The Indian Economy Blog

January 25, 2008

A Great Disruptor

Filed under: Business,Growth — Kiran @ 6:31 pm

The Tata Nano has been one of those products you just cannot ignore. While it got media coverage around the world, the reactions, though mixed, flowed easily. On the one hand there has been pride in the “World’s cheapest” tag, as a great achievement for Indian industry. The “People’s Car” tag has been well received with the hope that a whole new category of people can look to buy a car now. On the other hand environmentalists have claimed nightmares of increased urban congestion and pollution.

Again, all these topics have been beaten to death in the media. Here we will take a quick look at how it should seriously disrupt the status quo in the Indian car market and the potential to replicate that abroad.

An indigenous car industry is considered the crown jewel of a nation’s manufacturing ability. Governments have put in great efforts to promote local car manufacturers. Today, most nations’ car markets are dominated by foreign companies.

A New Car Segment in India

The Tata Nano will create a new passenger car market segment in India. This will quickly become the biggest segment and will likely be dominated by Tata. This, combined with the strength of its existing portfolio, should make Tata Motors the biggest passenger car manufacturer in India. It will be the first time an Indian company will occupy that pole position with indigenously developed products. India will then be one of the few countries in the world where a local car manufacturer(s) dominates a market open to international manufacturers.

The Nano’s price pits it against products from Bajaj Auto, which has made a reputation for itself as India’s premier product development company in the two-wheeler space. Having already unveiled a prototype for a small car Bajaj has indicated that it will compete with the Nano. This will increase Indian presence in the new segment. The only other auto maker to have committed product competition to the Nano is Nissan-Renault and they might just collaborate with Bajaj.

Is there a World market for the Nano?

The “World” is actually a pretty disparate set of markets. However there are some common factors that are needed for success in any market.

First is cost of ownership. The Nano obviously does well on initial cost and fuel economy aspects. The third aspect of cost is determined by quality. Here the competition matters. Having cut its teeth competing against Suzuki and Hyundai in the Indian market, Tata Motors is obviously not going to achieve Toyota status in quality overnight. But that will not matter in the short term as neither Toyota nor any of its quality peers from Japan, Germany or the US are likely to provide product competition any time soon. And the Tatas sure are good at learning.

Second is compliance with government regulations on emissions and safety. The Nano might fail safety standards in some developed countries, but the low price provides a huge buffer to beef up on that front. And Tata Motors has made cars that meet the most stringent security regulations in the world, so they can do that for the Nano too – at a cost affordable for markets that require it.

Third is visual appeal and comfort. By most accounts it does look cute (Italian design does at least that much). It might suffer on the comfort perception in countries where it could be seen as cramped, but for four. Two-door hatchbacks (that seat two or five) are all the rage among economy minded buyers in the West. It should fit in that space – somewhere. Power might be a concern, but then replacing a 600 cc engine with a 1200 cc engine will not multiply the final price too much.

In summary, the Tatas look set to become the dominant player in the Indian car market via the new market segment established by the Nano. If allowed to compete on fair terms they should take this new segment to other developing countries too.

Will the price USP help it in developed countries though? In the United States there is a huge market for cars costing less than $10,000. Small cars were always popular in Japan and are catching on big-time in Europe too. There are lots of people even in the first world who cannot afford new cars. So there is a huge market in the biggest car markets in the world for a strong price warrior. The Nano was not made for these markets but the huge price difference it has with the cheapest cars in those countries offers plenty of room for redesign. Do you hear someone say that is impossible? Really – “impossible”?

18 Comments »

  1. Given the congestion that mass vehicle ownership can result in (not just the Nano), let’s hope that we are also forced to build world class urban infrastructure and regulations to handle all this influx of vehicles on to the roads.

    Comment by Photonman — January 25, 2008 @ 8:03 pm

  2. I am surprised that you are missing out on the Developing world markets. Brazil, Russia, China, anyone? At least interms of price, one can assume there is a market there. Maybe not Russia so much, as you’d need a car which can do long distances, and have a decent heater to boot. But Brazil seems a likely candidate – and possibly Africa, where many of Tata producs already sell.

