Tata Motors unveils world's cheapest car Nano

Amid a great deal of hype and fanfare, Tata Motors, frontrunners in the acquisition race for Ford Motor's British luxury brands Jaguar and Land Rover, unveiled its People's Car rechristened Nano, that meets Euro 4 emission and safety norms in the India Auto Expo 2008, New Delhi, Thursday, Jan. 10.

The Nano, also called the Rs.1 lakh car (or $2,500 or £1,277 - the base price of the cheapest version excluding VAT, transportation cost and dealer margins) was Tata Motors' pet project with the vehicle designed to bring car access to the masses who now drive motorcycles and scooters in India. While India's population is more than one billion people, only around one million passenger cars were sold in the country last year. By contrast, more than seven million motorcycles and scooters were sold.

Tata Group chairman Ratan Tata, who was ranked by Fortune magazine recently as one of the world's 25 most powerful businessmen, said 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.

When I saw families riding on two wheelers it led me to wonder if we could create a safe, affordable all-weather car. Now we are happy to present the People's Car to India, Tata said. That's what drove me - a man on a two-wheeler with a child standing in front, his wife standing behind, add to that the wet roads - a family in potential danger.

Today, we indeed have a People's Car, which is affordable and yet built to meet safety requirements and emission norms, to be fuel efficient and low on emissions, Tata added. We are happy to present the People's Car to India and we hope it brings the joy, pride and utility of owning a car to many families who need personal mobility.

It will provide Indian families with a safe form of transport, he told a news conference Thursday during the launch of the car.

They are not concept cars, they are not prototypes... they are the production cars that will roll out of the Singur plant (in West Bengal) later this year, said the 70-year-old patriarch of India's most respected industrial family.

Though rise in price of steel and other factors were inhibitive, yet Tata did not give up on his dreams. Since we started the project four years back, there has been a steep increase in input cost, but since, a promise is a promise, the standard dealer version will cost Rs.1 lakh, Tata said after unveiling the car.

The Singur plant in West Bengal, where Nano will be manufactured, will have a capacity of 250,000 units per annum, which will be ramped up to 350,000 units subsequently.

While Nano will hit the Indian roads later this year, Tata plans to introduce it to other lower income areas like South America and Africa within the next four years.

Tata, which expects eventual annual demand of one million cars, said it would introduce a diesel version of the Nano at a later date.

A NANO LOOK AT THE NANO

So what does the Nano look like and how does it fare against its nearest competition?

The jellybean-shaped, snub-nosed Nano is a small four-door car and with a length of 3.1 meters (about 10 feet), a width of 1.5 meters and a height of 1.6 meters. The new vehicle is 8 percent smaller bumper to bumper than the cheapest car on Indian roads - the Maruti Suzuki 800 which pioneered the small car in India in the 1980s - but has 21 percent more volume or space inside than the 800. Unlike the 800, the Nano is comparatively less powerful - it has a 623cc two-cylinder engine and sports 33-horsepower.

The manufacturer claims that the car had a top speed of 100 km/hr and is designed for city driving. It also gives the car gasoline mileage at around 20 kilometers to the liter, or 50 miles to the gallon.

Tata also claims that the Nano is also built to meet safety requirements and emission norms.

Although Tata said his company made no claim to have made the most eco-friendly car in the world yet he affirmed, we did not do any shortcuts.

Nothing was eliminated that would interfere with safety or pollution or reliability, Tata said.

Let me assure you and also assure our critics the car we have designed will meet all the current safety requirements. The car has passed the full-frontal crash and the side impact crash tests... and will have a lower pollution level than even a two-wheeler being manufactured in India today, Tata announced, after driving the Nano onto a stage accompanied by the theme tune to Stanley Kubrick's 2001: A Space Odyssey.

However, environmental critics point to India's terrible road system and rising pollution levels and have said that the car will lead to mounting air and pollution problems on India's already clogged roads.

If you're talking about urban environment, it will cause serious problems, said Jamie Leather, a transport specialist with the Asian Development Bank (ADB). It's a major concern.

In 2005, Indian vehicles released 219 million tons of carbon dioxide, the leading greenhouse gas blamed for global warming.

By 2035, that number is projected to increase to 1,467 million tons, due largely to the expanding middle-class and the expected rise of low-cost cars, according to the ADB.

The cheaper and cheaper vehicles become, the quicker those pollution levels will increase, Leather said.

Top Indian environmentalist Rajendra Pachauri, the chairman of the Intergovernmental Panel on Climate Change who was recently awarded the Nobel Prize with former US vice-president Al Gore, has said he has nightmares about the potential impact of the new cheapmobile.

In my view this represents a bankruptcy of policy as far as transport options are concerned, said Pachauri.

