500 -Week 2 Discussion

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This case w as prepared by Am y Lem ley, w ith the assistance of N. Raghu Kishore, under the supervision of

Professor Paul Farris and Associate Professor Rajkum ar Venkatesan. It w as w ritten as a basis for class discussion

e-m ail to sales@ dardenbusinesspublishing.com . No part of this publication m ay be reproduced, stored in a

retrieval system , used in a spreadsheet, or transm itted in any form or by any m eans— electronic, m echanical,

photocopying, recording, or otherw ise— w ithout the perm ission of the Darden School Foundation. ◊

T H E T A T A N A N O : T H E P E O P L E ’S C A R (A )

It w as one of the longest-aw aited and m ost talked-about autom obile debuts in India. O n January 10, 2008,

Tata M otors unveiled its (U .S. dollars) U SD 2,500 car1 (also called “Rs1 lakh car” or “the people’s car”) at

the ninth A uto Expo in N ew D elhi. The Tata N ano brought a m edia blitz and a crush of onlookers that

required top-level security. W ould the car live up to its hype? A nd did its launch signal a new era for the

sm all car m arket in India? H ow could Tata ensure the product w ould be profitable?

W idely touted as the cheapest car in the w orld, the N ano w as scheduled to be available in Septem ber

2008. In addition to paying (Indian rupees) IN R1 lakh— equivalent to IN R100,000— buyers w ould also

have to pay 12.5% value-added tax along w ith charges such as road and transportation taxes. The tw o-

cylinder gasoline-pow ered version w ould debut first; the diesel versions w ould soon follow .

The N ano w as one of the w orld’s m ost fuel-efficient cars, getting 52 m iles per gallon (m pg) in the city and

61 m pg on the highw ay (22 km per liter and 26 km per liter, respectively). M easuring 3.1 m eters by 1.5

m eters, it displaced M aruti U dyog’s M aruti 800 as the w orld’s sm allest car, yet its seating room w as 21%

greater than the 800’s— providing am ple room for four adults.

C om pany H istory

The Tata G roup w as a diverse conglom erate that had international interests in engineering, energy,

inform ation system s and com m unications, m aterials, services, consum er products, and chem icals. Its 96

com panies em ployed 650,000 people on six continents.

For m any casual observers, the M ay 2008 new s that a British autom otive icons Jaguar and Land Rover had

been acquired from Ford M otor C o. by a non-W estern com pany cam e as a surprise. But new ow ner Tata

M otors w as in fact the sixth-largest com m ercial vehicle m anufacturer in the w orld and w as am ong India’s

largest autom obile com panies. In 2004, Tata M otors becam e the first Indian m anufacturing com pany to be

listed on the N ew Y ork Stock Exchange.

Tata Engineering and Locom otive C o. Ltd, a train m anufacturer, w as established in 1945. In 1954, the

com pany launched its first autom obile; betw een 1954 and 1969, it collaborated w ith D aim ler-Benz to

produce com m ercial vehicles know n as Tata M ercedes-Benz trucks, later produced independently as Tata

trucks. By the 1990s, Tata had entered the passenger-vehicle m arket w ith India’s first sport utility vehicles, 4/9/2017 Print canvas

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called the Tata Sierra. In 1998, it hit the jackpot w ith the Tata Indica— a nam e derived from “India’s C ar,”

an apt m oniker given that the car had becom e the m ost popular vehicle in the country’s econom y car

segm ent. Tata launched the Indigo in 2002. In 2005, Tata launched India’s first indigenously developed m ini

truck, called the Tata A ce.

In 2004, Tata M otors acquired the D aew oo C om m ercial V ehicle C o. Ltd., K orea’s second-largest truck

m anufacturer. In 2005, it acquired a 21% stake in H ispano C arrocera SA , a Spanish bus m anufacturer.

The com pany had m anufacturing plants in the Indian cities of Jam shedpur, Pune, and Lucknow , and

assem bly operations in M alaysia, K enya, Bangladesh, Spain, U kraine, Russia, and Senegal. G lobally, the

com pany served the European, A frican, A sian, M iddle Eastern, and A ustralian m arkets.

A s the N ano’s expected launch date neared, Tata M otors w as experiencing a dow nturn in its stock price—

from U SD 18.60 per share in Septem ber 2007 to U SD 9.53 in Septem ber 2008, a drop of alm ost 50% .

