Nano – Staying Small

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When Tata Motors unveiled the Nano Ultra Low Cost Car (ULCC) during Auto Expo 2008, there was absolute euphoria within the Indian and Global media. This was perhaps the first time that a carmaker had developed an all-new passenger car from scratch with a target price of INR 100,000 (US$2200, as per exchange rate in early 2008).

The car had the potential of becoming a viable replacement for the massive two-wheeler population in India, parc estimated at more than 40 million units in 2008.

Massive Potential

In short, the potential was mind-boggling. Even if the Nano captured 1% of the two-wheeler parc, this would have made it the biggest selling car in the Indian market. At INR 100k, the price seemed reasonable enough as well as the best-selling, mainstream motorcycles were priced around INR 50k.

Understandably, the media, analysts and forecasters went ballistic. Over the next many months, the media kept adulating the Nano to the extent that the square inches of media coverage itself would be worth a few million dollars worth of comparable advertising buy.

Cut to 2013, and the Nano managed to sell all of 18447 units. This sales volume is lower than what the Nano’s closest price competitor – Maruti-Suzuki’s Alto800 – sells in a month.

So how did the dream shatter?

To examine that, we need to go back to the very start and the media adulation. That was the high point for the Nano and things went rapidly downhill after that in a sequence of events that now, in retrospect, seem like a long unending nightmare for Tata Motors. We take a look at some of the issues that has killed limited the success of the Nano.

Like all investments, it’s all about Location, Location, Location…The Singur Fiasco

To start with, Tata Motors planned to make the car in Singur in West Bengal, one of the least developed states in India. The choice of Singur was strange, as West Bengal does not have a pre-existing automotive cluster. Having been ruled by communism leaning governments for a long time, it is also not the most enterprising of states, with one of the lowest industrial presence in the country.

Agreed the land was cheap but arguably Tata Motors could have negotiated a deal as sweet with any other Indian state as well.

The choice of Singur was also strange considering that all Tata Nano suppliers would have to create costly new manufacturing presence in Singur. Combined they would have needed to train a few thousand workers in a very short span of time.

However, all this pales in comparison to what Tata Motors ran into.

The company’s entry into Singur was greeted by widespread protests in the region, fuelled by mostly political motives and a bit by genuine concerns. Politicians of opposition parties claimed that farmers had been cheated out of their land by the state government and Tata Motors. This was partially true considering the compensation to farmers for land, which was fertile, was peanuts and decided in a very unilateral, dictatorial fashion.

Tata Motors countered, pointing out the compensation, overall job creation (arguably not significant considering the Nano’s sales volumes) and the significant improvement in employment levels in the region, which was one of the most under-developed in the state.  However, all was not simple chalk-and-cheese and like many other political dramas, a lot seemed to be happening in the background.

Last twelve months have been severe for the Nano

Last twelve months have been severe for the Nano

Eventually, things came to naught, shit hit the fan, and Tata Motors decided to salvage its reputation by moving the project out of the state altogether. Tata wanted to get as far as possible from Singur and the new location zeroed on was diagonally across the country in Sanand region in Gujarat.  The Nano was finally set to roll out.

Except plants – big automotive plants – don’t sprout out of the ground in a few weeks. They take long and similar time, and similar effort is also needed by the suppliers for setting up shops. Logistics and supports systems too take their own sweet time. Even at a very brisk pace, the Nano factory in Sanand took 14 months to complete.

Meanwhile, Tata took a look at lost opportunity costs in delaying the Nano launch further and decided to manufacture the car at its Pantnagar plant. The move was smart as well as painful. While the company was able to launch the car in the market, volumes had to be limited to around 3500 units per month for ten months due to limited production capacity at the Pantnagar plant.

In automotive sales parlance, this was missing the sweet spot on the car lifecycle bell curve.

But this is Tata Motors and lifecycle bell curves are manageable. The original Indica platform is now 16 years old and still continuing.

However, even with scant regard to lifecycle issues, Tata Motors missed the most euphoric period of Nano sales when people had to wait a long time for deliveries. After closing initial bookings, Tata Motors offered the car to only 100,000 customers selected through a lucky draw. The rest could wait and get interest on their deposits while others could cancel and get a refund.

Managing even 100k bookings was a tall order for the company with the limited production capacity. It finally took 21 months for the company to supply the 100k bookings.

However, by the time the company could supply the first 100k Nanos to the original buyers, the car had already started struggling in the market.

