UVA-M-0768
Rev. Feb. 2 2011
24,

THE TATA NANO THE PE
T
O:
EOPLE’S CAR

It was one of the longest t f t-awaited an most talke nd ed-about aut tomobile deb in India On buts a.
January 10, 2008, Ta Motors unveiled its (U.S. dollar USD2,50 car1 (also called “Rs1 lakh ata u rs) 00 car” or “t people’s car”) at the ninth Auto Expo in New Delhi. The Tata Nano brought a m the s w o media blitz and a crush of onlookers th required top-level sec o hat t curity. Woul the car liv up to its h ld ve hype? ignal a new era for the sm car mar e mall rket in India How could Tata ensur the a? re
And did its launch si w ofitable? product would be pro
Widely touted as the chea
W
d apest car in the world, th Nano was scheduled to be availab in t he s ble
September 2008. In addition to paying (Indian rupees) IN lakh— a p
INR1
—equivalent t INR100,0 to 000— buyers would also have to pay 12.5% valu w h ue-added tax along wit charges s x th such as road and d transport tation taxes. The two-cy ylinder gaso oline-powere version w ed would debut first; the d t diesel versions would soon follow.
The Nano wa one of th world’s most fuel-eff
T
as he m fficient cars, getting 52 miles per g gallon (mpg) in the city and 61 mpg on the highwa (22 km pe liter and 2 km per lit respectiv d n ay er
26
ter, vely). Measurin 3.1 meters by 1.5 meters, it dis ng m splaced Mar Udyog’s Maruti 80 as the wo ruti s
00
orld’s smallest car, yet its seating room was 21% greater than the 800’s— m an
—providing ample room for g m four adul lts. Compan History ny The Tata Group was a diverse conglomera that had internatio
T
G ate d onal interests in engineeri ing, energy, information systems and commun
,
n a nications, m materials, ser rvices, cons sumer products, and chemic
,
cals. Its 96 companies em mployed 650
0,000 people on six cont e tinents.
For many cas sual observe the May 2008 news that a Brit ers, y s tish automot tive icons Ja aguar d d red
o.
-Western com mpany came as a e and Land Rover had been acquir from Ford Motor Co by a non1

As of September 8, 2008, USD 1 = 44.5 Indian rupees (INR); INR100,000 = 1 lakh; 100 l o n
;
lakh = 1 crore. Note:
.
“lakh” mea 100,000, an its use is no restricted to a quantity of m ans nd ot money.

This case was prepared by Amy Lem d mley, with the assistance o N. Raghu K e of
Kishore, under the supervision of r Professor Paul Farris and Associate Pr
P
d rofessor Rajkumar Venkatesa It was writ an. tten as a basis for class discussion rather than to illustrate effective or in n e neffective hand dling of an adm ministrative sit right  2009 b the by tuation. Copyr
University of Virginia Da arden School Foundation, Ch
F
harlottesville, V All rights reserved. To o
VA.
order copies, se an end e-mail to sales@dardenbusinesspublish hing.com. No part of this pub p blication may b reproduced, stored in a retrieval be system, use in a spread ed dsheet, or trans smitted in any form or by any means—elec f ny ctronic, mecha anical, photocop opying, recording, or otherwise—
—without the pe ermission of th Darden Scho Foundation ◊ he ool
n.

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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 second-largest 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
The automobile industry in India benefited significantly from liberalization in the 1990s when the government eased regulations on foreign trade and restrictions on private companies.
International companies took advantage of India’s affordable yet highly trained engineers, establishing manufacturing operations throughout the country. In 2005, experts predicted that
India would become the world’s third-largest economy by 2020.
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.
2

“Indian Auto Companies to be Showcased at SAE Congress,” Business Line Financial Review, April 1, 2006.

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According to http://www
A
o
w.knowIndia
a.net, India exported “3
331,539 pas ssenger cars, and
1
over one million two o-wheelers.” Economy car
E
rs
In
ndian car buyers already had their ch y hoice of cars in the USD s D5,000 (INR
R195,000) ma arket; Maruti commanded more than 50% of that market share Estimates of automob ownersh in m 5 m e. s bile hip India ran nged from 8 to 25 per 1,000 people placing In
1
e, ndia at the l low end of global per-c capita automobile rankings (Table 1).
Table 1. Number of motor ve r ehicles per 1
1,000 people by country e, y.
Country
y
United States
S
Australi ia Canada
German
ny
Japan
United Kingdom
K
India
China

Motor Ve ehicles per 1,
,000
765
619
563
546
543
426
12
10

Source: United Nations World Statistic Pocketbook and
U
cs
Statistical Yearbook, 200 l 07.

