No Small Wonder: The Tatas Launch

the Nano
Published: April 09, 2009 in India Knowledge@Wharton

On March 23, the day Tata Motors launched the Nano -- its long-awaited
small car priced at US$2,000 -- the company's web site crashed. It had received
more than 40 million hits in a short span of time and was unable to cope with the
traffic. Visitors had come to the site to learn more about what is probably the world's
most economical car and to join the queue to buy it.

A crash is not good news for any automobile company, but this one -- a barometer of
the heightened interest in the Nano among Indian consumers -- evidently was. After
several months of problems, including violent protests which caused Tata to leave its
original manufacturing site in Singur (see "West Bengal's Nano Impasse: A
Roadblock for Tata -- and for Investment"), the Nano was finally ready to roll. For
Tata Motors, which has been facing difficulties on several fronts, there was reason to
celebrate. "We had no idea [the Nano] would attract so much attention," company
chairman Ratan Tata told a meeting of journalists just before the formal launch.

"[The Nano] is in sync with these recessionary times -- low cost, low budgets and
lower spending," says Amit Mookerjee, associate professor of marketing and
chairman of the Working Managers Program at the Indian Institute of Management
Lucknow (IIML). The launch "has captured people's imagination, not just their
attention."

The Nano's introduction comes at a time when things are not going very smoothly for
the Tata Group, and Tata Motors in particular. A few days before the launch, Kotak
Institutional Equities Research, the domestic brokerage arm of the Kotak Group,
reported that the Tatas would end the current financial year Rs. 1 trillion (US$20
billion) in debt. That's a worrisome number, but it is manageable given the cash flow
and the resources of the group.

Additionally, Tata Motors needs to refinance US$2 billion of its US$3 billion bridge
loan for the 2008 acquisition of Jaguar Land Rover (JLR) -- and money is both
expensive and difficult to find in these risk-averse times. Two days after the launch,
rating agency Standard & Poor's (S&P) downgraded the company, citing a material
deterioration in cash flow, a difficult operating environment and high debt. Tata
Motors, like other companies in the global auto sector, is feeling the pinch of the
slowdown.

Ratan Tata is aware that there are short-term hurdles facing the conglomerate. In an
email to his group's top executives late last year, he warned that "some of our
companies with substantial foreign operations or those which have made substantial
acquisitions are already facing major problems in raising capital...." He suggested,
among other safeguards, that all of the group companies "expeditiously finalize
pending loan and funding agreements, even if they involve accepting higher interest
rates."

"The Tatas overreached themselves with [the acquisition of] JLR," says Sumit Bali,
CEO of Kotak Mahindra Prime, the auto finance arm of the Kotak Group. "The timing
was wrong and the price was inflated." Adds Rakesh Batra, partner and national
automotive leader, Ernst & Young India: "They have extended themselves financially.
But in terms of the Tatas becoming a global player, it was a key strategic acquisition.
It just happened that the timing was all wrong, something that no one could have
predicted."

Nano to the Rescue?

Is the Nano going to be the chariot that drives Tata out of its troubles? At US$2,000
-- the reason why it is making both domestic and international waves -- the answer
is clearly no. "The current price is due to vanity and ego," says Amit Azad, director of
Azad Financial Services (AFS), a financial consultancy. "It will be difficult for the
Tatas to hold this price and not compromise on quality." There are many who share
his view. Ratan Tata addressed that notion during his pre-launch meeting with
journalists. "The Nano is not an ego trip," he said. "We made a promise [to deliver a
car at US$2,000] and we are keeping it."

The Nano's actual retail price ranges from US$2,400 to US$3,600, depending on the
model you buy (there are three) and where in the country you pick it up (state levies
and transportation charges vary). "The Tatas have said that the pricing is valid only
for the first 100,000 cars," says Batra. "Beyond that, it would probably go upwards.
How much depends on various factors like their profitability levels, volumes and so
on. If they are able to get good volumes and absorb a lot of the fixed costs, it will
give them more pricing power. If I were Tata, I wouldn't want to price it too low,
because there is nothing below me. The next car is the Alto [from Maruti Suzuki, a
subsidiary of Suzuki in Japan] priced at US$4,400. So, having proved that they can
produce a car at US$2,000, they now have a lot of room to play with. I think one
may see their pricing strategy closer to US$4,000 than US$2,000. They've already
said that 75% of the [purchases] are going to be for the deluxe version."