The Singur fiasco caused a delay, which allowed other manufacturers to recover from the shock of the Nano’s pricing and the fact that Tata Motors could actually design and produce such a product at an incredible price point. Some of these manufacturers listened to analysts and forecasters and shat in their pants ran to their drawing boards. In a few months, the media was reporting Nano killers being designed by Bajaj Auto (with Renault-Nissan), General Motors and Maruti-Suzuki. Even Piaggio unveiled a funky concept at a motorshow and everyone labeled it as a Nano competitor.

None of the conceived perceived rivals has made it to the roads.

Technical Issues – Designed for Cost Means Designed with Constraints

The Nano has been designed with a strict price point in mind. That means that the engineers had to innovate in nearly every thing, every component and every design aspect. Now some of these are truly innovations, others were – for want of a better word – shortcuts.

People were happy with three lug nuts (and not four), they could live with thin seats, they could digest the single wing mirror, they could tolerate the single windscreen wiper, no air-conditioning in the base model, no airbags and they absolutely were okay with the absence of any power steering.

However, the car’s limited top speed, perceived flimsy build, a boot that could be opened from the inside only and an engine mounted over the rear axle and below the rear passenger seat were irks that customers didn’t like. You also had inaccessible fuel filler that needed the front hood to be opened to operate.

However, the real frightener was the several cases of the Nano catching fire. The company blamed it on customers retrofitting the car with foreign electronic equipment like central locks and they causing a sparking. However, just to be sure, the company offered to retrofit the exhaust and electrical systems. All Nanos on the road were recalled though Tata Motors never termed it as a recall, considering the recall word was considered taboo till a few years back.

The Nano’s fire incidents caused a lot of media speculation and arguably had a severe negative impact on sales. Some customers with a sense of humor adorned their Nanos with ‘Caution – Highly Inflammable” tailgate stickers.

Even worse, the word-of-mouth on the other aspects of the Nano was hardly positive. Customers found the build quality short of expectations, the fuel efficiency mediocre and the car not holding itself well with age. The highway performance was short of required and the acceleration sluggish. Further, a small boot and a 15-liter fuel tank made the Nano strictly a city car.

In short, the Nano was somewhere between a car and a two-wheeler, both in terms of price as well as performance. That was not what the customer had been expecting.

Missing the sweet spot of pricing

While the initial lot of 100k customers was offered the base version of the Nano at INR 100,000, not many bought the base version as it was offered without air conditioning. The middle and upper end variants were preferred more and they were significantly expensive. As of today, the Nano’s on-road price in Delhi is between INR 163,000 and INR 288,000. In comparison, the Maruti Alto800’s lower end variant with air-conditioning is priced at INR 299,000 on road. In many aspects the Alto800 scores much higher than the Tata Nano, is perceived as a highway worthy proper car and Maruti-Suzuki has a much higher respect with the customer as compared to Tata Motors.

Emotions

Emotions in business bring significant influences, either positive or negative. In the case of the Nano, Ratan Tata’s deep emotional connect with the product was instrumental in the way it turned out finally.

When the Tata engineers were developing the Nano, the key brief was to target the INR 100k price point to ensure two wheeler buyers switch to the Nano. So close was the entire planning to the INR 100k price point that the entire design happened around it.

However, the strict INR 100k price-point meant that the development team often cut corners as explained earlier. As a result, the Nano ended up as a ‘less capable than a car’ kind of concept, limiting its appeal.

In retrospect, had the brief been different, like ‘Design a Maruti Alto killer’, the engineers would have enjoyed greater flexibility and not cut corners. The output would have been different. Typically such a car from Tata Motors would have been beaten the Alto on specs, size and just a bit on price.

And Tata Motors would have been able to sell 25000 of these cars every month, considering it was selling nearly 15,000 of the much larger sized Indica hatchbacks in a good month.

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If the product had limits, the communication, or lack of it, spoiled the Nano’s party further. When Tata Motors opened the bookings of the Nano, the first buyers were the curious cats. These were the fashionistas, typically guys who wanted to buy a Nano as their third car for the milk-and-bread run. Only a few genuine buyers as per Tata’s target audience of a two-wheeler owner, actually bought the Nano initially.

The Contenders that weren’t: Maruti-Suzuki went off on an important underground mission to reduce the costs of the Alto significantly to bring it down to the level of the Nano. Ordinary Alto suppliers were whipped and shaped up into suppliers for the ‘Alto Cost Down’ (YG4 CD) with Maruti-Suzuki working hard everywhere to ensure that the supply chain was much better optimized than ever before. However, lukewarm reaction to the Nano stopped MSIL to go further with reducing the prices of the Alto. The increased efficiency translated into better margins and managers at MSIL haven’t stopped grinning since. The media also reported that GM was working on a ultra low cost car. Nothing was ever revealed, even as a concept. Piaggio unveiled the NT3 city car concept at EICMA in 2010. Post that no efforts to productionize the same for India as and ultra low cost car have been made. Perhaps the closest anything has come to the Nano in terms of the overall concept is the Bajaj Auto’s planned ultra low cost car RE 60. This was earlier developed by Bajaj Auto to be jointly marketed with Renault-Nissan. However with Renault-Nissan walking away from the project, Bajaj now wants to position the RE 60 as a quadricycle to replace Bajaj’s three wheelers in the market. 

