THE TATA NANO: THE PEOPLE’S CAR (A)
It was one of the longest-awaited and most talked-about automobile debuts in India. On
January 10, 2008, Tata Motors unveiled its (U.S. dollars) USD2,500 car1 (also called “Rs1 lakh
car” or “the people’s car”) at the ninth Auto Expo in New Delhi. The Tata Nano brought a media
blitz and a crush of onlookers that required top-level security. Would the car live up to its hype?
And did its launch signal a new era for the small car market in India? How could Tata ensure the
product would be profitable?
September 2008. In addition to paying (Indian rupees) INR1 lakh—equivalent to
INR100,000— buyers would also have to pay 12.5% value-added tax along with charges such as
road and transportation taxes. The two-cylinder gasoline-powered version would debut first; the
diesel versions would soon follow.
The Nano was one of the world’s most fuel-efficient cars, getting 52 miles per gallon (mpg)
in the city and 61 mpg on the highway (22 km per liter and 26 km per liter, respectively).
Measuring 3.1 meters by 1.5 meters, it displaced Maruti Udyog’s Maruti 800 as the world’s
smallest car, yet its seating room was 21% greater than the 800’s—providing ample room for
four adults.
Company History
The Tata Group was a diverse conglomerate that had international interests in engineering,
energy, information systems and communications, materials, services, consumer products, and
chemicals. Its 96 companies employed 650,000 people on six continents.
For many casual observers, the May 2008 news that a British automotive icons Jaguar and
Land Rover had been acquired from Ford Motor Co. by a non-Western company came as a
surprise. But new owner Tata Motors was in fact the sixth-largest commercial vehicle
manufacturer in the world and was among India’s largest automobile companies. In 2004, Tata
Motors became the first Indian manufacturing company to be listed on the New York Stock
Exchange.
Tata Engineering and Locomotive Co. Ltd, a train manufacturer, was established in 1945. In
1954, the company launched its first automobile; between 1954 and 1969, it collaborated with
Daimler-Benz to produce commercial vehicles known as Tata Mercedes-Benz trucks, later
produced independently as Tata trucks. By the 1990s, Tata had entered the passenger-vehicle
market with India’s first sport utility vehicles, called the Tata Sierra. In 1998, it hit the jackpot
with the Tata Indica—a name derived from “India’s Car,” an apt moniker given that the car had
become the most popular vehicle in the country’s economy car segment. Tata launched the
Indigo in 2002. In 2005, Tata launched India’s first indigenously developed mini truck, called
the Tata Ace.
In 2004, Tata Motors acquired the Daewoo Commercial Vehicle Co. Ltd., Korea’s secondlargest truck manufacturer. In 2005, it acquired a 21% stake in Hispano Carrocera SA, a Spanish
bus manufacturer.
The company had manufacturing plants in the Indian cities of Jamshedpur, Pune, and
Lucknow, and assembly operations in Malaysia, Kenya, Bangladesh, Spain, Ukraine, Russia, and
Senegal. Globally, the company served the European, African, Asian, Middle Eastern, and
Australian markets.
As the Nano’s expected launch date neared, Tata Motors was experiencing a downturn in its
stock price—from USD18.60 per share in September 2007 to USD9.53 in September 2008, a
drop of almost 50%.
India’s Automobile Industry
In 2005–06, India was among the largest and fastest-growing car markets in the world. The
passenger car market was growing by almost 25% per year, and passenger-vehicle exports were
growing by 12.7% annually. India’s exports, which went mainly to Asia and Africa, were
growing at a rate approaching 30% annually and had already reached 850,000 units in 2005–06,
compared with 600,000 units in 2004–05.2 Some years saw as much as 65% growth in exports.
According to http://www.knowIndia.net, India exported “331,539 passenger cars, and over
one million two-wheelers.”1
Economy cars
Indian car buyers already had their choice of cars in the USD5,000 (INR195,000) market;
Maruti commanded more than 50% of that market share. Estimates of automobile ownership in
India ranged from 8 to 25 per 1,000 people, placing India at the low end of global per-capita
automobile rankings (Table 1).
Table 1. Number of motor vehicles per 1,000 people, by country.
Source: United Nations World Statistics Pocketbook and Statistical Yearbook, 2007.