India’s A utom obile Industry

The autom obile industry in India benefited significantly from liberalization in the 1990s w hen the governm ent

eased regulations on foreign trade and restrictions on private com panies. International com panies took

advantage of India’s affordable yet highly trained engineers, establishing m anufacturing operations

throughout the country. In 2005, experts predicted that India w ould becom e the w orld’s third-largest

econom y by 2020.

In 2005–06, India w as am ong the largest and fastest-grow ing car m arkets in the w orld. The passenger car

m arket w as grow ing by alm ost 25% per year, and passenger-vehicle exports w ere grow ing by 12.7%

annually. India’s exports, w hich w ent m ainly to A sia and A frica, w ere grow ing at a rate approaching 30%

annually and had already reached 850,000 units in 2005–06, com pared w ith 600,000 units in 2004–05.2

Som e years saw as m uch as 65% grow th in exports.

A ccording to http://w w w .know India.net, India exported “331,539 passenger cars, and over one m illion

tw o-w heelers.”1

Econom y cars

Indian car buyers already had their choice of cars in the U SD 5,000 (IN R195,000) m arket; M aruti

com m anded m ore than 50% of that m arket share. Estim ates of autom obile ow nership in India ranged from 8

to 25 per 1,000 people, placing India at the low end of global per-capita autom obile rankings (Table 1).

Table 1. N um ber of m otor vehicles per 1,000 people, by country. 4/9/2017 Print canvas

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Source: United Nations W orld Statistics Pocketbook and Statistical Yearbook, 2007.

W ith a population of 1.1 billion, “a m edian age of just under 25, and a rapidly expanding m iddle class, India

w ill overtake C hina next year as the fastest-grow ing car m arket, according to estim ates by C SM

W orldw ide, an auto industry forecasting service,” the International H erald Tribune reported.2 Figure 1

depicts sales trends in the Indian autom obile and m otorbike m arket.

Figure 1. Sales trends of autom obiles and m otorbikes in India, 2002–08.

D ata source: “Industry Trends of A utom obiles,” C orporate India, M ay 15, 2008.

There w ere six m ajor players in India’s passenger-vehicle segm ent (Table 2).

Table 2. M ajor players in India’s passenger-vehicle m arket, percentage of m arket share, num ber of dealers,

and sales per dealer, 2008.

NA = Not available 4/9/2017 Print canvas

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Note: Dealer com parison num bers are approxim ate.

Data sources: http://Autom obileindia.com (accessed August 10, 2008) and Em kay Research.

C ars w ere sold via dealer netw orks, and sales volum e depended both on the extent of the netw ork and the

sales per dealer (Table 2). A ccording to a J.D . Pow er and A ssociates study of the A sia Pacific m arket,

Tata’s dealer m argins across the various m odels ranged from 4% to 10% . A nother study, by A .T. K earney,

estim ated the profit m argin of ultra-low -cost cars at 2% to 3% — about U SD 75 for the U SD 2,500 Tata

N ano.1 D ealers received further discounts if they paid cash up front to Tata— am ounting to about 1% of the

full dealer cost. A lthough Tata M otors did not disclose its contribution m argins, the case w riters’ estim ate is

about 15% .

U sed cars

In the m onths leading up to the N ano’s highly touted launch, used car sales in India had fallen considerably.

The price of a used M aruti 800— arguably the N ano’s closest com petitor— fell 30% , A utoblog reported.

“Indian car buyers apparently are not dum b,” the article stated. “W hy buy a new or used car today w hen

you can w ait until the end of the year and get a new Tata N ano for m uch less?”2

Tw o- and three-w heelers

In 2007, India’s tw o-w heeler m arket w as the second-largest globally, w ith alm ost eight m illion in total units

sold (Figure 1). By 2011, tw o-w heeler production w as forecast to approach 18 m illion units. A typical

m otorbike cost about IN R37,000 (one-third the cost of a N ano). M anufacturers included Bajaj A uto, H ero

H onda, TV S M otor, Y am aha M otor, and K inetic. Table 3 show s the types of vehicles in this class and their

fuel efficiency, cost, and top speed.

Table 3. Types of tw o-w heelers available in India.3

Source: Created by case w riter.