    The congestion factor is a non-issue if you ask me. This car is not going to be bought by people in places like Delhi/Mumbai. An anecdotal, cursory look at the new cars on the streets in Delhi or Bombay will tell you that – a question to all residents of those to Metros – when is the last time you saw either an 800 or an Alto on the streets in ‘shrink-wrap’? And how about an i10 or a Santro or something bigger? Over time, I have observed less and less ‘new’ 800s and Altos on the streets in these metros. Why? Because the public transport systems in these cities is decent _relative_ to other parts of India. (I found, to my horror, that there are no taxis or autos in Ludhiana, only cycle rickshaws, or buses). Therefore, the lower end of those metros is taken care of. As for the people who make up the upper-middle class, they aspire to be one cut _above_ the 800s and altos, not _below_, even if it’s a 2nd/3rd car.

    So this car will make its dent in the smaller towns. Maybe congestion gets worse there – but I beg to differ. There are 3 lanes on a road. Whether one lane is occupied by a 2 wheeler or a car, doesn’t matter. You rarely see 2 two-wheelers squished into the same lane unless they are forced to be. But for all intents and purposes, they take up the same ‘road space’ as a car in that lane. In this way, whether it’s a car or a bike, doesn’t matter. If anything, since the Nano is protected from all sides more than a bike, this makes it easier for other traffic to manouver around the nano. One is much more wary of a barely balancing bike stuffed with four people, than a shielded car. This is _good_ for traffic. First world countries have better traffic for a variety of reasons, but the lack of variety is one of them.

    So the only real cause of damage can be parking lot congestion. This is a real concern, which needs to be tackled.

    Pollution is most definitely not. A four-stroke engine potentially carrying 4 people is less polluting than 4 two-stroke engines carrying one person each.

    Further this is a 600cc engine. Very low emissions.
    Finally, it’s a 600cc engine, with a small amount of BreakHorsePower. Changing it over to an electric motor should be an easy switch, and I foresee an electric nano in the very near future. (Switching to CNG and LPG is out due to the space constraints – where do you fit the cylinder?)

    Phew. Sorry, didn’t mean to blog on your blog!

    Comment by TTG — January 25, 2008 @ 9:13 pm

  3. @TTG

    ‘this car will make its dent in the smaller towns. Maybe congestion gets worse there – but I beg to differ….’

    You’re only counting those who make the switch from two-wheelers to cars – but not the first time buyers. With more than a million vehicle sales (mostly non-replacement) every year (with a 10-15% CAGR), we have every reason to worry about our urban infrastructure.

    Congestion *will* become a major problem unless we take up zoning, traffic regulations and parking infrastructure more seriously.

    That said, I’m an optimist. I hope market forces will do to our cities what democracy couldn’t!

    Comment by Photonman — January 25, 2008 @ 10:24 pm

  4. @Photonman – congestion already is a problem, and it will get worse. The need for better infrastructure and more innovative solutions cannot be denied. But I think that the Nano merely gives someone who can afford a one lakh car as much right to congest the road as someone who can afford a 5, 10 or 50 lakh car. So it is unfair to blame the Nano. Like you I am optimistic that Pachauri’s nightmares haunt enough people that we end up doing something about the congestion after all! But if we dont, it would still be unfair to blame the Nano.

    @TTG – The developing countries are definitely in, since the conditions there are more like India. The point I was trying to make was that the toughest markets to break into would be the developed countries, but even that would not be an insurmountable problem.

    There was a news story that the Tatas were working with GM on an electric version of the Ace for US markets. In an electric Nano, battery space would still be a concern. As also the cost of the batteries, though it should still be far cheaper than the Reva. Thats a good thought.

    Comment by Kiran — January 26, 2008 @ 1:07 am

  5. You are right on the point. This is going to a world-class disruptor. One could say that if this comes to fruition it will be a paradigm shift in how the world operates. The Third World will catch up with the First World much faster. The only question is of the availability of cheap oil.

    I am not sure that Tata will be able to compete well outside India. If the price increases to say meet regulatory standards, then the small cars being developed by the auto majors and similar cars from China will give the Nano a run for its money.

    Anyway this blog is not about Tata or about management. But yes, the release of this car matters in a social sense.

    Comment by HmmBut — January 26, 2008 @ 5:28 am

  6. maruti had done the same thing with the 800. created many new first-time car buyers in cities. but over time maruti’s focus shifted to building bigger and more profitable cars.

    i think tata motors will also use the nano to prompt many more people to buy their first car. and this will include the people from class B & C cities as well as rural areas. but they will soon have to focus on profitability for which they will have to get people to upgrade to the higher versions of the nano (beyond the magical figure of $2500) and bigger cars.

    and the earlier car models by tata motors (the indica and the sumo) has not helped in positioning them as a ‘safe car’ manufacturer. and common perception is that it is best to ‘wait and watch’ with any new tata car model, so that the company sorts out the initial glitched in the following batches, before you jump into the fray.

    but i agree that this car has the potential to disrupt the world car markets because some of the largest populated countries and growing economies (china, lat-am, asian countries) have a large population which is getting richer and are potential first-time car buyers, if the price is right!

