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Economics of a Tata Nano

with 3 comments

The Tata Nano logo

The Tata Nano logo

Image credit/source: The Tata Nano website (http://tatanano.inservices.tatamotors.com/tatamotors/)

https://ecofin.wordpress.com/2009/03/24/the-tata-nano-launched-in-multiple-variants/

https://ecofin.wordpress.com/2008/01/10/specifications-of-the-tata-1-lac-car/

https://ecofin.wordpress.com/2008/01/10/the-tatas-1-lac-car-the-nano-officially-lauched/

Can they really achieve profitability or is it just an exercise for Tata Motors to say they did it first, build market share in the entry level segment (they have effectively created an A- segment in the entry level segment in automobiles in India!) and built the world’s cheapest car ever even if they don’t make any great profits as their margins would be wafer thin?

I choose to think it has a lot of exogenous factors involved but profitability is possible provided sufficient conditional metrics are met.

First off, the Tata Nano production line needs to be made ready. The Sanand plant is still way off (another 12 months+) before it can come on stream.

Second, Tata’s have to bring in Toyota strategy of reducing costs and waste to improve profits than the traditional way of pricing of automobiles (cost plus, cost price + a markup over cost price = SP and the markup is their profit). Toyota strategy is cost minus (SP-cost = Profit). More cost reduction means more profit. This means Tata’s will continue to squeeze suppliers. Assembly line, once operational at Sanand plant should help streamlining production and speeding up the efficiency of the plant. Maybe, the Toyota way would be adopted. Plants would be churning out cars 24 hours a day once plants are operational to meet demand. Plant capacity utilization should be 100%+ as with Toyota in North America.

Quality of this Nano is still to be tested on actual production conditions in different situations. Test driving a car is one thing, road worthiness over a 6-month, 1 year, 5 year period is another.

After sales support service is a critical metric that will encourage new customers and have existing ones promote this. This is where the Maruti Suzuki Co. got it right. The cliched concept of “driving to Leh and getting a Maruti service station there’ speaks volumes of the Maruti strategy that after sales service is a critical pricing determinant.

Social cost-benefit analysis.  The Tata’s started out with this ambitious project to cater to needs of those customers who used a two-wheeler for a family of four. While the needs of that family are now met, the million dollar question on all the environmentalists minds is the Nano’s adding to the already chaotic traffic woes of Indian roads and while infrastructure is lagging far behind development, can it play catch up before the Nano’s start hitting the road in thousands? Time is the only test of this as I don’t expect much to change with any political party at the center or state. Politics will always supercede infrastructure needs in this country. The real social cost-benefit is as yet unknown in real terms.

Volumes reminds me that the entire concept of Tata Nano to achieve profitability is based on volume sales. You have only 100000 cars, the volumes are not justified to even make a breakeven, let alone any profit. You sell a million of those, and then you are talking business. Now, will suppliers come to the party? Do they have what it takes to establish new facilities near Sanand to source components to the Nano production line? Economies of scale have to be exploited and diseconomies of scale avoided. Let’s see how successful Tata’s make the Nano on this aspect. They have thought about all this – I am sure, how much of it becomes a reality is an altogether different ball game.

While Tata’s have cut costs at all levels, the real test of efficiency is also in its mileage and safety. These two have a big “top of the mind recall’ for the discerning customer.

While Ratan Tata has created a new market space and a blue ocean in conceiving the Nano project and ensuring it gets to production personally monitoring it’s progress, and 100/100 to him and the Tata Motors organization for that, the real test of the true “Nano” is going to be seen in the coming months and years. I will write more on this as soon as the cars start operating on Indian roads. That will be more of a review. I might lay my hands on one and then write; in keeping with my pledge on the previous post!

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Written by Naveen Athresh

April 1, 2009 at 4:28 pm

3 Responses

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  1. Hi Naveen, my 2 cents…if the NANO has to be sold in volumes, then they have to reduce the minimum deposit which is around 80K INR.

    BTW, Maruti is the correct spelling and not Maruthi as we southies would spell 🙂

    Prem

    April 2, 2009 at 7:01 pm

  2. Hi Prem,

    Thank you for dropping by.

    Have fixed the typo on “Maruti”.

    About price reduction, you have a point but I doubt if the Tata’s will get around to doing it. Reason being they have been negatively impacted with the global economic crisis with the Tata acquisition of JLR and unless the UK Government gives out easier aid/bridge loans to them, they are in a tight spot. Anyway, they will take every extra rupee they can lay their hands on in these tough times – of course, the ethical way!

    The whole idea they have is that they can get to keep your 80K Rs. for almost 1 year by the time the cars from Sanand start rolling by. This is interest free money they get to keep. Multiply that 80K by the huge demand for the Nano and they get a lot of money which they can in turn use for their production. Which car manufacturer gets such kind of dough upfront and get to keep it for a long waiting period? I can’t think of many!

    Also, factor in their additional income from sale of those Nano applications! Tata’s have sure found a secret sauce to generate liquidity in this cash crunch even in the Indian market!

    Do keep visiting this space regularly.

    Cheers,
    Naveen

    Naveen Athresh

    April 2, 2009 at 7:20 pm

  3. Yes Naveen, I have been a regular now.

    I do agree with you on taking every rupee away in these togh times and the whole economical model around this car. Heard that TATA’s are going to develop an entire range of merchadise revolving around this car which will be sold at their lifestyle outlets.

    Keep writing…

    Cheers,
    Prem

    Prem

    April 3, 2009 at 11:05 am


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