Bajaj A uto also dom inated the m arket for passenger-carrying three-w heelers, com m only called “auto

rickshaw s.” O ften used for transporting sm all cargo loads, these vehicles had earlier faced com petition from

the Tata A ce, as w ell as from Piaggio’s A pe Truk, a four-w heeled cargo carrier. Just m onths before the

N ano’s launch, rickshaw drivers had begun filing petitions through their union requesting that they be

allow ed to drive the N ano under their existing three-w heeler perm its.

Even if N ano m anages to convert 10% of the tw o-w heeler m arket of about seven m illion, it w ill have alm ost 4/9/2017 Print canvas

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50% share of the car m arket [Figure 1]. N ano m ay lead to a 20% reduction in prices of tw o-w heelers and a

35% decline in prices of secondhand cars, according to industry cham ber A SSO C H A M .4

A m an V erm a, a H ero H onda show room m anager in East D elhi, expected tw o-w heeler sales to rem ain

strong. “N ano m ay give a lot of people a chance to ow n a car,” V erm a said. “But m ore than fixed price, it’s

the variable cost of m aintenance, fuel, and spare parts, w here the tw o-w heeler sector has an edge.”

“A car is m uch m ore suitable, safer, and a com fortable option than a tw o-w heeler, but in a cost-conscious

nation like India, there w ill alw ays be a place for a tw o-w heeler,” said another tw o-w heeler dealer. “There

w ill not be a large-scale m igration to the N ano. Both the bike and the entry-level car segm ent w ould have its

ow n niche custom ers in future.”

The Tata N ano

N ano is expected to change the autom obile m arket in India. It w ould cater to a typical m iddle-incom e

Indian fam ily of four w ho w ants to avoid rain, w ind, and dust … It’s freedom for four.

— D ilip C henoy, Society of India A utom obile M anufacturers

W hat m ust you forgo for U SD 2,500? A ir-conditioning. Pow er steering. Pow er w indow s. A tachom eter.

D ual w indshield w ipers. But the cost savings in creating a U SD 2,500 car did not result only from such

om issions. Rather, Tata sought the bulk of its cost savings in a stream lined m odular design in w hich m any

com ponents served m ore than one function. Perhaps m ost notably, the car’s com ponent parts could be built

at separate facilities and shipped for local m anufacture. Even village garages could assem ble it, creating a

unique distribution channel for rural areas. In that w ay, the N ano w as a kit car, said Tata G roup C hairm an

Ratan Tata:

A bunch of entrepreneurs could establish an assem bly operation, and Tata M otors w ould train their people,

w ould oversee their quality assurance, and they w ould becom e satellite assem bly operations for us. So w e

w ould create entrepreneurs across the country that w ould produce the car. W e w ould produce the m ass

item s and ship it to them as kits. That is m y idea of dispersing w ealth. The service person w ould be like an

insurance agent w ho w ould be trained, have a cell phone and scooter, and w ould be assigned to a set of

custom ers.5

A t the start of the launch, Tata expected that its new 1,500-crore plant at Singur in W est Bengal w ould

handle the bulk of the m anufacturing; but construction w as put on hold after significant protest from area

farm ers w hose land the governm ent had appropriated for the project w ithout com pensation. In response,

Tata elected to shift production to another facility, and to reduce its initial run from 40,000 to 10,000 cars

per m onth during the first few m onths of production.6

Betw een 2003, w hen developm ent began, and m id-2008, the cost of raw m aterials to assem ble the N ano

had risen from 13% to 23% of retail selling price, com pared w ith a 7% cost for the average U .S.

autom obile.7 Even before this cost spike, how ever, the com pany had planned to use reverse auctions to

low er parts costs. It set a rejection rate of less than 100 parts per m illion and expected to reduce w arranty

costs tenfold. (N ote: A utom obile m argins w ere typically 10% to 15% on spare parts for dealers and 20% to

25% for Tata M otors; for norm al servicing, the dealer m argin w as about 4% to 10% ). 4/9/2017 Print canvas

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In all, 90% of the N ano’s com ponents w ere outsourced, and about 75% w ere single-sourced. Tata

engaged 100 subcontractors, signing them to long-term volum e contracts rather than annual contracts. H alf

these vendors w ere to be co-located in a m anufacturing park adjacent to Tata’s Singur plant— occupying a

portion of the 950-acre property the governm ent had m ade available to the cooperative enterprise.

