THE TATA NANO: THE PEOPLE’S CAR (ABRIDGED)

Source: © User:High Contrast/Wikimedia Commons/CC-BY-SA-3.0.

It was one of the longest-awaited and most-talked-about car debuts in India. On January 10, 2008, Tata Motors unveiled the Nano, a USD2,5001 automobile referred to as “the people’s car.” Would it live up to the 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? Measuring 3.1 m by 1.5 m, the Nano 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. The Nano was also one of the world’s most fuel-efficient cars, getting 52 mpg in the city and 61 mpg on the highway. Touted as the cheapest car in the world, the Nano was scheduled to be available in September 2008.
1

USD = U.S. dollar; INR = Indian rupee.

Tata and India’s Automobile Industry Tata Engineering and Locomotive Co. Ltd. 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. By the 1990s, the company had entered the passenger vehicle market. In 2004, Tata Motors acquired the Daewoo Commercial Vehicle Co. Ltd., Korea’s second-largest truck manufacturer, and became the first Indian company to be listed on the New York Stock Exchange. The next year, it acquired a 21% stake in a Spanish bus manufacturer, and in May 2008, it bought British automotive icons Jaguar and Land Rover from Ford Motor Co. 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 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, growing by almost 25% per year; passenger vehicle exports were growing by 12.7% annually. India’s exports, which went mainly to Asia and Africa, were growing at about 30% per year and had reached 850,000 units in 2005–06, compared with 600,000 units in 2004–05. Some years saw as much as 65% growth in exports, and India exported 331,539 passenger cars and more than 1 million two-wheelers in 2005–06.

Car Buyers’ Preferences With a young population of 1.1 billion, a growing middle class, and only a dozen cars for every 1,000 people, India was poised to overtake China in 2009 as the fastest-growing car market (Table 1). India’s passenger vehicle segment included six major players; car buyers already had their choice of automobiles in the USD5,000 market, of which Maruti commanded more than 50%. Cars were sold via dealer networks, and sales volume depended on the extent of the network and the sales per dealer. In 2008, Tata maintained the third-largest dealer network and was second only to Maruti in units sold per dealer. In the months leading up to the Nano’s launch, used car sales in India fell, and the price of a used Maruti 800 dropped 30%, leading one journalist to ask, “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

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).

2

Table 1. Motor vehicles per 1,000 people by country, 2007, and Indian passenger vehicle market share by percent, 2008.
765 619 563 546 543 426 12 10 United States Australia Canada Germany Japan United Kingdom India China Maruti Udyog Hyundai Motors India Ltd. Tata Motors Honda Siel Cars India Ltd. Ford India Pvt. Ltd. 52.2% 19.2% 16.6% 4.4% 1.9%

Data source: United Nations World Statistics Pocketbook and Statistical Yearbook, 2007; http://automobileindia.com (accessed August 10, 2008).

In 2007, India’s two-wheeler market was the second-largest in the world with almost 8 million total units sold. Two-wheeler production was forecast to approach 18 million units by 2011. A typical motorbike cost about one-third the price of a Nano, and the two-wheeler market was almost five times as large as the passenger car market from 2007–08. Aman Verma, a Hero Honda3 showroom manager in East Delhi, expected two-wheeler sales to remain strong: “It’s the variable cost of maintenance, fuel, and spare parts where the two-wheeler has an edge.”4

The Tata Nano If you buy a car for USD2,500, you forgo air-conditioning, power steering, power windows, a tachometer, and dual windshield wipers. But Tata sought the bulk of its savings in a modular design in which many components served more than one function. The car’s component parts could be built at separate facilities and shipped for local manufacture. Even village garages could assemble the car, creating a unique distribution channel for rural areas. Critics questioned whether the low price of the Nano meant the vehicle was of low quality. But one vendor credited Tata with designing from scratch, saying it precluded “dumbing down” the engineering.5 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 increase for the average U.S. automobile. Even before this spike, the company had planned to use reverse auctions to lower part costs. It set a rejection rate of less than 100 parts per million and expected to reduce warranty costs tenfold. In all, 90% of the Nano’s components were
Hero Honda, the Indian motorcycle and scooter manufacturer, was a joint venture of Hero Motocorp Ltd. and the Indian two-wheeler subsidiary of Honda. 4 “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). 5 Heather Timmons, “In India, A $2,500 Pace Car,” International Herald Tribune, October 11, 2008.
3

outsourced, and about 75% were single-sourced. Tata engaged 100 subcontractors, signing them to long-term volume contracts. Half these vendors were to be co-located in a manufacturing park adjacent to Tata’s new INR1,500 crore6 (USD275 million) plant in Singur, West Bengal. Tata expected the Singur plant to handle the bulk of the manufacturing at the outset. Tata’s original plan was to produce 350,000 Nanos the first year, then set up three additional plants, with an ultimate sales goal of 1 million units annually. But the Singur plant was to be built on land appropriated by the government, which led to significant protest from area farmers; construction was put on hold, and Tata shifted production to another facility, reducing its initial run from 40,000 to 10,000 cars per month. Tata’s dealer margins across the various models were estimated to be as much as 10% and as little as 2%, or about USD75 for a Tata Nano. Dealers received discounts if they paid cash up front to Tata—amounting to about 1% of cost. Tata Motors did not disclose its contribution margins, estimated to be 15%.