With a population of 1.1 billion, “a median age of just under 25, and a rapidly expanding
middle class, India will overtake China next year as the fastest-growing car market, according to
estimates by CSM Worldwide, an auto industry forecasting service,” the International Herald
Tribune reported.2 Figure 1
Data source: “Industry Trends of Automobiles,” Corporate India, May 15, 2008.
There were six major players in India’s passenger-vehicle segment (Table 2).
Table 2. Major players in India’s passenger-vehicle market, percentage of market share, number
of dealers, and sales per dealer, 2008.
NA = Not available
Note: Dealer comparison numbers are approximate.
Data sources: http://Automobileindia.com (accessed August 10, 2008) and Emkay Research.
Cars were sold via dealer networks, and sales volume depended both on the extent of the
network and the sales per dealer (Table 2). According to a J.D. Power and Associates study of
the Asia Pacific market, Tata’s dealer margins across the various models ranged from 4% to
10%. Another study, by A.T. Kearney, estimated the profit margin of ultra-low-cost cars at 2% to
3%—about USD75 for the USD 2,500 Tata Nano.1
Used cars
In the months leading up to the Nano’s highly touted launch, used car sales in India had
fallen considerably. The price of a used Maruti 800—arguably the Nano’s closest competitor—
fell 30%, Autoblog reported. “Indian car buyers apparently are not dumb,” the article stated.
“Why buy a new or used car today when you can wait until the end of the year and get a new
Tata Nano for much less?”2
Two- and three-wheelers
In 2007, India’s two-wheeler market was the second-largest globally, with almost eight
million in total units sold (Figure 1). By 2011, two-wheeler production was forecast to approach
18 million units. A typical motorbike cost about INR37,000 (one-third the cost of a Nano).
Manufacturers included Bajaj Auto, Hero Honda, TVS Motor, Yamaha Motor, and
Kinetic. Table 3
Bajaj Auto also dominated the market for passenger-carrying three-wheelers, commonly
called “auto rickshaws.” Often used for transporting small cargo loads, these vehicles had earlier
faced competition from the Tata Ace, as well as from Piaggio’s Ape Truk, a four-wheeled cargo
carrier. Just months before the Nano’s launch, rickshaw drivers had begun filing petitions
through their union requesting that they be allowed to drive the Nano under their existing threewheeler permits.
Even if Nano manages to convert 10% of the two-wheeler market of about seven
million, it will have almost 50% share of the car market [Figure 1]. Nano may lead to a
20% reduction in prices of two-wheelers and a 35% decline in prices of secondhand
cars, according to industry chamber ASSOCHAM.4
The Tata Nano
Nano is expected to change the automobile market in India. It would cater to a
typical middle-income Indian family of four who wants to avoid rain, wind, and
dust … It’s freedom for four.
—Dilip Chenoy, Society of India Automobile Manufacturers
What must you forgo for USD 2,500? Air-conditioning, Power steering, Power windows, A
tachometer, and Dual windshield wipers. But the cost savings in creating a USD2,500 car did not
result only from such omissions. Rather, Tata sought the bulk of its cost savings in a streamlined
modular design in which many components served more than one function. Perhaps most
notably, the car’s component parts could be built at separate facilities and shipped for local
manufacture. Even village garages could assemble it, creating a unique distribution channel for
rural areas. In that way, the Nano was a kit car, said Tata Group Chairman Ratan Tata:
A bunch of entrepreneurs could establish an assembly operation, and Tata Motors would train their
people, would oversee their quality assurance, and they would become satellite assembly operations for
us. So we would create entrepreneurs across the country that would produce the car. We would produce
the mass items and ship it to them as kits. That is my idea of dispersing wealth. The service person would
be like an insurance agent who would be trained, have a cell phone and scooter, and would be assigned
to a set of customers.
At the start of the launch, Tata expected that its new 1,500-crore plant at Singur in West
Bengal would handle the bulk of the manufacturing; but construction was put on hold after
significant protest from area farmers whose land the government had appropriated for the project
without compensation. In response, Tata elected to shift production to another facility, and to
reduce its initial run from 40,000 to 10,000 cars per month during the first few months of
production.
