At Last, Tata Motors' $2,000 Nano

It was hardly the new-car launch Ratan Tata might have hoped for. About six months overdue, the $2,000 Nano won't actually be delivered until July. The plants where the five-seater was to be built are still unfinished. And the tiny cars are so low-priced that automaker Tata Motors (TTM) probably won't get much of a profit boost initially.

But six years after the project was conceived, Ratan Tata, chairman of the Tata Group, announced on Mar. 23 that the world's cheapest car would soon be available in one of the world's fastest-growing car markets. Tata Motors, which is 37% owned by Tata Group, plans to begin a lottery to pick 100,000 people who will be eligible to buy the first Nano cars that roll off the production line. "We have made a promise and we have kept that promise," Tata told journalists in Mumbai.

Despite the project's ups and downs, the Nano remains a singular achievement for Tata Motors, India's largest automaker. Globally, Tata's pledge in 2003 to build a $2,000 car set off a race among bigger global players to develop a similar vehicle. In India, it meets all government-required safety and emissions standards. And the buzz has led to big expectations for sales, with Indian dealers clearing out their inventory of other models since the beginning of the year to make space in their showrooms for the Nano.

The question facing Tata Motors now is: Will investors applaud?

Tempering Expectations

While the Nano will no doubt raise Tata Motors' brand, few analysts think the car will add much to the company's earnings for some time. The most generous estimates from analysts put the company's $8 billion in revenues up by 3% this year. The car probably won't make a profit for another three years, when the company could be churning out 350,000 units annually, says India Infoline (INFL.BO) analyst Jatin Chawla. By then, Tata Motors might be offering higher-end versions that meet stricter airbag and rear-crash requirements in other markets, may be exporting to Europe, and may even have diesel and hybrid versions that the company says are in the works.

But that's a big question mark at this point. Even Tata Motors seems to be trying to temper expectations. The automaker's managing director, Ravi Kant, said it may not have the capacity to produce more than 50,000 of the ultralight cars this year. That's half of what Tata had hoped for before protestors drove the company out of its nearly completed $300 million plant in Singur, near the east coast of India. "At that rate of production, it's highly doubtful if they can achieve operational efficiencies, let alone operational profits right away," said Vaishali Jajoo, an auto analyst with the Mumbai-based Angel Broking.

Those numbers are also a far cry from the half a million cars per year that Tata eventually thinks it can build—an ambitious target when you consider that Indians bought a total of 1.2 million passenger cars last year. Ramping up to that level could take years, allowing rivals a chance to close the gap. Indian two-wheeler manufacturer Bajaj (BJAT.BO) has a tieup with Nissan (NSANY)-Renault (RENA.PA), which could launch their own low-cost car by 2011, said an official in Bajaj's product development unit.

"Nightmares" About Project's Completion

There's also competition from Maruti Suzuki (MRTI.BO), which had sold the least expensive car until the Nano came along. The Maruti 800, which is made by a 50-50 joint venture between Japan's Suzuki Motor and India's largest passenger car manufacturer, is about 80% more expensive than the cheapest variant of the Nano. Its sales have soared despite the financial crisis that has hit economies around the world. (American manufacturers such as Ford (F) and General Motors (GM) control less than 5% of the Indian market, mostly with higher-end models.)

There are other challenges. A new plant that Tata is building in the western Indian city of Gujarat remains far from complete, according to executives working for suppliers who have visited the site. To meet demand for the initial orders, Tata has had to set up assembly lines at a temporary site in Pantnagar, in central India. In addition, suppliers are now shipping parts to that site, inflating Tata's costs.

Another distraction: how to finance the purchase of Jaguar and Land Rover. Tata bought the British luxury car brands last year, paying just over $2.3 billion, but it's now scrambling for cash. Some $2 billion of its loans are due for refinancing in June. Tata Motors' Kant refused to answer questions about financing for the Jaguar-Land Rover deal, but analysts think Tata Motors will turn to the Tata Group for help. Tata Group, which has annual revenues of $64 billion, already has nearly $20 billion of debt, according to a report by Indian brokerage house Kotak Mahindra. The Tata Group could sell shares or assets, or look for more expensive refinancing options. Last year, Tata Motors' shares fell 78%, compared with a 52% drop for the benchmark Sensex index. Since January, the stock has rebounded 1.2%, vs. a 7.7% drop for the Sensex.

The one area where Tata has benefited from project delays is in materials costs. Hot rolled coil, a benchmark for steel prices, has fallen nearly 62% since June 2008, to about $450 a metric ton, making the nearly 600kg (1,322-lb.) car cheaper to produce. At the news conference, a reporter asked Ratan Tata if he thought the Nano might get any cheaper. "For now, I have no dreams of any sort, only nightmares about getting this project complete," Tata said.

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