Tata Motors, the General Electric of India is a conglomerate with a commanding presence in a vast industries across India and globally. In January 2008, Tata introduced to the Indian public it’s ultra cheap car “Nano”. The expected retail price for the Nano was expected to be as little as USD2,500 and would cater for the fast growing middle class segment of the Indian population. Tata Motors was set to change the face of the automobile industry in India. This was however met with some challenges, given the economic environment of India and thereby causing a delay of the launch by six months.
The introduction of the “People’s car” created a new category/ trend of ultra cheap cars which then led to other auto makers following in hot pursuit to roll out their own brand of vehicles in this category. What inspired Tata Motors to build the Nano? Why was there a need for an inexpensive car in India? In India there were fewer then 10 cars for every thousand people in 2007. Middle class household incomes in India start at roughly USD6,000 – USD3,000 per annum. While only 8 million Indians at that time owned a car (Crisil) another 18 million have the means to buy one.
The idea of Nano–The People’s Car was inspired by the middle class Indians who bought and transported their entire families on scooters. To most middle class families in India owing a car is a far cry. Rattan Tata, Tata Motor’s Chairman said that the tiny car is aimed at keeping the families of India’s growing middle class from having to travel with as many as four people on a scooter. It led him to wonder if a safe, all weather form of transport for a family can be conceived at an affordable price.
It took Tata motors four years to realize this concept which today is a People’s Car, which is affordable and yet built to meet safety requirements and emissions. The advent of Nano has seen an increase of about 65 percent of Indian families who can now afford to purchase a car. What innovative steps did Tata undertake to design the Nano in a way that would meet the $2,500 price tag? Do you think tht the low price automatically means poor quality? How did Tata Motors address the quality issue while developing its budget car?
Tata Motors addressed several key characteristics that Indian families would place importance on when considering a car low price, adequate comfort, fuel efficiency and safety. Applying the ‘Ghadian engineering’ principle Tata started working from scratch taking into account accessories and certain features that most Western consumers take for granted. With the customer at the center of their consideration Tata took into account the customers needs, wants and affordability. Tata set USD2,500 as the price that it thought customers could pay and then worked backwards.
Working with less and using the lean design concept, engineers and suppliers worked together to redesign many components. This coupled with reduction in the amount of steel in the car and the use of lightweight steel reduced the cost tremendously. The most innovative aspect of the Nano is it’s modular design, which has reduced cost significantly for the supply chain and distribution network for Nano, where it can be sold in innovative kits approach in which their components can be build and shipped separately to be assembled at various locations.
This has, in turn opened up business opportunities for local entrepreneurs. Adhering to safety and environmental regulations, Tata did not compromise on the quality of making a car. Tata Motors took innovative, creative and cost effective route to redesign existing parts of a normal car and thereby lowering the cost leading to 34 patents associated with the design of the Nano. Example, Nano has a smaller engine because more horsepower would be a waste in India’s jam packed cities where cars travel at an average speed 10-20 miles an hour thus making the airbags a redundant feature of the car.
The Nano’s overall safety performance and environmental friendliness exceeds current Indian regulatory requirements. Notably its high fuel efficiency has been able to lower pollution level to that lesser then of a two wheeler. What caused the delay in Nano’s launch? What important features of the Indian economic environment were the key factors that caused the problem? What does this story teach about risk of doing business in India? Tata Motors was expected to roll out its first batch of Nano cars in October 2008, but was delayed to spring 2009.
Originally,Tata Motors announced that it would be manufacturing Nano in Singur, West Bengal acquiring 600 acres of land costing them USD350 million. The property was purchased from the West Bengal government who acquired it from local farmers by imposing the force of eminent domain. The government of West Bengal was very keen on the project, as it would rejuvenate industries in West Bengal, a poor farming region. Problem arose when farmers with some smaller land holdings refused the compensation given by the government and demanding the land be given back to them.
According to Tata Motors the land was necessary for 60 parts suppliers to the Nano which keeping close to the plant was vital to maintain the Nano’s extremely low cost. The protest escalated with blockades and threats to the company’s workers leading to evacuations. The only way it could operate there is if the environment became congenial and supportive of the project. Following more hostile actions by the local farmers Tata Motors abandoned the Singur plant.