If our roads are going to be flooded with these cars by a few million each year, what is that going to do? Every car that goes on the road is going to use road space. We're only adding to congestion and increasing pollution, he said.

Tata's car could jam cities and raise pollution, according to the Centre for Science and Environment (CSE), which has led a campaign for cleaner air in New Delhi. Average vehicle speed in India's capital has dropped to 15 kilometers an hour in 2002 from as much as 27 in 1997, it said.

As congestion builds up and vehicles slow down, emissions increase up to five times, it said on its website.

Even if they claim it will be fuel efficient, the sheer numbers will undermine this, Vivek Chattopadhyaya, an air pollution specialist at the CSE, said. India's infrastructure doesn't have the capacity. The centre estimates that the five million vehicles on Delhi roads today meet only a fifth of the capital's transport needs. Most people travel by bus but could be convinced to buy a car at such a low price. Delhi, where air pollution levels are more than twice the safety limit, is already registering 1,000 new vehicles a day.

Infrastructure is a major concern with India and I accept that we are behind our neighbors in the area. And India is working towards it with a new roads policy. But in the next five year, Tata Motors is only targeting to have 500,000 small cars that will constitute just 2.5 percent of the total number of passenger vehicles in the country. With those numbers, the small car can hardly be an infrastructure nightmare as it is made out to be, Tata said.

Tata said he believed India desperately needs a mass transit system but asked, should (ordinary Indians) be denied the right to individual forms of transport?

Alluding to fears expressed by Pachauri, Tata said the Nano meets Bharat Stage-III emission norms and can also meet the Euro 4 norms.

Pachauri will not have a nightmare and Sunita Narain (CSE director) can also sleep, he quipped.

According to Tata Motors, the Nano will come in three variants - standard and two deluxe models with AC and market watchers claim that the Nano is going to be the showstopper of this year's Auto Expo.

COST CUTTING TECHNIQUES

So how did Tata Motors manage to build a car that costs almost half of the cheapest car currently available anywhere in the world?

Prior to the launch, Tata said that developing the new model cost between $380 million and $435 million.

The company has been able to slash the price by asking its 500-odd engineers and suppliers to redesign the many components to cut costs. The speedometer, for example, is in the center of the dashboard over the air vents, not behind the steering wheel, so the dashboard can be build with fewer parts.

The car reportedly uses super strong glue rather than welds in some joints - a technique that a handful of other car makers have used before, though perhaps never as extensively.

Analysts feel that Tata Motors' cost-cutting drive was relentless: the windshield has just one washer rather than two, the metal steering column was hollowed out to save on steel, cheaper bearings - strong enough to perform well up to (70 kph) but fast wearing beyond that - may have been used rather than more expensive components.

The car will come with air conditioning, but will have no power steering. It will have front disk and rear drum brakes.

The car's dashboard features just a speedometer, fuel gauge, and oil light. The car does not have reclining seats or radio. The shock absorbers are basic.

The company has applied for 34 patents to cover its innovations.

Tata Motors cut costs by minimizing components, particularly steel, and taking advantage of India's low production costs. Because of its size, it uses less sheet metal, has a smaller and lighter engine than other cars, smaller tube-less tyres and a no-frills interior, a company official said on conditions of anonymity.

It's a very tight package, Ratan Tata said. We shrunk it, made the engine smaller and used fewer materials but we haven't taken any shortcuts in term of safety or emissions.

I have confidence in what we can do, provided we are critical enough about what we can do and we have a desire to improve, he said.

You have to have a belief that you can do something. You have to carry that belief through till the end or decide not to do it. What we should not do is a half-hearted job, Tata said.

INDIA INC. GIVES A PAT ON THE BACK

Meanwhile, India Inc. gave a warm welcome to the launch of Nano, calling it a proud moment for India.

It is a proud moment for India. It demonstrates India's technological and entrepreneurial ability. The car will help people move from two-wheeler to four-wheeler and it will leap-frog the two-wheeler, Industry and Commerce Minister Kamal Nath said at the Auto Expo on Thursday.

It fulfills the need of the common Indian who aspires to move from a two-wheeler to a four-wheeler, he added.

Tarun Das, director-general of the Confederation of Indian Industry (CII), which is one of the joint organizers of the auto expo this year, sees the Nano as a godsend for the Indian economy. Such entrepreneurial verve, he said, will boost the confidence of Indian industrialists long overshadowed by China's manufacturing prowess.

It's a revolution, said Das, noting the involvement of 100 suppliers in the indigenously developed vehicle, which has spawned 34 patents. What it proves is that you can do R&D in India. For a business community that has all been used to going down the joint venture route, the Rs.1 lakh car is going to be inspiration. I think it will be manufactured around the world. With a three- or five-year loan, anyone can afford it.

Tata has done in four years what the Japanese took 30 years to do. It will change the whole industry, Das said.

