Oliver Wyman Case: Full Electrons Ahead

i

• 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)

What could be the reason? One of the topics to be discussed is incentives for the purchase of electric vehicles:

• 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

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

The interviewee should realize that even at a price of € 51,000, the model “300” should keep up well with the competitor’s model given its bigger range (+20%) and price premium of only € 1,000 (+2%). What could be the reason?

The interviewee should notice that the cap of the government premium does not explain low demand for the smaller type “150”

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:

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.

• 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.

• 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

• 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

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.

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.

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).