Low-priced Nano taps into Indians’ aspirations

The $2,000 vehicle, launched Monday, targets millions of Indians who up to now couldn't afford more than a motorbike.

For $60 down, a shopowner in a heartland Indian city can – for the first time – own a set of wheels. That’s the promise of the new Nano, a pint-sized car with an even smaller price tag: 100,000 rupees, or about $2,000.

As he launched the much-hyped vehicle Monday, Indian auto mogul Ratan Tata said the toughest task was to ensure that, for the price, drivers didn’t get a “half-car.” Some might question his success: the jellybean-shaped Nano can’t break 65 m.p.h., and power brakes and even the front cup holder are premium features.

But Mr. Tata has broken a major threshold here, reaching out to an untapped middle class of modest income and no credit history that’s eager to acquire the trappings of their country’s rising prosperity. And he’s doing it at a time when the US automotive and banking sectors are diving for the bunkers.

“The guys who are the true candidates for the Nano are working for smaller outfits in tier-two townships; guys lower down on the economic strata,” says Vikas Sehgal, a principal at consulting firm Booz Allen in Chicago, noting that India’s middle class has been far more insulated from the economic crisis. “You ask these guys about the global slowdown, and they say ‘What slowdown?’ ”

Middle-class focus

Indeed, it’s the middle class in poor nations who will be the focus of innovation for years to come, much as the Internet has spawned new businesses over the past 15 years, says Vijay Govindarajan, professor at Dartmouth College’s Tuck School of Business.

“Innovating in these countries does require a fundamental shift in the price paradigm,” says Dr. Govindarajan. The shift isn’t foreign to America – think Henry Ford’s cheap car for the masses. “I wish Ford, which entered India in 1993, had brought that kind of thinking into India. They could have made this product then.”

Tata calls such talk “serendipitous” for his company.

“All we set out to do was find a safer way to move Indian families at an affordable price,” he said. “All of us have been overwhelmed by the reaction.”

Cheaper than a Yugo

So how did Tata Motors make a car that costs less than the Kelley Blue Book value of a used 1989 Yugo?

The tiny two-cylinder engine sits right behind the rear seat. With a light front end, the steering column can be little more than a thin pipe with no power steering. The car weighs in at 600 kilograms, or about 1,300 lbs., making it the cleanest car in India and a gas sipper to boot – it gets 23.6 km/liter, or 50-plus miles, per gallon.

Instead of being made from stamped sheets of metal, the Nano’s body is formed more efficiently in a mold. A second windshield wiper or the little door for the gas tank are frills (you have to pop the hood to fill ’er up.)

It helps, too, that Indian labor is cheap – workers at the manufacturing plant make some $3,000 a year, executives say.

A new price point
The Nano undercuts the price of the cheapest car sold here, the Suzuki Maruti 800, by more than $1,000. The price falls within a “big blip” on the automotive cost curve, since the market for two-wheeler motorbikes tops out around $1,200, says Mr. Sehgal. Millions of Indians could afford more than a two-wheeler, but not any of the four-wheelers on offer – till now.

In the small cities of India’s interior, these folks are the owners of neighborhood shops and civil servants with the government, says Deepesh Rathore, an India-based analyst with Global Insight. With the cost of living higher in the big cities, customers there may be entry-level engineering graduates at startups, he says. Seghal estimates this total market to be more than 20 million families over the next five years.

Govindarajan says the Indian market has not been as hard hit as the US one. People have money to spend, though they are a little more hesitant now. “It’s more psychological [but] this may be one of those products that brings the cash out,” he says.

Sales of the Nano will depend on extending financing down to this population. Tata officials boasted of agreements with 15 banks already. And the global slowdown may wind up helping Nano sales.

“Six months back, interest rates were at an all-time high – that would have been a bad time to launch the car,” says Mr. Rathore. “Now we are at an economic point where interest rates are coming down.”

Riskier loans

Aggressively extending loans down the income chain has been maligned in the US, but experts balk at any “subprime” comparison, since income will be verified and lenders won’t be far from borrowers.

Still, Tata faces a bumpy road. The biggest question is quality. If the car isn’t seen as reliable, potential customers may opt for used cars they can trust. As reassurance, the Nano offers an 18-month, 24,000-km (15,000-mile) warranty. [Editor's note: The original version was missing a verb.]

And despite the flurry of enthusiasm for the car, the cheapest model probably won’t yield profits unless Tata breaks the sales record for a new model, say analysts. “My gut feeling [is] in two months ... they’ll raise the price,” says Rathore. “That’s common practice for car manufacturers in India.”

That could be problematic for the company, which made some big-ticket purchases – including the troubled Jaguar and Land Rover brands – during the height of the economic boom. The company also failed to get many Nanos off the assembly line before launch, thanks to protests that caused the company to relocate a factory.

First 100,000 cars in July

Tata plans to start delivering an initial batch of 100,000 cars starting in July. In the meantime, it plans to hawk Nano watches, T-shirts, earrings, even an online game – “all the things you would want to keep as a memento while you wait for your car,” joked Rajiv Dube, president of Tata’s passenger car division.

The problems meeting expected demand means that Tata is not considering the Chinese market yet, Tata said, though plans are in the works for a European and US version within a few years.”

Tata also faces the danger that it’s provided a handy road map for its competition. And it’s likely to be constrained by the country’s lagging infrastructure. In cities like New Delhi, there’s limited space on the roads for more cars, and in smaller, interior towns there’s not much road at all – not to mention parking spaces.