On October 2008 Tata Motors accepted an invitation by the Gujerat government who allocated 11,000 acresn benefits and assurances. Despite these assurance by the state government the relocation to Gujerat met with the same problems as West Bengal thus resulting in the production of the Nano taking place in Tata’s existing factory in Pantnagar, Uttarakhand. The crux of the problems lie in the fact that land is one of India’s scarcest resources, and its acquisition is key to balancing industrial growth with the needs of rural farmers.
Sunita Narain, head of Delhi’s Centre for Science and Technology observed that India is seeing local people having a voice in the process and thinks Indian democracy can accommodate it without the violence. In fact some economist says the Indian system will give rise to a “negotiated industrialisation”. Given this scenario, there is a surely a pertinent risk of doing business in India as the government is not able to give a certain degree of assurance that a business will not be met with problems from the people.
The fundamental problem that was seen in the Nano case was not the difficulty of obtaining approvals, material etc but the resistance of the people. Would you agree that introduction of the Nano to the world auto market will be setting a new trend in the auto industry, and possibly reshaping the industry? What did Tata Motors teach other automakers in terms of leadership and innovation? Upon launch Nano saw a surging demand from first time buyers and motorcyclist in India contrasted with plunging automobile sales in the U. S.
and Europe market where the economiy kept consumers away from showrooms. “The Nano has the potential to become a game-changer for Tata in the long run,” said Gaurav Lohia, an analyst at K. R. Choksey Shares & Securities Pvt Tata Motors by introducing Nano has created a new category in the auto industry ie ‘ultra-low-cost-vehicle’. In the auto industry today we see automakers rolling out (not so cost friendly) smart cars, hybrid cars etc but we have yet to see a car that fits a low budget, environmentally friendly and fuel efficient (before the Nano).
The advent of the Nano in the auto industry has now set a new benchmark for other auto industry leaders to follow in terms of innovation. Tata Motors thought competitors to first listen to what the people need, their affordability and only then work towards meeting that on an innovative platform. Following Tata’s footsteps, Ford, Nissan, Volkswagen, Hyundai and General Motors are working to reshape their operations and scurrying to introduce their own their own budget cars.
Do you agree that there is a future for low budget cars like Nano in other markets besides India? Do you think Tata Motors is going in the right direction by trying to develop its low cost Nano models adapted to European and U. S. markets? How could you evaluate likelihood of success of the Nano on the U. S. market? What should Tata Motors do to win American consumers? In countries like India, China and Brazil we can see a rapid economic growth where lower priced cars are often best sellers due to its affordability.
The success and future of low budget cars lie in these countries where growth has created a larger middle class segment with the economic means to upgrade their lifestyle. Gupta and Wang, BusinessWeek said despite the competition is this segment, Tata’s Nano, has a pivotal leverage to its competitors, which is called in business language ‘ the first mover advantage”. Tata’s Nano is not just a product for an identified market need today but also as a platform for tomorrow. The key to leveraging any product or service as a platform for future growth is to treat it as a bundle of capabilities.
Underlying capabilities can be leveraged across different markets far more easily than is the case with end products or services. Tata Motors at the helm of this innovation has changed the way the world’s auto industry operates and set a new standard for the auto industry to benchmark. The entrance of Tata’s Nano into the European and U. S market may be potentially devastating to financially strangled automakers such as Form and GM. As Gupta and have pointed out , Nano is not just a particular type of car designed for the peculiarities of the Indian market.
It is also a bundle of proprietary technologies, supplier relationship, and a mindset that prizes frugal engineers which applied to the needs of the rich Europeans and North American markets could easily result in an upgraded car at a lower cost than it’s competitor. The idea that brought about the Nano was based solely on the Indian target market at conception. It was designed and built as an entry level cars without the luxury of what the consumers in Europe and the U. S. akin to. To capture the U. S. market the Nano will have to upgrade it’s safety features, add accessories, further R&D, which will perhaps see a price increase.
The Nano, manage to maintain it’s low cost yet add the extra feature, it will not only challenge new car models but also the used car market which can be potentially successful in the U. S. market. It would however be advisable for Tata Motors to concentrate on marketing their existing Nano without the hassle of any upgrade to growing countries like China, Nigeria, Brazil where there is a high demand. Tata Motors has potential to capitalize and be successful in these markets as they are seen as having “the first mover advantage” over its competitors.