C ritics questioned w hether the low price m eant the vehicle w as of low quality. But one Tata vendor credited

the com pany w ith designing from scratch, saying it precluded “dum bing dow n” the engineering: “There are

so m any legacy costs built into a design, and trying to engineer those out is difficult. It’s better to start w ith a

clean sheet of paper and engineer low costs in.”8

Tata’s original plan w as to produce 350,000 N anos the first year; it had plans to set up three additional

plants to achieve its goal of selling one m illion units annually.

C om petitive R esponse

“Sm all cars have alw ays been popular in India, even w hen oil prices w ere low ,” said autom obile industry

analyst A shvin C hotai.9 Indeed, previous low -cost, high-efficiency car launches had m et w ith success: The

Indian governm ent had collaborated w ith Japanese auto giant Suzuki M otor C orporation to release the m ini

M aruti 800 in the 1980s; in 2008, at the tim e of the N ano’s release, the M aruti 800 retailed at U SD 5,000.

H yundai and Suzuki each m anufactured up to one m illion subcom pact cars in India in 2007, and they had

plans to expand. Renault, N issan, and Bajaj A uto w ere already exploring w hether a U SD 3,000 autom obile

w as possible.

But M aruti w as in no rush to reach low er than its M aruti 800 at U SD 5,000. “O ur thinking is that a

consum er w ho is looking to buy a M aruti 800 or M aruti A lto w ill never settle for the Tata car because of the

difference in value propositions that the respective cars offer,” said M aruti Suzuki India Ltd. M anaging

D irector Shinzo N akanishi. “In any case, the im pact of the car w ill be felt m ore in the tw o-w heeler segm ent,

and every Tata 1 lakh ow ner w ill be a potential buyer of our cars.”10

“India is a grow ing econom y and so people w ill buy cars,” said K rish K rishnan, w ho m anaged a green

investm ent firm called G reen V entures. “It is a good thing that they w ill perhaps be buying a sm aller car

w hich is com plying w ith m ore stringent norm s rather than a m uch larger car or a tw o-w heeler that follow s

less stringent norm s.”11

Tata D ealer R esponse

In spring 2008, Tata dealers expressed excitem ent about the N ano, saying m any custom ers had already

inquired about it. O ne dealer characterized the m arket as m iddle-class fam ilies and college students.

“A lm ost 50% of college-going students go for a bike,” he said, “w hich costs around a m inim um of 40,000

to 50,000 rupees, and they don’t w orry to shell out 50,000 m ore if they are getting a m ore com fortable,

safe, and spacious journey. Fam ilies w ould no doubt feel the sam e w ay.” A lthough tw o-w heelers offered

tw ice as m any m iles to the gallon, “safety and com fort are the key w ords that Tata N ano assures, w hich is

the driving force for the success of this car.”

A nother dealer cited the car’s attractive design as a selling point: “The car has great looks and is cute, w hich

is very m uch appealing to m iddle-class fam ilies and students.” Still, he conceded that price w as the N ano’s

chief appeal. “Pricing the car that low is the biggest plus point, and I don’t think any [other] car com pany in 4/9/2017 Print canvas

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the w orld can perform such a feat of low cost and efficient use of labor and raw m aterials.”

In response to criticism that that Tata’s overall sales-satisfaction index ranked the com pany below the

industry average,12 Tata dealers m entioned that they w ere going to increase the num ber of service stations

and outlets in few m onths and concentrate on this aspect keenly.

The N ano w ould also be a viable alternative to a used car, som e dealers said. “A s it is,” said a K arol Bagh

dealer of used M arutis, “there are no buyers for the 95–96 m odel. They sell for just [IN R]25,000 and [are]

m ostly picked up by scrap dealers.” “N ano could surely put a dent in the secondhand car m arket for even

new er m odels,” said another dealer.

W here the R ubber M eets the R oad

W ould India’s grow ing m iddle class see the N ano as the optim al transportation solution? A ccording to a

research report by the C redit Rating and Inform ation Services of India Ltd., the N ano could expand the

num ber of households that could afford a car by 65% . “The on-road price for a N ano is expected to be in

the region of [IN R]1.3 lakh. This brings dow n the cost of ow nership of an entry-level car in India by 30% ,

m aking a new car affordable to fam ilies w ith incom e level of [IN R]2 lakh,” the report stated.13

A s the Tata N ano began to hit the streets, so did new spaper articles and editorials decrying the “people’s

car” as an environm ental “nightm are.” “W hen you low er the price that drastically, how w ill you be able to

m eet safety and em issions standards?” asked A num ita Roy C houdhury of the C entre for Science and

Environm ent in N ew D elhi. “It’s just not sustainable, w hether from an environm ental point of view or in

term s of congestion.”14

In the N ew Y ork Tim es, author Thom as Friedm an pleaded w ith India to address public transportation

issues rather than replicating U .S. traffic and pollution w oes:

If [India] applied itself to green m ass-transit solutions for countries w ith exploding m iddle classes, it w ould

be a gift for itself and the w orld. To do that it m ust leapfrog … It w ill also be an India that gives us cheap

answ ers to big problem s— rather than cheap copies of our w orst habits.

