Huge Hype, Small Profits

If the experience of India's Tata auto-maker is a guide, is there hope for GM, Ford and Chrysler when it comes to building small cars? Meanwhile, if the goal of building small inexpensive cars is to start new car buyers on the path toward buying bigger, more profitable cars, is the marketing of small cars really consistent with the goals of environmentalists? There are more than 2.5 billion people in India and China and they would rather drive than walk. Their day will come despite the efforts of environmentalists and global warmists to postpone the inevitable.


NEW DELHI -- When the Nano minicar was conceived by India's Tata family in 2003, patriarch Ratan Tata said his intent was to provide an affordable, fuel-efficient, safer alternative to the two-wheelers deployed by millions of low-income Indians.



The 3.1-meter-long car's launch Monday will come at a very different time - for India, the auto industry and the Tata empire as well.



The focus will be as much on whether the Nano will sell big and deliver profits to debt-strapped Tata Motors Ltd. as on whether it could spur a transportation revolution on India's roads.

With an expected price tag of 100,000 rupees (about $2,000) for dealers for the basic model, the Nano will be one of the world's cheapest cars, if not the cheapest.

The company has so far declined to discuss details on costs, production plans, and profit margins. It's expected to reveal fresh information, such as the monthly production volumes and sales forecasts, on Monday at the launch event in Mumbai.

Like auto makers the world over, Tata Motors is contending with slowing demand for its bread-and butter commercial vehicles in India as well as its luxury nameplates, Jaguar and Land Rover.

Scrambling to raise money, it sold a 1.37% stake in group company Tata Steel Ltd. to Tata Sons Ltd., the parent of both Tata Motors and Tata Steel, for 3.59 billion rupees last year.
Tata Motors is also laying plans to sell small stakes in six profitable unlisted units, according to local media reports.

Undoubtedly, the Nano, with a 623-cubic centimeter, rear-gasoline-engine, symbolizes the global auto industry's rush to embrace affordable, lower-emission vehicles amid the economic expansion of developing nations from India to Brazil. Should the car succeed commercially, it could represent the coming-of-age of modern India's manufacturing prowess.

But going by the auto industry's experience with small cars, the tiny upstart Nano won't be much of a money-spinner. Manufacturers have traditionally made razor-thin margins on smaller cars, using them to lure buyers only to try to up-sell them to more profitable makes as they grow in age and wealth.

Indeed, the Nano's well-publicized affordability could prove to be a double-edged sword. On the one hand it might draw young and lower-income buyers. Yet it may be too low to significantly improve Tata Motors' consolidated revenue and profitability.

Other auto makers are pursuing their own versions of the Nano.

Bajaj Auto Ltd., India's second-biggest motorcycle maker, is developing an inexpensive small car with Nissan Motor Co. and Renault SA. General Motors Corp. and Volkswagen AG have indicated they may join the low-price bandwagon.

Suzuki Motor Corp., which controls half of India's car market through its joint venture Maruti Suzuki India Ltd., sells the 0.8-liter Maruti 800. The cheapest car in India - for now - it costs nearly twice as much as the Nano.

"We don't see the Nano as a game-changer today. In our current forecast scenario, we are hesitant to think about that," John Bonnell, J. D. Power & Associates' director of forecasting (Asia Pacific), said. "I think the (100,000 rupees) market price will be difficult to sustain over a long period of time given there is always a minimum material cost."

Bonnell doubts India's enormous numbers of motorcycle buyers will upgrade to Nanos en masse because it's still more than three times the price of a modest two-wheeler and costs more to maintain.

Ratan Tata, Tata Motors' chairman who heads the diversified Tata Group conglomerate, has said the Gujarat factory will have an initial capacity of 250,000 cars per year; that volume could eventually be doubled.

Amol Bhutada, an analyst with Edelweiss Securities Ltd. in Mumbai, says the Nano's margin of profitability will be at least 5%, reflecting lower commodity prices and the federal government's excise-tax cuts on small cars in the past year.

However, he notes that "the Nano cost structure is based on high volumes. So, only when you make good use of the installed capacities, then you will start making good money on such products, which we believe will come only from fiscal year 2010-11 when we expect them to produce 300,000-400,000 units per year."