In terms of the company's financials, it will take some time for the Nano to have any
impact, Batra notes. "In the first year, they are [predicting] sales of about 50,000
units; that's only around US$120 million. As they scale up to a level of 250,000 cars
annually, there will be some impact." In the December quarter, Tata Motors recorded
a loss of US$52 million, its highest ever. "I don't think the Nano will change the
financial landscape for Tata Motors," Bali says. "But it certainly gets them a lot of
publicity, visibility and media coverage."

The Nano will help out in the short term in one way. According to an analysis in
business daily Mint, "Tata Motors looks set to harness massive demand for its Nano,
the world's cheapest car, helping it raise funds to cover bridge loans for last year's
purchase of the JLR brands." The down payment to order the Nano is US$1,890 (for
the basic version). That is almost the entire cost of the car and therefore unusual,
but company sources and banks (which have lined up attractive finance packages)
feel that the demand is huge and there will be no shortage of applicants. The
conservative estimate is 500,000 orders. Mint notes that the application money will
likely generate a free-float of US$1 billion for the company for several months.
(Meanwhile, the Tatas will be paying 8.5% interest to the applicants who are on
waiting lists for future deliveries.)

Reinvigorating the Auto Sector

It is not just for Tata Motors that the Nano matters; it is likely to have an impact on
the entire auto sector. "The Nano could surprise everybody by reinvigorating the
sector," says Azad of AFS. Consumers may be tempted to purchase a car because of
the Nano launch and the attendant publicity, "but they could migrate to other
manufacturers because of issues like the long waiting period, attractive offers from
competitors and the launch of [other lower] priced, no-frills [autos]."

Shekar Viswanathan, deputy managing director (commercial) of Toyota Kirloskar

Motor, agrees. "[The Nano] will open a new market segment. However, how that
market segment will do is difficult to predict at this point in time. If the Nano can
sustain the promises made at the time of its launch, we believe it will be very, very
good for the auto sector, [and] many more players will introduce vehicles in that
segment. Other players may not be forced to introduce small cars, as each segment
has its own demand and supply dynamics. They will introduce small cars provided
they remain profitable and fuel efficient."

That mixed response is already evident. A few hours after the Nano launch, Skoda
Auto India, a Volkswagen group company, announced that it was advancing its
launch date for its planned small cars to 2011. Bajaj Auto -- principally a
manufacturer of two- and three-wheelers -- has, however, gone back to the drawing
board for its proposed ultra-low-cost car, which it is collaborating on with Renault
and Nissan.

How will the Nano affect the current fortunes of other small-car players in the auto
industry? "The Nano and Maruti Suzuki's small cars fall in two different segments,"
says R.C. Bhargava, chairman of Maruti Suzuki. "There is no direct competition. The
Nano may impact the sale of our entry-level model -- the Maruti 800. This is natural
whenever a new car is launched in the market. The Nano will also expand the
market." Meanwhile, the Maruti 800 has other concerns: It is not Euro 4 emission
standards compliant, and is being phased out beginning next year.

There could, however, be some impact on the two- and three-wheeler space. Ratan
Tata has repeatedly said that his inspiration for the Nano came from seeing an entire
family -- father, mother and two kids -- perched on a two-wheeler, navigating
crowded and dangerous city roads because they couldn't afford anything better. In
his view, the Nano is a family car.

But makers of two- and three-wheelers do not seem particularly worried. "I am not
saying there will be no impact at all," says Pawan Munjal, managing director and
CEO of two-wheeler manufacturer Hero Honda Motors. "Some [consumers] will
definitely move to a car. But there will be no major impact. There is no change in the
market." Bajaj Auto, too, sees limited impact on its two-wheelers, because the price
difference is too much. In three-wheelers, which function mainly as passenger-
carrying auto-rickshaws, the company has sufficient cushion to reduce prices.

Meanwhile, the Tatas are already working on the Tata Europa, a jazzed-up version of
the Nano for the export market. According to Ratan Tata, "It will have a larger
engine, better interiors with leather trim, a superior exterior finish.... Our plan is to
have it ready by 2011."

"I'm not sure how [the Nano] will do in the U.S. market because the consumer desire
there is more for large cars and SUVs than small cars," says Batra of Ernst & Young.
"The U.S. market is sensitive about gas pricing. When gas prices went up, there was
huge demand for hybrids. But the moment gas prices came down, hybrid sales fell
off." According to Viswanathan, "The major driver of change in the U.S. will be
cheaper transportation needs. There will be a decisive shift in the U.S. over the next
20 to 30 years towards use of public transport and the development of the public
transportation system. However, Americans will not scale down to the Nano
segment." Azad is slightly more optimistic. "US$150-a-barrel crude [prices] certainly
woke up the U.S. consumer," he says. "The financial turmoil came as another rude
shock and has shaken the confidence of consumers in key markets. This has changed
sentiments for the better for cheap/economy cars. Though buying patterns may not
drastically change overnight, even a small percentage change is enough to
guarantee a big market."

