Tata Nano - Strategy, Impact on the Automobile Industry

The great wonder car by Tata’s has stunned the entire world. Critics who often said that it was not possible to make a car at a price below $3000 were taken to a back sit when Ratan Tata the chairman of Tata Motors unveiled this car in New Delhi at a price of $2500. Since then it has been in lime light and has been making news in the auto sector throughout the world. Much of India's low-cost production edge comes from cheap labor and a large part of the low-cost assembly in factories and plants is done through manual operations. However this situation is changing fast withcompanies wanting to increase productivity by automating their lines. Tata cut costs by minimizing components, particularly steel, and taking advantage of India’s low production costs.

Because of its size, it requires less metal, has a smaller and lighter engine than other cars, smaller tube-less tyres and a basic interior. Tata divided the components into two types – proprietary designs and Tata Motors design. For proprietary design components, Tata went with established suppliers who then worked on the development from Indian technology centers hence saving further cost. The cost associated with employing engineers in international development centers was a costly affair which made Tata’s use local design capabilities.

For components and systems designed in-house, Tata Motors chose suppliers with strong process capabilities who could give valuable suggestions and improvements in the designs. Nearly everything has been sourced locally and the Nano boasts of greater than 95% of content sourced locally since day 1. Tata’s suppliers were an integral part of the design and development process. Tata not only worked on its own processes but also helped its vendors innovate. Instead of annual contracts, Tata went with long term volume contracts with its suppliers, driving down the costs even further. A three-shift operation and consolidated purchasing with suppliers allowed for a further reduction in costs.

Impact on 2 wheeler Industry 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. Its freedom for four. Currently, the middle income family cannot afford a 4 wheeler and are forced to go for a two wheeler option. But things might change once Nano enters the market. Nano is far safer than two-wheelers where the fatality rate is double that of cars. It has been predicted that the Nano might consume 10% of the two wheeler market of nine million and will have almost 50% share of the car market.

The 100-125 cc two-wheeler range, which comprises 90% of the two-wheeler market in terms of sales, could be severely affected with the launch of Nano. Bike makers Hero Honda and Bajaj have realized this and have jumped into the bandwagon of ultra small cars. There would also be an impact to the hatch back small car segment especially the Maruti 800 and other cars in this range. People might also think of buying 2 Nanos instead of buying a Sedan. The long term impact would be when Nano enters the 2nd hand market at a price range of 30 – 60k.

On the flip side there are a few parameters that would save the drastic drop in the two wheeler segment. Amongst the middle income consumers, there is a major percentage of customers for whom monthly expense, maintenance and mileage is very crucial. Nano may give a lot of people a chance to own a car, but more than fixed price, it’s the variable cost of maintenance, fuel and spare parts, where the two wheeler sector has an edge. A car is much more suitable, safer and a comfortable option than a two wheeler, in a cost conscious nation like India, but there will always be a place for a two-wheeler.

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. The Nano would cost roughly less than half its nearest competitor the Maruti 800 and just about double than that of a 150 cc bike. Also with a huge demand that’s already generated for the Nano, the waiting period to own the vehicle could be more than 6 months which might force the middle income consumer who needs a vehicle urgently to go for a two wheeler. On the onset, the two-wheeler manufacturers would be forced to work on new technologies to make better motorbikes and scooters. This would also in turn influence the price tag of the two-wheelers.

Impact on 4 wheeler segment

With the launch of Nano, the dynamics of India’s auto industry are likely to undergo major changes as wide spectrum of auto manufacturers ranging from two-wheelers to cars will come under intense pressure to minimize prices as much as possible. Success of Nano is expected to make every automobile company change the way it works and looks at the volume market. The creation of an ultra low cost segment has already created a shudder in the automobile industry. Many automobile companies have announced their entry into this segment while others have hinted price cuts to sustain demand. Industry experts believe that introduction of Nano will lead to a sharp drop in prices of used car and in turn will stretch the budget of a new car buyer looking for exchanging old car. This aspect will affect sales of all small cars like Wagon R, Zen Estillo, Santro, Indica, Hyundai ‘i10’ and Spark.

While Maruti is already working on re-pricing its cheapest offering – Maruti – 800 aggressively, Bajaj Auto has firmed up plans to enter into the small car segment, not in the range that Nano would be, but at a price range between the Nano and the Maruti - 800. Global automobile majors such as Toyota, Honda, General Motors, Ford etc. who were already working on their India specific small cars have put their respective small car plans on the fast track. Within a week of the Nano launch, Toyota and Volkswagen have mulled a possible entry into the ultra low cost car segment. Toyota claims that development of the prototype of its small car is on its final stages and will come up by 2009. Volkswagen is also believed to be working on a small car design exclusive of its current line of small cars to be launched in India.