    Comment by guruprasad — January 26, 2008 @ 9:45 am

  7. God save people on indian streets

    Comment by madhuri — January 29, 2008 @ 2:40 am

  8. As of now Tata Nano enjoys somewhat of a monopoly which is not good for the future. Once other companies (bajaj, maruti, etc) come into the 1 lakh car market, Tata will step up and improve its product in terms of safety and comfort. In terms of looks, I think Nano does fine but from inside it doesn’t look too comfortable and appealing. Would people agree that that a two-wheeler is more comfortable for now? There can’t be no definite answer until Nano is launched.

    Comment by Deebu — January 29, 2008 @ 9:48 pm

  9. >> In the United States there is a huge market for cars costing less than $10,000.
    I doubt this assertion. Most people here look down upon anyone driving a Korean car like Hyundai or Kia, leave alone a Chinese or Indian car. Yaris or Aveo and the historic Yugo in the cheap car section dont make as much sales as a Ford F series Pickup, Toyota Corolla, Honda Civic and GM’s SUVs that all cost in the 20K+ range. Even the Japense cars get the “DUH” looks, in many regions used to Audis, BMWs and Merc’s. And with respect to low income consumers, most people dont buy a new car, but buy a 10+ year old Japanes car for almost a similiar price of what a Nano would cost. Try convincing them that a cute Toy car with questionable longetivity is better than a 1996 Civic. Unless oil goes to say $200/barrel, no American that I know of will touch cars like these with a 100 foot pole.

    Comment by Balaji Viswanathan — January 30, 2008 @ 9:57 am

  10. The only thing this car going to disrupt is India traffic, nothing more. The only selling point of this car is it’s price. But most supporters of this car didn’t realize is that the price of a car worth far less than human lives. Who want drive this car (more like a golf cart) out in the road and get crash to dead once there is a collsion with other cars? That is one of the reason why the number of motorcyles in US is so low, it may cost more to buy and upkeep a bigger car, but the price of your family well being overweight price factor.

    Comment by Eric — January 30, 2008 @ 1:06 pm

  11. @Deebu – I agree on the monopoly part – in fact if the car is a huge success as expected, and there is no competition at that price point, it is very likely that the price will be increased substantially.

    @Balaji – The median income in the US per household member is less about $26,000. People working on minimum wage earn about $12,000 a year, and you can find minimum wage workers all over the US. Have car companies ignored such people? No, they constitute a market for really old second hand cars. Would they consider buying a new car for $5000? I think they might.

    Comment by Kiran — January 30, 2008 @ 8:13 pm

  12. prices of NANO may be less in comarison to other cars but its sales will also depend on its qulity. Remember Tata had to do 18 changes in Indiac to make it successfull. so wait and see its performance first. Also if its of somewhat acceptable performance then definetly it will dominate indian market as its first to enter into this new segment and nissan and bajaj will take some time to launch their product. Beside India Nano also have a good market in 3rd world countries in africa where price will certinally be first factor in the minds of buyer.

    Comment by Sekhar — January 31, 2008 @ 5:59 pm

  13. On environmental perspective, traditionally, having a car is a status symbol. Nano definitely lacks that as you are telling people you cant afford a “proper” car. So it is utility car that I can use every day for my business and family trips. But what about the operational costs? I guess it is same as the proper cars and much higher than a two-wheeler. It may affect the potential market for Nano especially when oil price is rising.

    But I think I will love to have a Nano…a middle class dream of driving a car…may be occasionally…just for family trips after the honeymoon days are over. So we will have the potential replacing customers from two wheelers (a drop in Bajaj share price :P)and new customers. Of the new customers, some may be like me who may own it but not use regularly (using train to come to office take me 10 mins, Nano on a congestion free road will take 20 mins, train costs Rs 1.50 per trip, Nano Rs 30?).

    So road congestion will probably increase but not to a great extent that someone need to start a dharna. oil pool deficit will probably increase and so is pollution level. Is there any simulation on effect of tata nano on economy? But personally I like to see a possible change in social identity :P..cheers!