Competitor and Dealer Response So far, low-cost, high-efficiency car launches had been successful in India. In the 1980s, Suzuki Motor Corporation had collaborated with the Indian government to release the Maruti 800. By 2008, it retailed for USD5,000, and Maruti was in no rush to reach lower, according to Shinzo Nakanishi, managing director: Our thinking is that a consumer who is looking to buy a Maruti 800…will never settle for the Tata because of the difference in value propositions. The impact of the car will be felt more in the two-wheeler segment, and every Tata [Nano] owner will be a potential buyer of our cars.7 In response to criticism that Tata’s overall sales-satisfaction index ranked the company below the industry average, Tata dealers said they were going to increase the number of service providers and outlets in a few months and concentrate on their growth.

Where the Rubber Meets the Road According to a research report by the Credit Rating and Information Services of India, Ltd., the Nano had the capability to expand the number of households that could afford a car by

Crore and lakh are units used for large numbers: 1 crore = 10 million; 1 lakh = 100,000. “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).
7

6

65%. “The on-road price for a Nano is expected to be in the region of [INR130,000]…making a new car affordable to families with an income level of [INR200,000],” the report stated.8 As the Nano began to hit the streets, so did newspaper articles and editorials criticizing it. “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…from an environmental point of view or in terms of congestion.”9 Customers flocked to Tata dealerships to see the latest model in the early days, peaking at 9,000 in July 2010; their numbers fell to a low of 509 in November before rebounding to 5,784 in December. Total Nano sales for 2010 were roughly 77,000. Sales of all passenger vehicles, including three-wheelers, were up about 30% to 2.4 million, and two-wheeler sales grew by 22% in 2010 to 8.7 million units. There were several reasons for Nano’s sales problems. In New Delhi, the car’s lowest price was INR137,555 a significant increase from INR100,000. Safety concerns were also ignited by at least three reported fires. Further, ever since the construction stoppage at the Singhur plant, Tata had struggled with production. It was not until June of 2010 that Tata finally achieved an annual production capacity of 250,000 Nanos. In the interim, the company did not advertise or expand distribution channels. When the company achieved national distribution in late 2010 and thought its problems were over, it announced a series of marketing initiatives. One was a television campaign launched in December: the spot, set in small-town India, showed a young girl asking her grandmother, “When will it arrive?” Finally, after watching it cope with narrow lanes and rocky terrain and hearing the compliments from bystanders, the viewer saw a sunshine-yellow Nano arrive. But observers such as Sudipt Roy, a marketing professor at the Indian School of Business, were skeptical: The positioning of the car was wrong. There was a great disconnect in the kind of people they were reaching out to and the kind of people they wanted to sell to…They created a special website, used social networking, leveraged blogs, and purchased online advertising. The online medium was hardly the right way to sell to their target segment. It should be around shops…where they can create

Arunawa Biswas, “Is the Two Wheeler Segment Dreading the (El)-Nano effect?” Economic Times, January 10, 2008. 9 “What’s Good and Not So Good About the Tata Nano,” Reuters, January 8, 2008, http://www .financialexpress.com/news/Whats-good-ansd-notsogood-about-Tatas-1-lakh-car/259077/ (accessed April 6, 2009).

8

buzz…They ended up selling 75% of the cars in five major cities…For 50% of 10 the people, it was a second car. Responding to reports that most of the Nano’s targeted customers felt intimidated by flashy showrooms, the firm set up 289 Special Nano Access Points in addition to the 874 regular sales outlets. Other programs addressed financing and maintenance concerns. Because the base model was sold at USD2,700 and the top variant for as much as USD4,000, 90% financing was seen as vital. Tata also introduced an INR99 (USD1.82) monthly maintenance option and extended warranties to 60,000 km or four years. With the new marketing programs and increased production capacity, Tata also announced plans to expand the sales of the Nano to neighboring countries such as Thailand, Sri Lanka, and Bangladesh by the second half of 2011. Speaking at an auto industry event in Bochum, Germany, Tata CEO Carl-Peter Forster said, “We will go after these markets one after another. The Nano is a raw diamond that needs polishing.”11

 case