With a population of 1.1 billion, “a median age o just under 25, and a rapidly expan
W
m of r nding middle class, India will overtake China next year as the fastest-grow w e wing car mar rket, accordi to ing estimates by CSM Worldwide, an auto indu s W ustry foreca asting servic ce,” the Inter rnational H
Herald
Tribune reported.2 Fi r igure 1 depicts sales tren in the In nds ndian automo obile and mo otorbike mar rket. Figure 1. Sales trend of automo ds obiles and m motorbikes in India, 2002 n 2–08.

Data so ource: “Industr Trends of Au ry utomobiles,” C
Corporate India May 15, 200 a, 08.

1
2

Timi Mozinder, “I ir Indian Auto Ind dustry: An Ove erview,” http://
//www.knowin
ndia.net (access April 6, 2008). sed Heat ther Timmons, “In India, A $2,500 Pace Ca Internation Herald Trib ar,” nal bune, October 11, 2008.

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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.
Passenger Vehicles
Maruti Udyog
Hyundai Motors India Ltd.
Tata Motors
Honda Siel Cars India Ltd.
Ford India Pvt. Ltd.
GM

Percentage of Market Share
52.2
19.2
16.6
4.4
1.9
NA

Number of Dealers
580
225
200
NA
125
100

Sales (Units) per Dealer
1,275
800
1,000
NA
225
600

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 Dealers received further discounts if they paid cash up front to Tata—amounting to about 1% of the full dealer cost. Although Tata Motors did not disclose its contribution margins, the case writers’ estimate is about 15%.
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).

1

Stephan Mayer and Ruediger Plaines, “Mega Market for Ultra-Low-Cost Cars: Focusing on Customers in
Developing Markets,” A.T. Kearney, Inc., 2008.
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).

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Manufacturers included Bajaj Auto, Hero Honda, TVS Motor, Yamaha Motor, and Kinetic.
Table 3 shows the types of vehicles in this class and their fuel efficiency, cost, and top speed.
Table 3. Types of two-wheelers available in India.3
Vehicle
Moped, mokick, or step-thru Scooterette/mini

Gas mileage
(km/liter)

Cost (INR)

55–70

15,000–40,000

55

20,000–25,000

Scooter

40–60

25,000–50,000

Motorcycle

Up to 70

35,000–75,000

Enfields Diesel Bullet
(India’s only diesel two-wheeler) 66

65,000

Market
Teens, the elderly, and city riders
City riders, students
Popular with women, city riders; longer rides possible
Primarily a style choice; more popular with men
Seekers of “India’s
Harley-Davidson”

Speed (kph)
40–45
65
70 and up

80 and up

80 and up

Source: Created by case writer.

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
Aman Verma, a Hero Honda showroom manager in East Delhi, expected two-wheeler sales to remain strong. “Nano may give a lot of people a chance to own a car,” Verma said. “But more than fixed price, it’s the variable cost of maintenance, fuel, and spare parts, where the twowheeler sector has an edge.”
“A car is much more suitable, safer, and a comfortable option than a two-wheeler, but in a cost-conscious nation like India, there will always be a place for a two-wheeler,” said another two-wheeler dealer. “There will not be a large-scale migration to the Nano. Both the bike and the entry-level car segment would have its own niche customers in future.”
3

1 kilometer = 0.62 miles; 1 liter = 0.26 gallons; kph = kilometers per hour.
“Is the Two-Wheeler Segment Dreading the Nano Effect?” http://nanocar.wordpress.com/2008/01/15/is-thetwo-wheeler-segment-dreading-the-nano-effect/ (accessed April 6, 2009).
4

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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 USD2,500? Air-conditioning. Power steering. Power windows.
A tachometer. 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.5
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.6 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%).

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/94424steer-clear-of-tata-motors (accessed April 6, 2009).
7
Nelson Ireson, “Rising Costs Could Eat Tata Nano’s Profits,” Motor Authority, August 5, 2008.
5

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In all, 90% of the Nano’s components were outsourced, and about 75% were singlesourced. 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
Tata’s original plan was to produce 350,000 Nanos the first year; it had plans to set up three additional plants to achieve its goal of selling one million units annually.

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.”11
8

Timmons.
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.
9

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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 Tata dealers mentioned that they were going to increase the number of service stations and outlets in few months and concentrate on this aspect keenly.
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

J.D. Power Asia Pacific 2007 Sales Satisfaction Index (SSI) Study, J.D. Power and Associates.
Arunawa Biswas, “Is the Two Wheeler Segment Dreading the (El)-Nano effect?” Economic Times, January
10, 2008.
12
13

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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.
Still, customers flocked to Tata dealerships, eager to see the latest model. “I would definitely consider buying the Nano as the cost of the car fits my pocket,” said one consumer, an
IT professional with a multinational corporation in Gurgaon who travels every day in a Bajaj
Pulsar. “And above all it gives good mileage.”

14

Reuters, “What’s Good and Not So Good About the Tata Nano,” January http://www.financialexpress.com/news/Whats-good-ansd-notsogood-about-Tatas-1-lakh-car/259077/ April 6, 2009).

8, 2008,
(accessed