Still, custom ers flocked to Tata dealerships, eager to see the latest m odel. “I w ould definitely consider

buying the N ano as the cost of the car fits m y pocket,” said one consum er, an IT professional w ith a

m ultinational corporation in G urgaon w ho travels every day in a Bajaj Pulsar. “A nd above all it gives good

m ileage.”

1 As of Septem ber 8, 2008, USD 1 = 44.5 Indian rupees (INR); INR100,000 = 1 lakh; 100 lakh = 1 crore. Note:

“lakh” m eans 100,000, and its use is not restricted to a quantity of m oney.

2 “Indian Auto Com panies to be Show cased at SAE Congress,” Business Line Financial Review , April 1, 2006.

1 Tim ir M ozinder, “Indian Auto Industry: An Overview ,” http://w w w .know india.net (accessed April 6, 2008).

2 Heather Tim m ons, “In India, A $2,500 Pace Car,” International Herald Tribune, October 11, 2008. 4/9/2017 Print canvas

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1 Stephan M ayer and Ruediger Plaines, “M ega M arket for Ultra-Low -Cost Cars: Focusing on Custom ers in

Developing M arkets,” A.T. Kearney, Inc., 2008.

2 John Neff, “Tata Nano Tanking Used Car M arket in India,” February 8, 2008, http://w w w .autoblog.com /

2008/02/08/tata-nano-tanking-used-car-m arket-in-india/ (accessed April 6, 2009).

3 1 kilom eter = 0.62 m iles; 1 liter = 0.26 gallons; kph = kilom eters per hour.

4 “Is the Tw o-W heeler Segm ent Dreading the Nano Effect?” http://nanocar.w ordpress.com /2008/01/15/is-the-

tw o-w heeler-segm ent-dreading-the-nano-effect/ (accessed A pril 6, 2009).

5 John Hagel and John Seely Brow n, “Learning from Tata’s Nano,” BusinessW eek, February 27, 2008,

http://w w w .businessw eek.com /innovate/content/

feb2008/id20080227_377233.htm (accessed April 6, 2009).

6 Irw in Greenstein, “Steer Clear of Tata M otors,” Septem ber 8, 2008, http://seekingalpha.com /article/94424-steer-

clear-of-tata-m otors (accessed A pril 6, 2009).

7 Nelson Ireson, “Rising Costs Could Eat Tata Nano’s Profits,” M otor Authority, August 5, 2008.

8 Tim m ons.

9 Rina Chandran, “Tata M otors’s $2,500 Car to Put India on Global Autos M ap,” Hindustan Tim es, January 11,

2008.10 “W e Can’t M ake a 1 Lakh Car: M aruti,” Express New s Service, January 10, 2008,

http://w w w .expressindia.com /latest-new s/W e-cant-m ake-a-1lakh-car-M aruti/259919/ (accessed April 6, 2009).

10 “W e Can’t M ake a 1 Lakh Car: M aruti,” Express New s Service, January 10, 2008,

http://w w w .expressindia.com /latest-new s/W e-cant-m ake-a-1lakh-car-M aruti/259919/ (accessed April 6, 2009).

11 Chandran.

12 J.D. Pow er Asia Pacific 2007 Sales Satisfaction Index (SSI) Study, J.D. Pow er and Associates.

13 Arunaw a Bisw as, “Is the Tw o W heeler Segm ent Dreading the (El)-Nano effect?” Econom ic Tim es, January 10,

2008.

14 Reuters, “W hat’s Good and Not So Good About the Tata Nano,” January 8, 2008,

http://w w w .financialexpress.com /new s/W hats-good-ansd-notsogood-about-Tatas-1-lakh-car/259077/ (accessed

April 6, 2009). 4/9/2017 Print canvas

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The Tata N ano: The People's C ar (A )