Disruptive Technology or Marketing?

Even if the Nano itself doesn't make it to the U.S., the concept could. According to
BusinessWeek, "No one disputes that the Nano is innovative on multiple levels --
from its engineering to its marketing to its manufacturing. So it's hard to avoid the
question: What can a humbled Detroit learn from the Tata Nano?"

"The Nano is a disruptive technology and will have an impact on the auto industry
both in India and the world over," says Bali. "It has the potential to reshape the
automotive world." Azad notes that the Nano should teach Detroit auto
manufacturers not to be complacent. "It is the lack of desire to challenge the so-
called impossible and the inability to think the unthinkable which is responsible for
the Nano coming from a place like India." It is not about to change the world,
however, he adds. "This is certainly not disruptive technology. At best, it is
disruptive pricing."

Viswanathan agrees. "Nano is not a disruptive technology, in the sense that it does
not bring in a new method of transportation using breakthrough technology. It is a
project that attempted to create a separate and distinct market segment at a price
point that was not available [before it]." Says Batra: "I don't think [the Nano] is
going to radically change car design globally. The drivers are more around emission
technology and safely norms rather than an ultra low cost car."

"The Nano is a kind of a disruptive innovation, bringing non-users into the category,
offering a superior value at the entry level as compared to existing offerings," says
S. Ramesh Kumar, professor of marketing at the Indian Institute of Management,
Bangalore (IIMB). "It is a fine example of the creation of customer value," as
opposed to mere cost reduction.

But cost reduction is what consumers tend to associate with the Nano, despite the
best efforts of the Tata marketing team to project it as a "family" car rather than a
"cheap" one. (Ratan Tata reportedly dislikes the latter term.) So, is the Nano another
example of the frugal engineering that saw the Chandrayaan mooncraft being
launched at a small fraction of what it would have cost NASA? (See: "Moonstruck:
What Will India's Lunar Mission Achieve?") No, says Viswanathan. "As used by Carlos
Ghosn [of Renault and Nissan], frugal engineering is a concept which involves
outsourcing of design work, etc., to less expensive countries, which will also be able
to bring about innovations, keeping developed countries' road conditions in mind.
The Nano is not really an example of frugal engineering. It is an example of how
clever engineering can create a new market segment."

But according to Azad, the answer is yes. "This is certainly the best showcase for
Indian manufacturing and frugal engineering. The best thing the Nano has done is to
awaken the world to the fact that Indian engineers have the potential to break price
barriers without compromising on the quality of the product."
A less debatable notion is that the Nano represents a prime example of frugal
marketing. Tata Motors has limited funds to spend on advertising and promotion. But
the Nano is everywhere -- in front-page lead stories in newspapers, in prime-time
shows on TV, and on the Internet. Nano ads are all over the media, too, but the
banks offering finance packages for the car are paying for them. Meanwhile, "nano"
has entered the general vocabulary as a term designating something as much
smaller, shorter in duration or cheaper than the norm. You have "nano shopping,"
"nano holidays" and even "nano apartments" (the only ones that are selling in the
real estate downturn).

"Low-cost options, whether they be cars, airline seats, retail offerings or anything at
all, cannot afford to advertise through the traditional media," says Harish Bijoor,
brand strategy specialist and CEO of Harish Bijoor Consults, and visiting professor at
the Hyderabad-based Indian School of Business. "Such options need to depend
heavily on editorial publicity, which in any case is the most robust of all publicity
mechanisms. Word-of-mouth is a great tool as well. The Nano benefits from all of
this.

"'Nano' is a great adjective, and it is a very relevant word in the current context," he
continues. "It is a recession-word -- all about small being beautiful." Adds Kumar:
"The company has chosen an appropriate brand name, as this association of
'smallness' has not been made use of in any other category. It is also simple to
pronounce in a multilingual country."

The Nano has made the waves it needed to. Now, all eyes are on the company to see
whether it can maintain its production schedules. A new plant in Gujarat is still under
construction. Meanwhile, there is talk of the Tatas returning to Singur in West
Bengal. Customers have started to pay, because orders for the Nano began in early
April. Now, they are waiting. Ratan Tata knows that delays in delivery will be
damaging. "We don't really want customers to wait for the car," he told the press
recently. "As my friend [Fiat chairman Luca Cordero] di Montezemolo said in Paris,
waiting to buy a car is like waiting for a pretty woman. If you wait too long, she
might get old and fat." Apparently, everyone wants a Nano; no one wants a Nani.