The car is good to look at. There is a space in the market between two-wheelers and the 800 (Maruti's small car). It will be a success if they deliver what they promised. And I see no reason why they can't, said Jagdish Khattar, former managing director, Maruti-Suzuki.

It's a good product but it's still too early to say whether it will overtake the 800 because it caters to a totally new market segment, he said.

An official of Hyundai Motors, which unveiled an LPG version of its Santro Thursday, was more circumspect. We definitely see it as impacting our sales, he said in halting English, preferring to maintain anonymity. Hyundai Motors is India's second largest carmaker after Maruti-Suzuki.

The best thing is that they have kept the price at levels promised at concept stage. It is good to look at. I can't say about the driving experience as I have not taken a trial, said Ramesh Suri, chairman of Subros.

Admitting that Nano's launch will have some impact on sale of its small cars, Maruti-Suzuki's managing director, Shinzo Nakanishi said, We cannot make a cheaper car. We don't know how to make Rs.1 lakh car unless we sacrifice something. Our engineers have said they cannot do it. We won't go below the 800 in our product line-up.

I think it's a moment of history and I'm delighted an Indian company is leading the way, said Anand Mahindra, managing director of Mahindra & Mahindra which is the largest maker of SUVs in India.

I congratulate Tata. He has delivered what he promised, said Onkar Kanwar of Apollo Tyres Ltd.

The foreign carmakers were more tightlipped in their response and some said they would not emulate Tata's feat even if they could.

The Rs.1 lakh car is a good decision and a good intention, but as far as Volkswagen is concerned producing a Rs.1 lakh car is a pure no because meeting the quality standards and safety is not feasible at all in such a model, Volkswagen Group Sales India managing director (passenger cars) Andreas Prinz told the media. Expressing apprehension on the safety features, Prinz said there would be some compromise in quality if a company makes Rs.1 lakh car and Volkswagen would not compromise.

Every car has its own buyers and I am sure this car would also have its set of customers, but this segment does not excite us, General Motors India president and managing director Karl Slym said, echoing similar sentiments.

I think it is a great thing for India because mobility is giving new opportunities. I hope Tata is driving a great success with the Rs.1 lakh car, but it is not our plan, said Thomas Kuehl, a member of the board of directors of SkodaAuto India.

Though Tata is targeting the consumers who are buying two-wheelers, the two-wheeler majors in India are not worried.

Two-wheeler market leader Hero Honda appeared least worried with the arrival of the Nano, saying it was only the carmakers that would be impacted by the Tata's car.

Hero Honda Motor vice-president (sales and marketing) Anil Dua said, The more, the merrier. Fundamentals of the two-wheeler industry are strong and Rs.1 lakh car is not something which we are worried about.

It's a red letter day for Indian industry, a day India should be proud of, said Venu Srinivasan, chairman and managing director of TVS Motors.

It is fantastic, outstanding engineering. It helps redefine the sector in the country. It has established new grounds, said Srinivasan. Ratan Tata has the vision to create a new business model and all the naysayers are looking at it with concern. The Nano is a path breaker.

Y2K (programming bug) made the world sit up and take notice of Indian IT capabilities - providing high quality solutions at affordable costs. Now Tata Motors' impressive Nano will have a similar beneficial effect on India's automotive industry, said Arun Firodia, chairman of the Kinetic group, one of Tata Motors' rivals in Pune.

The Rs.1 lakh car is not going to impact our potential customers. Our customers would buy our products for the sheer joy of riding, said P. Sam, group head (marketing and sales) Yamaha Motor India Sales Pvt Ltd.

Meanwhile, auto analysts say the Nano could have a major impact on the way global car companies think about costs.

As a concept it's brilliant. It's spacious and promises to be fuel efficient, Hormazd Sorbajee, editor of Autocar India, said.

It may revolutionize car costs downward, said Indian auto analyst Murad Ali Baig, adding that the Nano was bound to be followed by other low-cost cars.

Though Baig, agrees that the Nano is a great product, the cheapest complete car in the world, yet he feels that the Nano cannot give great performance pleasure. It is meant only for intra-city driving, he said.

MARKET ANALYSTS' VIEWPOINT

The market, meanwhile, is playing the wait-and-watch game before deciding whether Tata's car will translate into a success and as if on cue, the share price of Tata Motors plunged 6 percent on Thursday.

Tata Motors should have no trouble selling it to hundreds of thousands of Indian families a year, market analysts said. Still, at such a low price it could take a long time for Tata to recoup its investment in developing the world's cheapest car. With profit margins as low as 5 percent, it could take more than five years for the project to be in the black, estimated Vaishali Jajoo, senior research analyst at Angel Broking in Mumbai. It depends on how the margins will be, and at this price they are going to be very low, she said.