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So healthy was the response to the Nano and so caught up was the company with limited production capacity that Tata Motors left the job of brand development to the media. The media coverage was still healthy and Tata Motors was getting universal accolades for the Nano’s frugal engineering and good looks.

However, somewhere down the line, the media had branded the Nano as the ‘World’s Cheapest Car’. While the media was mostly complimentary with the statement, analysts feel that a number of customers found the tag ‘cheapest car’ negative. Car buying in India is half utilitarian and half emotional. Car buyers have a sense of happiness and pride when they buy cars. The cheapest car tag failed to connect with the emotional aspect of car buying and buyers moved away from the Nano.

Limitations

A number of Tata Motors products succeed as they find great acceptance in the fleet / taxi market. The Nano’s size and very limited boot space turned into a shortcoming here as fleet operators did not find the car practical. The unavailability of a diesel engine was another reason why fleet operators could not be turned into Nano buyers.

Excitement, or the lack of it

Most manufacturers resort to offering newer variants, colours and options on cars to keep the excitement levels high. Tata Motors did little of that with the Nano. The much rumoured diesel engine variant is still to hit the roads and the CNG fuel option was launched only 45 months into the lifecycle. Clearly, even this failed to generate any excitement as sales levels hardly improved post the CNG variant launch.

To sum it up, the Nano is a package that falls short of customer’s expectations from a car. At the same time, it also falls short on the customer’s expectations of pricing. Correcting either the pricing or the package itself may have changed the sales numbers significantly.

As of now, nearly five years into the lifecycle, opportunity exists more for a change in the package than change in the pricing.

Should Tata really be worrying about the Nano?  

With its small volumes, the Nano makes a very small impact on Tata Motors’ top line and bottom-line numbers. A back-of-the-envelope calculation by EMMAAA reveals that the Nano accounted for only 0.21% of net revenues for the company. It is unlikely that the platform is profitable at all.

Even if the Nano did met its initial lofty sales targets, the impact on Tata’s top line would have been to the extent of 2%-3%. However, at those volumes, the Nano program would have been profitable.

So why does Tata persist with the Nano? Is it an enormous, collective company ego or Ratan Tata being there in the picture maintains a strong emotional connect?

Enough for the company to keep persisting with the existing template.

Why Nano is Significant

While discussing Nano resurrection, we need to examine the car’s indirect impact on Tata Motors and the Indian automotive industry. In the last decade, Tata Motors made two strategic moves that won it instant recognition as a global player. One was the acquisition of Jaguar-Land Rover; the other was the Nano.

With the Nano, Tata earned a name for itself in frugal engineering. The car brought a new way of thinking in the automotive industry and even global suppliers like Bosch designed low-cost components specifically for the Nano, something they had not done for the automotive business elsewhere. A lot of this development happened in research centers in India as global research center just did not have the culture, confidence or capability to develop ultra low cost components. A lot of that know-how will flow into future Tata models as well as cars from other Indian manufacturers.

That learning may just be the biggest takeaway from Nano.

Can the Nano be resurrected?

Anything in the world can be changed provided we change either the pricing, or the positioning or the packaging of the product. In the case of the Nano, literally everything may need to change.

Including the name.

There are two ways of changing a painting – rub off bit by bit and redraw new lines or dump the entire canvas completely and start afresh. The Nano’s resurrection may work better if Tata Motors chooses to use the second strategy. However, the above mentioned emotional connect means that they are likely to stick to the first strategy.

Painful.

Also as a strategy, it is, at best, stopgap and Tata Motors is barely trying to make the Nano relevant before eventually killing it and replacing it with Nano Gen-2 with a different name. That would be the new canvas then.

Tata has started by changing the positioning of the car. From an ultra low cost car designed to bring mobility to millions, the Nano is being re-positioned as a second or third car in the household, as a fun car and as a car that will appeal to the youth. A new power steering version (Nano Twist) and brighter colors convey the message.

As a short-term strategy, this makes a lot of sense. Since the launch of the Twist, Nano’s sales have come back to 2500 units a month for the first two months of 2014, from the 559 units it sold in December 2013.

However, as a long-term strategy, it relegates the Nano to mediocrity. From being a car for the masses, the strategy will result in the Nano ending up as another few thousands a month model.

