Richard Lynch*

Richard Lynch*

Doreen and Shem felt criminal as they sidled into the second­hand 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 second­hand 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 nice­looking car, but with an unfamiliar name. A Proton MPi and from a far­away 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 three­year­old, second­hand 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).

/ 1 0 • Chapter 16 Pricing Considerations and Approaches

instead. The buyers found that the second­hand cars were problem­free 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' fleet­first policy in the United Kingdom meant that the average price ol a medium­sized family car was £2,000 higher than it would otherwise be. In the United Kingdom, fleet buyers include car­hire companies and ears bought as additional re­ muneration 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 British­owned car companies, fleet buyers followed a made­in­Britain policy (Ford, Rover or GM) or, increasingly, made in the European Union. They also bought from the big dealers repre­ senting 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 vari­ ations 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 pan­European 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 American­owned Ford, have manufactured cars on a pan­European basis. For example, its small car, named the 'Fiesta', combined parts produced in the United Kingdom.

Cu.se if,: Proton MPi