But Tata did not guarantee that the price of the Nano would remain at $2,500.

The Nano's price will depend on the how the prices of steel and other inputs needed to make it move between now and when it hits the road, Tata said, besides depending on other factors like whether Tata Motors can squeeze more discounts out of its component suppliers as it ramps up production.

As for profitability, Tata said that the more expensive models would eventually make the Nano project profitable. The car, with all its variants will indeed be a profitable proposition for the company, he said.

Market analysts are also saying that Tata must get the cars on the roads as soon as possible and hope no quality issues crop up that could discourage buyers. Tata's first major passenger car, the Indica, which was launched back in 1998, had trouble in early years with everything from its engine to its interiors.

The quality will be the key for demand, said S. Ramnath, director at IDFC-SSKI Securities in Mumbai. The problem is [in the past] Tata has not delivered on quality.

It's a big, big bet by Tata,'' said Amit Kasat, a Mumbai- based analyst at Motilal Oswal Securities Ltd., who recommends investors buy Tata's stock. The automotive world will be keenly watching how it plays out, so that car companies can make their own adaptations for similar-priced cars.

With oil rising to $100 a barrel, automakers must improve fuel efficiency, and Tata's car may be a starting point, said A.S. Thiyaga Rajan, who manages $250 million as managing director of Singapore-based Aquarius Investment Advisors Pte.

The global race to get a cheap, fuel-efficient car is on furiously, said Rajan. As long as the design looks good and the safety standards are met, then there will be thousands of hungry buyers.

The Nano is the first new design from Tata since it unveiled the Indica in January 1998 as India's first locally designed car. The new model may exceed the Indica in popularity, said R.K. Gupta, who manages $150 million as managing director of Credit Capital Asset Management in New Delhi and is planning to buy more shares of the automaker.

The car could spur even an office clerk to dream of owning a car, Gupta said.

Deven Choksey of KR Choksey Securities said Tatas need to pump up 300,000 units a year to squeeze costs, while Maruti 800 sells only 80,000 a year. This means that Tata Motors must chip into those who now ride motorcycles, which now sell 850,000 units a year in India.

The only logical explanation is a new segment where they can sell the car, Choksey said.

I believe it is good product as far as specifications are concerned, said Deepak Jain, auto analyst from Anand Rathi Securities. If we look at the demand scenario, the kind of numbers it can do- if we look at the demand, the different segments which it is addressing- it is a second car market which people would eventually buy. Every year we sell around 1.3 million cars, it could alter the market, which is addressed by Alto and Maruti 800. Almost 1.5 million Altos and Maruti 800 cars are being sold every year and it can also address the secondhand car market, which we expect with this car can actually crash in terms of pricing. So I believe it addresses lot of segments and it can be a big demand puller. As far as the shift is concerned, initial estimates is around 10 percent of the two-wheeler market can actually shift towards the small car.

Meanwhile, the market analysts all agree that the market segment Tata Motors' Nano is targeting will soon become the hotbed for competition.

And, indeed, the automotive world has taken note. Ford Motor Co. said this week it would invest $500 million in India to make a small car that will have a sticker price as low as $7,500. Nissan Motor Co. has plans for a $7,000 and then $5,000 car in the next few years. Meanwhile, France's Renault SA and Nissan are helping Indian motorcycle maker Bajaj Auto Ltd. launch a $3,000 car. In fact, Bajaj, best known for building India's ubiquitous three-wheeled taxi scooter known as the auto, displayed its own prototype earlier this week. But it is not expected to be on sale for another two years. German automaker Volkswagen AG said Wednesday it would also start to make small cars at a new plant in 2010.

Tata, however, remains unperturbed and says he is quite gratified that other companies are following suit. It's not our God-given domain, he said, adding that Tata Motors' rivals may be able to free-ride on its efforts, copying the cost-cutting tricks it had to discover through painstaking trial and error. It will be an easier task for them than it was for us, Tata said.

CONCLUSION

The Nano is part of a global race to lower the prices of entry-level cars for millions of new developing world consumers and its release comes as India's domestic car market is predicted to soar in the coming years on the back of the country's fast-growing economy and increased consumer wealth.

India sells 1.4 million four-wheelers compared to 5 million in China and over 10 million in the US. There is enough scope for India to develop a large domestic market and analysts say Indian car sales would more than quadruple to $145 billion by 2016.

Nonetheless, India, the world's second most populous nation presents a striking contrast between that kind of industrial clout and the poverty in which most Indians still live and the Nano lies between those two extremes: a car built to attract members of the urban middle class who at present perch on motorcycles.

No doubt, the Nano's launch will put Tata Motors on the automotive global map. However, the fact that it will add to India's already acute traffic problems should remind the government of its failure to provide basic services.