Your client, large automotive OEM WyCar, has developed its first fully electric vehicle (EV) and introduced it as a pilot on the Austrian market last year. However, sales have been far below the expected numbers. The management has engaged you to support them in understanding the reasons and advise them on how to adjust the product offering.
The case follows a linear storyline and is designed to be presented to the candidate by an interviewer. The interviewer should read through it to understand the structure ahead of the interview. Depending on the desired focus area of the interview – quantitative or qualitative – additional questions can be addressed along the way, e.g. estimation of EV market share (see Diagram 1) or general discussion of risks and challenges in the EV industry.
Kurzlösung (Ausklappen) (Einklappen)
- The model was introduced in January last year in two versions:
- Model “E-Ficiency 150” with a small battery and a range of 150 km, at a base price of € 35,000
- Model “E-Ficiency 300” with a larger battery and a range of 300 km, at a base price of € 48,000
- 1,800 units in total were sold throughout the year
- There is one competing model on the Austrian market, which can go 250 km with one battery charge and has a base price of € 50,000 (available since 2011)
Identifying the problem
- The interviewee should inquire about the overall market development and/or whether there are any competitors on the market
- The interviewee should ask whether WyCar’s and the competitor’s models are comparable / how they differ
- Comparable in technology and design
- Access to same public charging infrastructure
- The competitor’s base price offering includes all usual equipment such as automatic air condition and a sound system with wireless connectivity
- In contrast, WyCar’s model “300” requires an extra charge of € 3,000 for the same set of optional equipment (the model “150” is fully equipped)
- The Austrian government has introduced a refund of 12% of the purchasing price of a fully electric vehicle, but only if that price is equal to or below € 50,000 (the government does not want to subsidize luxury cars)
- The competitor’s model thus has an effective price of € 44,000 only which might explain the much higher demand
What could be possible reasons?
The interviewee's research team discovers the following survey results:
The interviewee should realize that mostly young people in large cities are interested in EV with a range of only 150 km; however, their willingness to pay is usually lower than the model’s current price.
Oliver Wyman Case Team Tasks
- The management has understood the problems concerning pricing for the two models
- However, current margins are already very low and there is no scope to reduce manufacturing cost in the short term
- The management thus is ready to lower prices only if they can
- generate additional revenues related to sales of their EV, and/or
- reduce non-manufacturing cost related to sales of their EV
- They have asked the interviewee to develop ideas for both
- The interviewee should develop a couple of ideas; the management then asks to run a deep-dive analysis on their favorites:
Idea 1: Battery warranty
- The junior consultant in the interviewee's team remembers his behavioral economics classes and people’s risk aversion in particular
- He suggests to introduce an optional warranty for the battery for the first five years after purchase of the vehicle (free replacement in case of failure)
- The client’s engineering department provides statistical data showing average failure rates of WyCar’s battery:
What is the minimum price WyCar has to charge for the warranty in order to make sure the proposition does not incur additional costs for them, if WyCar’s replacement cost is € 5,000 per battery on average (assume there is no default warranty even within the first two years)?
Likelihood of failure within the first five years is 22%; expected replacement cost per car sold is € 1,100 which is also the minimum price to be charged to the customer for the replacement warranty.
Idea 2: Cooperation with energy provider
- In a meeting with the Head of Business Development, she mentions that she is currently discussing a cooperation with large national energy provider MountainSpark
- WyCar could offer MountainSpark’s home-charging station together with the purchase of an EV
- The customers would get the charging stations for free but would need to keep or sign up a home energy contract with MountainSpark for five years
- Total cost including installation of the station is € 750, of which WyCar would contribute 40% and MountainSpark would bear the rest – in return, WyCar would get 10% of the variable power revenues generated by the home charging stations over the five year contract
- The following table shows a summary of the interviewee's analysis on the economics of EV in Austria:
Would this cooperation be economically viable for WyCar?
Rather not – the cost per station for WyCar is € 300, just equal to the expected revenue of € 300 over five years (with a negative NPV). In addition, WyCar would be exposed to the risk of decreasing power prices
Idea 3: Online distribution for model “150”
- In discussion with the client’s management, it turns out that the only direct cost besides manufacturing attributable to EV is distribution
- WyCar currently sells its EV through traditional car dealerships alongside the conventional models
- Average distribution cost is 10% of the final purchasing price
- The interviewee's junior consultant has recently read a survey indicating that young urban people prefer fancy showrooms and online orders to conventional dealer relationships
How could WyCar adjust its distribution strategy?
Open showrooms in large cities and sell online the “150” model given the main potential group of buyers.
If selling online a model “150” car entails handling costs of 1%, at what price can WyCar offer the car if they pass on the full savings on distribution to the customer?
They can offer the car online at € 31,815 which is WyCar’s cost before distribution (90% of € 35,000) plus 1% for handling.
Based on the interviewee's work, the management decides to offer the battery warranty at a price of € 2,350 for the model “300” as an optional service, and at the same time lower the model’s sales price (fully equipped) to € 50,000 in order to qualify for the government subsidy.
Which percentage of customers has to buy the warranty in order to keep WyCar’s profit margin from model “300” stable?
80% of customers have to buy the warranty – average profit from the service is € 1,250 and the price decline to be compensated is € 1,000.
The interviewee should weigh all the information he or she gathered throughout the case and conclude that WyCar’s electric vehicles are too expensive relative to the customers’ willingness to pay and the competitor’s offering. The issue can be addressed by offering additional services (e.g. a long-time warranty for the battery) to compensate for price reductions, and by reducing cost (e.g. shifting sales to online channels to reduce distribution cost).
More questions and risks to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case