29 Jun BA 390-Kei Cars-The U.S. government fuel-economy regulations require
Question
Kei Cars
The U.S. government fuel-economy regulations require carmakers to achieve a fleet average of 54.5 miles per gallon by 2025. Smaller vehicles can help car companies meet those standards. Tiny vehicles in Japan, known as kei cars (from “kei-jidosha” or “light automobile”), achieve 55 mpg ratings. Kei cars are not new in Japan. They began as a tax and insurance break to stimulate the Japanese economy after World War II. However, the typical kei buyer in Japan is close to 50 years old, causing concern for Japanese automakers focusing only on the Japanese market. The U.S. regulations provide an opportunity for these automobiles in America. However, profit margins are almost as tiny as the cars themselves, causing carmakers to wonder if they can make an adequate profit when exporting to the United States. Of the big-three Japanese carmakers—Honda, Toyota, and Nissan—Honda is the only one making kei cars. It is considering bringing its new Honda NBox to the United States. Its closest competitor would be Daimler’s Smart car, which made a profit of $108.3 million on sales of $10.7 billion in the United States last year. Smart cars sell for around $13,000 but seat only two people. In comparison, Honda’s NBox holds four people and would be priced at $16,000, making it an alternative for small-car-minded families. To answer the following questions, refer to Appendix 2, Marketing by the Numbers.
1. What is the profit margin for the Smart car? Show your math.
2. If the unit variable cost for each NBox is $14,000 and the Honda has fixed costs totaling $20 million for this car, how many NBox cars must Honda sell to break even? How many must it sell to realize a profit margin similar to that of the Smart car? Show your math.
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