for both aesthetic and reliability problems, called the Zastava Koral. It sold for what was, even then, a ridiculous price – about $3,999.99 US, or the equivalent of about one-quarter of what a low-end Chevy or Toyota might have gone for during the same period. And the joke was that you’d probably need to buy four of them, too, because at any given time there’d probably be only one of them in running condition, while the others were in the shop waiting for replacement parts to be shipped from Yugoslavia…

In business it’s a classic example of what’s usually called the “low price leadership” strategy (providing the equivalent product at the lowest possible price); it’s also an excellent example of one of the primary problems with that strategy: lack of parity in product quality. If I offer you a product for half the price my competition charges, you’re far more likely to purchase my product – unless my product has only one-quarter of the value, in which case you’re probably not. In the grand scheme of things, a Yugo that runs one day in five and will only survive for 25,000 miles or so is not worth a third of a Chevrolet that will run every day for five years and last for 120,000 miles; it’s not even worth as much as a used Honda Civic that will be good for another 100,000 miles at the same price. Unless your product is at least reasonable comparable to the competition, the lower price will not ensure an advantage. Which wouldn’t really be news, except that another company is trying the same stunt – and is likely to encounter the same problems…

A story from the Associated Press by way of the Houston Chronicle website tells the ongoing saga of the Tata Motors “Nano” – reputed to be the world’s cheapest production car. These tiny vehicles have been introduced into the consumer market in India, where they compete primarily with motorcycles and scooters, offering a much safer and more comfortable ride, particularly if you intend to carry two or more people at once. There has been talk of importing them into the United States for a while now; it’s expected that their $3,000 price tag (cheaper than a Yugo even 25 years later!) would make them a strong competitor for Smart cars, Segways, Prius and other small/ultra-efficient vehicles. Unfortunately, the news story is about an increasing number of cases where the Nano spontaneously bursts into flames. There is even some concern that it might explode…

Now, we’ve established that I’m not really a good judge of consumer behavior. I was on the focus group for a new Ford design that turned out to be the Ford Focus, and I thought the thing was hideously ugly and no one would ever buy it. Several million Focuses later, I have been forced to concede that the mere fact that the Focus IS hideously ugly does not seem to have kept people from buying them in droves. So it’s possible that people will purchase the Nano in large numbers, as well; that the mere fact that it may burst into flames and explode without warning may not be enough to keep people away from a basic commuter car that costs half of what a Segway does…

Just the same, though, I think I’ll pass on investing in stock in the company…