Which would be a pity.

Nano’s Data Reporting Problems: 3718 units. That is how many Nanos Tata has sold more than they have made. Sounds funny? You see, when analysts look at SIAM data charts we expect a gap between production and sales numbers. Normally the production numbers are slightly more than the sales numbers with the gap (logically) representing the inventory in the system. However in the case of Nano, the sales numbers are actually higher than the production numbers. Simply put, Tata has sold more Nanos than it has made. Which is ridiculous. In fact, right from the very first month of sales, throughout its lifecycle, Tata was making less Nanos than it was selling. In July 2009, Tata sold 2475 Nanos and made only 2000 units. This means that nearly 500 Nanos were underreported in the first month of production. While a few months of such data inconsistency can be attributed to wrong entry, in the case of the Nano, this inconsistency has been present throughout the lifecycle. We would love to have a comment on this data discrepency from someone in SIAM / Tata Motors 

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4 Responses

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  1. Ajai
    Mar 28, 2014 - 03:15 AM

    Very insightful analysis. Great job!

    Reply
  2. Srini
    Mar 28, 2014 - 06:51 AM

    Deepesh, good analysis, but here are my two bits:

    1. Tata’s reputation
    The Indica, Indigo and Marina had already sealed Tata’s reputation as a manufacturer of unreliable cars. If Tata had built up a track record of making well-engineered cars and being able to take care of them via good after-sales, the Nano would have had it slightly easier. But neither their passenger cars were reliable nor was their ability of their service network to handle it. So their reputation had already sealed the Nano’s fate. Conversely, if Maruti had made a Nano, it would have been successful. Of course, it is another thing that Maruti didn’t enter the segment because they thought Indians were graduating to bigger, better cars.
    2. Hubris
    The Nano’s reputation brought worldwide attention to India. But that also meant the spotlight was on Tata and they thought they were on top of the world. The hubris blinded them. They could do no wrong, as after all the Tata Group now owned the crown jewels of the so-called British empire (JLR, Corus, Tetley).
    3. What happened to that two-wheeler customer prospect?
    In the process of global acclaim, they forgot the core, noble essence of the Nano – get that two-wheeler rider and his family off the bike and into a vehicle that will offer protection and comfort. So what have they done to get that man? He is bothered about running costs, which the Nano did not match. Going to a fancy showroom with salesmen wearing trousers and spotlights meant he felt out of place to visit the showroom. And the showroom did not come to him earlier. Then of course, Tata did not pay attention to how the customer will perceive the Nano – that of a cheap car. And what about easy finance schemes to get him on board? How about a Equated Daily Instalment paid in cash instead of a fancy EMI debit and a bank account? I don’t know if the Nano marketing guys at Tata went out of office into the heat and dust of India’s hinterland to carry through RNT’s dream of the Nano. Tata Motors should have hired good guys from Hindustan Unilever! If they had done that, and that too successfully, they would have realised that it is important to make that two-wheeler customer prospect feel good that he made the decision to buy a Nano. They should have made the Nano buyer the hero, and not the car – “Here is the brave man, who has spent a bit of his savings, just so that he can take his family out in comfort and safety. What a guy!” He needs to be emulated, he needs to be honoured. His neighbours should take pride in him, his children’s school teachers should praise him, his co-workers should try to follow suit. Where was the pride in owning a Nano?
    4. Compromise
    The essential question of the Nano product was not answered: “Am I making a compromise by buying a Nano?” Why should the customer compromise when he could buy a practical alternative, like the Maruti 800 or Alto? Or even a second-hand one? Why should he forsake all the utilitarian attributes just to buy a Nano? You have mentioned all the compromises in the car, but what about the compromise in his mind – There was no compelling reason to buy one. Did he feel the need for it? Shouldn’t Tata have tried hard to perceive the gap and fill it?
    5. The internal Nano effect
    In the whole worldwide acclaim the Nano received, Tata took their eyes off the ball. They ignored their SUV and UV business. The Sumo platform is still going on, the Aria was a flop, and the Safari Storme is old wine in a barely new bottle. What happened to the core Tata strengths? They left Mahindra to occupy it, leaving M&M to replace them in the passenger vehicle pecking order.

    It is easy for us to comment on what Tata did not do right in retrospect. Also we were never inside Tata House to know what problems they faced or are facing, and under what pressures they made their decisions. We will never know. It is easy for us to pass judgment – but it must be done, simply because others and even Tata can perhaps learn from it.

    Reply
  3. Resilient And Relaxed Tricycles
    Oct 07, 2014 - 08:22 AM

    Excellent blog post. I absolutely appreciate this site.
    Thanks!

    Reply

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