It has been almost two years since Tata Motors (TTM) unveiled a prototype of its $2,500 Nano at the January 2008 New Delhi Auto Expo. Analysts and reporters predicted at the time that by now the industry would follow Tata's move by rolling out a host of cheap, small cars.
As the buzz surrounding low-cost cars subsides, though, there are no signs of the competition. The diminutive Nano's closest rival for the potentially lucrative and mostly untapped market for cars that cost less than a few thousand dollars is a joint venture where Bajaj, an Indian two-wheeler manufacturer, and the Nissan-Renault alliance would share the remainder. The companies announced their plans for a Nano-killer in May 2008, and Bajaj showed the mock body of a prototype the day before the Nano was unveiled in January 2008. Back then the hype was so huge that even the empty shell of the unnamed car made the front page of Indian newspapers, and Nissan-Renault chief Carlos Ghosn predicted the $2,500 car would be ready by 2011, with the joint venture expecting to build a 400,000-unit plant just for that car.
Since then, however, few details have emerged, and it isn't clear the companies will be able to meet their self-imposed deadline. Two Bajaj executives, speaking on the condition of anonymity, tell BusinessWeek the company is finding it difficult to persuade suppliers to do the kind of aggressive research and development required to push down prices without a clear guarantee that it would produce a sizable number of cars, especially without an approved final design. A Bajaj spokesperson declined to comment. Nissan's executive vice-president for Africa, the Middle East, and Europe, Colin Dodge, said last week that Nissan's (NSANY) input in the car is now minimal. "The project itself is very difficult," says Dodge. "Doing this car for around $2,500 and getting motorbike drivers to jump into four-wheel vehicles [is] very challenging…[but] the car is coming along." Dodge declined to comment on when the car will be released or if it will be badged as a Nissan, Renault, or Bajaj.
Where's Hyundai? South Korea's Hyundai is taking its time, too. The second-biggest carmaker in India, the Korean company has spent more than two years mulling over a plan for an 800-cc, three-cylinder car that would be cheaper than its best-selling Santro, which retails for about $5,000 in its most stripped-down version. has yet to release details on its plan and hasn't set a target launch date. Even if Hyundai does eventually produce such a car, it may have limited ambitions: Seoul-based spokesman Oles Gadacz says the car wouldn't be exported to China, the world's largest auto market by car sales.
Given its success in the Indian market, the Korean automaker can afford to put risky plans for an ultra-cheap car on hold. Hyundai's India plant is operating at near-full capacity, says Lee Hang Koo, an auto specialist at government-funded think tank Korea Institute for Industrial Economics & Trade in Seoul. "It does not make any business sense to introduce a new platform with poor profitability and uncertain volume," adds Lee, who doesn't expect Hyundai to make the low-cost car a priority.
India's top automaker isn't focusing on the ultra-cheap auto sector, either. Until the Nano came along, Maruti Suzuki laid claim to India's cheapest car, the Maruti 800, which sells in the $3,500 to $4,000 range. Now the company (in which Japanese automaker Suzuki owns a 54% stake) has actually moved away from that segment. In 2007 it redesigned that car, the Maruti 800, into the Maruti Alto, a slightly up-market version with better air conditioning, nicer seats, and a new look, making the approximately $4,500 Alto India's best-selling car. That's no surprise. When hype over the Nano was nearing its peak, Suzuki Chief Executive Osamu Suzuki said the Japanese automaker wouldn't follow Tata's lead. "Our fundamental stance is that rather than Suzuki becoming very concerned about watching over our shoulder to see what other people are doing, we'll move forward at our own pace," he said in December 2007.
Little Incentive The hesitation among international carmakers—and the challenges Bajaj and Nissan are running into—underline the potential pitfalls of making such a cheap car. The Nano car project is far from profitable; even when it reaches its full production run of some 250,000 cars a year in 2012, it will add no more than a few percentage points to Tata's revenues, according to estimates by Vaishali Jajoo, an analyst with Angel Broking in Mumbai. The company has sold only 7,500 Nanos so far, and with such a low sale price, margins are likely to be almost anorexic—a few hundred dollars at the most when steel and other commodity prices swing to their cyclical lows. With that headline-grabbing $2,500 price tag, Tata hopes to make profits from the slightly up-market versions, which with air conditioning and power windows sell for about $3,200, and its export models, like the Nano Europa, which may retail for as much as $8,800.
For the export models, though, Tata will have to beef up safety measures, making the car heavier, and it will also have to invest even more money to make the electric models of the car it has promised. And it may have to work hard to fight perceptions created by being a cheap, made-in-India car in Western markets obsessed with comfort and safety. Since September three Nanos across the country developed a short circuit that caused fire-retardant plastic parts to smoke up from the heat. Tata says it will carry out a preemptive audit of cars sold and in inventory as a precautionary measure, and it has ruled out a recall, choosing instead to replace the supplier for that specific part, called the combination switch.
Part of the reason other carmakers are taking their time is that it still isn't clear whether it's worthwhile to spend the money and time to develop such a cheap car. For Tata, so far, the benefits have been intangible: swinging an international spotlight onto a company that sells 88% of its cars inside India. At the same time, Tata took four years to design the car, and a year and a half to sell the first one, giving it a head start that might make it difficult for others to catch up. Until the car was actually shown in 2008, many skeptics thought it would be a box on four wheels. "So they didn't start planning a competitor until then," says Prakash Telang, the managing director of Tata Motors. "But we are acutely conscious of the fact that the lead times can't last forever."