    Comment by Raaz — February 4, 2008 @ 12:16 pm

  14. I think our buy-a-car mentality, be it with the Nano in particular, or cars in general.
    What is wrong with cycles and buses? (And walking!!)
    Congestion is less, pollution is less, road safety is better if everybody uses it, speed is NOT affected (I know this from experience), health is improved, and one doesn’t have to then waste extra time in ‘exercise’. For long distances (inter town), efficient public transport can be used.
    It’s not necessary that everybody bicycles: women with children, old people etc. can use public transport, and that must be improved.
    Cars also externalise some of the problems. The other people on the road – pedestrians, cyclists etc suffer more from their pollution and congestion.
    And we don’t have to kill so many tribals in Kashipur, Kalinganagar, Chhattisgarh, etc.. for the sake of steel! The basic cause of the naxalite problem is forcible acquisition of forest lands for iron ore mining and processing.
    I know this sounds idealistic. But I’ll tell you my own experience. My home is in Tamil Nadu and I live in a very privileged environment of a medical college campus (a medical college and hospital – two campuses 6 km apart). Now there is very good public transport in vellore as it is. One can get a bus every 5 min between 4:30 am and 10 pm. Further, the hospital itself has a fleet of buses to take doctors, other staff and students between the two campuses at regular intervals. Yet, most of the people in the college campus (where I live) have one, and in many cases, two cars. I tried to argue the above points with my parents. But they wouldn’t understand. The irrationality defeats me! Who said we become more ‘rational’ when we grow up?
    One of the problems in this specific case is that the hospital actually gives an allowance to each car-owner, for fuel and maintenance. It really bothers me that patients’ money is being spent on this. I think they could have say four or five cars available for emergencies, with drivers on standby, in case a doctor gets a night call or something.
    But the problem is that it’s status, status, status. The docs compare themselves with others in private practice. Those guys also have cars, so we must too. (Mummy!!! Waaah!!!)
    I think issues like these need to be raised in our towns before they become the congested and insane monstrosities that our cities have – Delhi and Bangalore in particular.

    Comment by Dhruva — February 7, 2008 @ 10:14 am

  15. [...] manufacturing – and especially auto-making – lies outside the field of my interest and expertise, this post from the Indian Economy blog highlights the new Tata Nano as an example of exactly the phenomenon I subscribe to above. In [...]

    Pingback by The Park Paradigm » Reverse engineering. — February 10, 2008 @ 1:43 am

  16. Another aspect that Tatas can look into is bringing Hybrid Technology to Nano so that it is more appealing to First World countries. With EU emission norms getting more stringent by every passing year, a car like Nano is the last thing that gas guzzler manufacturers like DC n BMW want to compete against. Ditto could be the case with US market. Lure of hybrid can make many a buyers give Nano a serious thought.

    And, I don’t agree with the argument that chinese manufacturers can threaten Nano if it comes to Mass Production or for that ‘cheap’ production. Car industry is fairly mature industry and and a new entrant ( even a chinese one) will take a long time to establish itself. In fact, since Quality is a prime cirteria in car selection, chinese cars risk being treated as ‘Giffen’ goods.
    As far as congestion on roads is concerned, let us look at it this way. Ignoring Nano introduction in next few months, what would be the 2-wheeler consumption? Safe assumption would be sales would be 2-3 times more than total possible Nano sales. In my opinion, that should rest the environmental concerns only about Nano. The problem is bigger than that and Nano will surely not add to it.

    btw, loved the optimism about market forces driving the infra development :)

    -Falcon

    Comment by Falcon — February 11, 2008 @ 11:42 am

  17. [...] the most globally high-profile move by an Indian auto company. We examined some implications then. We now look at some implications of another equally high-profile event – the Jaguar-Land Rover [...]

    Pingback by The Indian Economy Blog » Opportunities From Big Brand Acquisitions — March 29, 2008 @ 4:41 pm

  18. My two cents – Nano will go down as a big flop. The car tries to target a segment that is nothing but a figment of the Tata’s imagination. Cheap car that runs on gasoline in a country which is scrambling in a lost race to secure its energy future – what else can be added to this recipe for disaster.

    Moreover, what Tata needs to figure out is how to use its vast industrial might and automotive knowhow to solve the mass transportation problem creatively.

    Comment by Girish Mallapragada — April 10, 2008 @ 4:19 am

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress