Magic Margin Formula: Crossovers
Small Increase in R&D Costs Yield Significant Profit Margins
There is no disputing that the crossover niche is exploding around the world, as customers seem like they can’t get enough of the car-based trucklets of all shapes, sizes, and price brackets. However, automakers have found an additional happy coincidence of the segment’s popularity. Profit margins on traditional B- and C-segment (subcompact and compact) vehicles are typically razor-thin, often forcing automakers to seek out lower-cost locales for production, such as Mexico and Eastern Europe, to be able to eke out what little profit there is. According to Automotive News, the small incremental per-unit increase in research and development costs on a crossover compared to a similar-sized conventional car can yield vastly better profit margins.
The outlet quoted Ford of Europe chief Jim Farley saying an increase in development costs of a little more than $500 per unit can result in as much as a $10,000 increase in transaction price of the end product. Although the profit percentages are most pronounced and significant in the smaller-sized crossovers due to their higher unit volume, the demand for crossovers goes all the way up to the ultra-luxury segment. Bentley recently announced its plan to look at increasing output at its Crewe, England, plant to meet high demand for the $200,000-plus Bentayga SUV.
Source: Automotive News