Between 2003, when development began, and mid-2008, the cost of raw materials to
assemble the Nano had risen from 13% to 23% of retail selling price, compared with a 7% cost
for the average U.S. automobile.7 Even before this cost spike, however, the company had
planned to use reverse auctions to lower parts costs. It set a rejection rate of less than 100 parts
per million and expected to reduce warranty costs tenfold. (Note: Automobile margins were
typically 10% to 15% on spare parts for dealers and 20% to 25% for Tata Motors; for normal
servicing, the dealer margin was about 4% to 10%).
In all, 90% of the Nano’s components were outsourced, and about 75% were single-sourced.
Tata engaged 100 subcontractors, signing them to long-term volume contracts rather than annual
contracts. Half these vendors were to be co-located in a manufacturing park adjacent to Tata’s
Singur plant—occupying a portion of the 950-acre property the government had made available
to the cooperative enterprise.
Critics questioned whether the low price meant the vehicle was of low quality. But one Tata
vendor credited the company with designing from scratch, saying it precluded “dumbing down”
the engineering: “There are so many legacy costs built into a design, and trying to engineer those
out is difficult. It’s better to start with a clean sheet of paper and engineer low costs in.”8
Competitive Response
“Small cars have always been popular in India, even when oil prices were low,” said
automobile industry analyst Ashvin Chotai.9 Indeed, previous low-cost, high-efficiency car
launches had met with success: The Indian government had collaborated with Japanese auto
giant Suzuki Motor Corporation to release the mini Maruti 800 in the 1980s; in 2008, at the time
of the Nano’s release, the Maruti 800 retailed at USD5,000. Hyundai and Suzuki each
manufactured up to one million subcompact cars in India in 2007, and they had plans to expand.
Renault, Nissan, and Bajaj Auto were already exploring whether a USD3,000 automobile was
possible.
But Maruti was in no rush to reach lower than its Maruti 800 at USD5,000. “Our thinking is
that a consumer who is looking to buy a Maruti 800 or Maruti Alto will never settle for the Tata
car because of the difference in value propositions that the respective cars offer,” said Maruti
Suzuki India Ltd. Managing Director Shinzo Nakanishi. “In any case, the impact of the car will
be felt more in the two-wheeler segment, and every Tata 1 lakh owner will be a potential buyer
of our cars.”10
“India is a growing economy and so people will buy cars,” said Krish Krishnan, who
managed a green investment firm called Green Ventures. “It is a good thing that they will
perhaps be buying a smaller car which is complying with more stringent norms rather than a
much larger car or a two-wheeler that follows less stringent norms.”
Tata Dealer Response
In spring 2008, Tata dealers expressed excitement about the Nano, saying many customers
had already inquired about it. One dealer characterized the market as middle-class families and
college students. “Almost 50% of college-going students go for a bike,” he said, “which costs
around a minimum of 40,000 to 50,000 rupees, and they don’t worry to shell out 50,000 more if
they are getting a more comfortable, safe, and spacious journey. Families would no doubt feel
the same way.” Although two-wheelers offered twice as many miles to the gallon, “safety and
comfort are the key words that Tata Nano assures, which is the driving force for the success of
this car.”
Another dealer cited the car’s attractive design as a selling point: “The car has great looks
and is cute, which is very much appealing to middle-class families and students.” Still, he
conceded that price was the Nano’s chief appeal. “Pricing the car that low is the biggest plus
point, and I don’t think any [other] car company in the world can perform such a feat of low cost
and efficient use of labor and raw materials.”
In response to criticism that that Tata’s overall sales-satisfaction index ranked the company
below the industry average,12
The Nano would also be a viable alternative to a used car, some dealers said. “As it is,” said
a Karol Bagh dealer of used Marutis, “there are no buyers for the 95–96 model. They sell for just
[INR]25,000 and [are] mostly picked up by scrap dealers.” “Nano could surely put a dent in the
secondhand car market for even newer models,” said another dealer.
Where the Rubber Meets the Road
Would India’s growing middle class see the Nano as the optimal transportation solution?
