You Can’t Always Get What You Want, But You Get What You Need: The True Cost of Homologation

swift sport

Car and Driver‘s review of the Euro-spec 2018 Suzuki Swift is notable not so much for the quality of the review, but for the omission of one of the most tired tropes in automotive writing: the pean to import almost any vehicle, no matter how wretched, simply because we cannot buy it.

Few auto journalists have ever been product planners, and as far as I know, nobody has ever given up a product planning gig to become a car scribe, so information on the topic is not readily available. The only book on automotive product planning dates back to the days of VHS.

The business case for any given product varies wildly due to the underlying economics, so it’s impossible to give a one-size-fits-all explanation of how the decisions are made on what is imported and sold here and what remains beyond our reach. This isn’t intended to be an exhaustive explanation, but a quick overview for car enthusiasts who consider industry topics to be verbal Ambien.

Let’s start with the least capital-intensive scenario, which is entirely fictional and bears no relation to any existing OEM or vehicle. A very low volume specialist OEM with a long history of selling simple, lightweight sports cars that are “Lots of Trouble, Usually Serious”, is considering importing a popular and successful sports car that has already been on sale, in other markets, for a decade.

Because it has been a strong seller for so long in various markets across the globe, we can assume that the development costs, from the initial sketches, to hand-building of prototypes to construction of the assembly line to certifying the crash worthiness, emissions compliance and other regulatory minutiae, have been fully amortized. A high-volume passenger car can easily cost more than $1 billion to develop: this OEM sources powertrains from other, larger OEMs (rather than develop its own, at a significantly higher cost) and does not equip its cars with many creature comforts. Therefore, we can make the assumption that development costs are around $500 million.

Due to the low volume nature of this car, the OEM is confident that they will be able to obtain a waiver for the vehicle to be certified as roadworthy by the U.S. government, despite it lacking the mandatory dual airbags. However, the OEM must still satisfy the myriad arcana of the FMVSS, or Federal Motor Vehicle Safety Standards. The FMVSS is a byzantine set of rules and regulations consisting of many subtle differences from the standard used in the rest of the world, known as UNECE. Whether it’s a “non-tariff barrier” to bar vehicles from the rest of the world is a debate that I’m not interested in having, but there are two facts that cannot be disputed

  1. In practical terms, it prevents a lot of interesting cars from being sold in the US and Canada
  2. It also prevents us from getting cars that are materially less safe than what we are used to

According to various whispers and rumors, the cost of certifying this particular sports car to meet FMVSS, sans airbags, and with an additional waiver for some lighting-related issues, was US$50 million back in 2005. If you tossed airbags into the mix and had a powertrain that needed to be certified for sale (versus, say, grabbing an already certified engine and gearbox from a very large OEM that farmed it out to a well-known maker of musical instruments and sports bikes), that figure would multiply substantially.

With an investment of US$50 million and an assumed MSRP of $50,000, the OEM would need to sell roughly 1,000 units over the model’s life to break even, assuming that no mid-cycle updates necessitated a re-do of crash testing or engine certification. Luckily for the OEM, this model sold roughly 11,000 units over its lifespan. It’s difficult to determine what kind of margins were available to the OEM, but they almost certainly earned a healthy ROI.

For mainstream products, which not only require things like airbags, but advertising campaigns, dealer and service staff training across a large network of stores, lavish media events, spare parts inventories, a healthy incentives budget for when sales inevitably slow and umpteen other ancillary costs that few individuals outside of an OEM ever think about, this figure can balloon upwards, while the cost of a given model can vary in either direction. This is why many small cars, such as the Volkswagen Polo or Up!, have such a difficult business case – the cost for homologation and launch is very high (easily in the low to mid nine-figures, given the multiple powertrains, bodystyles and other features, crash testing each variant that requires it, launching the vehicle etc) while the market for compact and subcompact cars is small and the margins are painfully thin (if not negative).

In certain cases, OEMs will proceed even if the costs seem prohibitive. If not for the Obama administration’s demand for a “40 mph car” (later corrected to “40 mpg car”, proving that one needs no to either shape policy or report on automotive affairs), the Fiat 500 would never have reached our shores. A car like the Honda S2000 is another example of something that would have required an exorbitant investment in an all-new bespoke platform and powertrain. However, Honda was able to justify it on the ground of it being the 50th anniversary of the company’s founding, and the fact that they produced it for nearly a decade, which likely helped absorb some of the cost. And then, there is the Nissan Murano Cross Cabriolet, which, according to industry lore, was greenlit because Mrs. Ghosn wanted a ragtop Murano.

Beyond the economics, there’s a larger question at play: are we really missing out on anything by not having access to Suzuki, or Skoda, or Seat or the other brands and nameplates that aren’t sold here? How much of it is just the relentless fetishization of said vehicles by the automotive media, which has no skin in the game and has never been exposed to the rigorous exercise of having to justify one’s product recommendations to an irritable executive who is mainly concerned about hitting next month’s sales targets (and which daily rental company will be able to help him out with this by buying a lot of cars at a hefty discount)

I’ve never driven a Swift, but the universally positive reviews and its success in amateur rally racing indicates that it’s likely a very good car. But note that it sells in the U.K. for the equivalent of US$20,000. The United States is a highly competitive market, where big vehicles are cheap, gas is cheap, credit is cheap, road tax is cheap, parking is cheap and choice is abundant. This creates an environment where the incentives push consumers towards bigger and more luxurious vehicles. If it were to sell in the U.S., it would likely need to be priced closer to $15,000, and the compact vehicle segment is notoriously difficult to suceed in, because for not much more money, you can put yourself into a Honda Accord or even a very basic full-size truck -both of which are much more suited to Interestate highway driving and the needs of the typical American consumer. Think back to the Fiat 500, which, Abarth aside, is really a miserable little penalty box of a vehicle. It could disappear tomorrow, and I doubt anyone would be able to muster even an iota of grief. Now multiply that same indifference by 100 and that’s how many consumers care about a third-tier Japanese econobox brand.

The one Suzuki product that might align with American tastes is the Jimny SUV, but the body-on-frame construction and short wheelbase would be a nightmare in terms of crashworthiness and CAFE compliance. Even if Suzuki could clear those hurdles, would they really be able to undercut an $18,000 Jeep Renegade (which is not as rugged, but more importantly looks like a *real* Jeep and is more refined in every qualitative measure) and also move it in sufficient volumes? By all accounts, it’s an unrefined piece of junk, fit for little more than agrarian use on Yorkshire sheep farms. I don’t think we are really missing out on all that much.

A more cost effective option would be to just buy one of the last Ford Fiesta ST’s. We enthusiasts begged for it, and Ford went to the trouble of importing it, but we failed to hold up our end of the bargain and buy them, just as we have before and surely will again. This is why we can’t have nice things.

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2 thoughts on “You Can’t Always Get What You Want, But You Get What You Need: The True Cost of Homologation”

  1. Thanks for the insight. I’m curious how the case of the Nissan Micra (sold in your homeland, desired south of the 49th likely ONLY by me) applies here. I understand that it’s primarily a Quebec thing, and that the Versa exists in the same range…again, I’m probably fetishizing one of those things we just can’t have.

    Or I just have to bite the bullet, get a passport, and head North to sample one for myself.

    Like

    1. Chris,

      It’s really not that special. In fact, I had a Versa Note rental, and it is so far superior, it’s not even funny. The Micra Cup cars were known to be especially “tippy” due to the high CoG.

      As far as sales, well, let’s put it this way – from what I know, this will be the end of the line for the Micra once the current generation is gone.

      Like

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