According to a research report by the Credit Rating and Information Services of India Ltd., the
Nano could expand the number of households that could afford a car by 65%. “The on-road price
for a Nano is expected to be in the region of [INR]1.3 lakh. This brings down the cost of
ownership of an entry-level car in India by 30%, making a new car affordable to families with
income level of [INR]2 lakh,” the report stated.13
As the Tata Nano began to hit the streets, so did newspaper articles and editorials decrying
the “people’s car” as an environmental “nightmare.” “When you lower the price that drastically,
how will you be able to meet safety and emissions standards?” asked Anumita Roy Choudhury
of the Centre for Science and Environment in New Delhi. “It’s just not sustainable, whether from
an environmental point of view or in terms of congestion.”14
In the New York Times, author Thomas Friedman pleaded with India to address public
transportation issues rather than replicating U.S. traffic and pollution woes:
If [India] applied itself to green mass-transit solutions for countries with exploding
middle classes, it would be a gift for itself and the world. To do that it must leapfrog …
It will also be an India that gives us cheap answers to big problems—rather than cheap
copies of our worst habits.
As the Tata Nano began to hit the streets, so did newspaper articles and editorials decrying
the “people’s car” as an environmental “nightmare.” “When you lower the price that drastically,
how will you be able to meet safety and emissions standards?” asked Anumita Roy Choudhury
of the Centre for Science and Environment in New Delhi. “It’s just not sustainable, whether from
an environmental point of view or in terms of congestion.”14
In the New York Times, author Thomas Friedman pleaded with India to address public
transportation issues rather than replicating U.S. traffic and pollution woes:
If [India] applied itself to green mass-transit solutions for countries with exploding
middle classes, it would be a gift for itself and the world. To do that it must leapfrog …
It will also be an India that gives us cheap answers to big problems—rather than cheap
copies of our worst habits.
As of September 8, 2008, USD 1 = 44.5 Indian rupees (INR); INR100,000 = 1 lakh; 100 lakh = 1 crore.
Note: “lakh” means 100,000, and its use is not restricted to a quantity of money.
2
“Indian Auto Companies to be Showcased at SAE Congress,” Business Line Financial Review, April 1,
2006.
1
Timir Mozinder, “Indian Auto Industry: An Overview,” http://www.knowindia.net (accessed April 6,
2008).
2
Heather Timmons, “In India, A $2,500 Pace Car,” International Herald Tribune, October 11, 2008.
1
1
2
John Neff, “Tata Nano Tanking Used Car Market in India,” February 8,
2008, http://www.autoblog.com/2008/02/08/tata-nano-tanking-used-car-market-in-india/ (accessed April 6,
2009).
3
1 kilometer = 0.62 miles; 1 liter = 0.26 gallons; kph = kilometers per hour.
4
“Is the Two-Wheeler Segment Dreading the Nano Effect?” http://nanocar.wordpress.com/2008/01/15/isthe-two-wheeler-segment-dreading-the-nano-effect/ (accessed April 6, 2009).
5
John Hagel and John Seely Brown, “Learning from Tata’s Nano,” BusinessWeek, February 27,
2008,http://www.businessweek.com/innovate/content/
feb2008/id20080227_377233.htm (accessed April 6, 2009).
6
Irwin
Greenstein,
“Steer
Clear
of
Tata
Motors,”
September
8,
2008,http://seekingalpha.com/article/94424-steer-clear-of-tata-motors (accessed April 6, 2009).
7
Nelson Ireson, “Rising Costs Could Eat Tata Nano’s Profits,” Motor Authority, August 5, 2008.
8
Rina Chandran, “Tata Motors’s $2,500 Car to Put India on Global Autos Map,” Hindustan
Times,January 11, 2008.10 “We Can’t Make a 1 Lakh Car: Maruti,” Express News Service, January 10,
2008,http://www.expressindia.com/latest-news/We-cant-make-a-1lakh-car-Maruti/259919/ (accessed April 6,
2009).
10
“We Can’t Make a 1 Lakh Car: Maruti,” Express News Service, January 10,
2008,http://www.expressindia.com/latest-news/We-cant-make-a-1lakh-car-Maruti/259919/ (accessed April 6,
2009).
11
Chandran.
12
J.D. Power Asia Pacific 2007 Sales Satisfaction Index (SSI) Study, J.D. Power and Associates.
13
Arunawa Biswas, “Is the Two Wheeler Segment Dreading the (El)-Nano effect?” Economic
Times,January 10, 2008.
14
Reuters, “What’s Good and Not So Good About the Tata Nano,” January 8,
2008,http://www.financialexpress.com/news/Whats-good-ansd-notsogood-about-Tatas-1-lakhcar/259077/ (accessed
9
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