A car for 100,000 rupees has failed to tickle most Indian's fancy. Many might think it's the price (app. $2,500), still too high for the Indian consumers. I think it's the lack of parking that is also preventing TATA's Nano from taking over roads in India. The average consumer lacks space to park the car outside their homes (no space available inside the house) on narrow streets in most Indian towns. Furthermore, paid parking at work and other destinations further makes operating a car more expensive than a two-wheeler. Of course, fuel price differential between a car and motorcycle limits the possibility of making Nano the peoples' car in India.
I present two interesting views on Nano. First, from Professor Madhav Badami of McGill University in Montreal who pointed out the following shortcomings in Nano:
Working paper, IIM Bangalore (2008)
A Note on the Tata Nano, and its Implications for Motor Vehicle Ownership and Activity
Mr. Ratan Tata was reportedly motivated to develop an inexpensive car in order to have M2W vehicle users switch to cars because he was concerned for their safety -- it is not uncommon to have entire families, including small children and babes-in-arms, travelling on unstable M2W vehicles. Thus was the idea of the Tata Nano born.
Although it has been claimed that the low price of the Nano will cause demand for it to explode, and therefore, motor vehicle ownership and activity to further accelerate in India, it is doubtful to what extent this will happen, and whether those who currently use, or plan to purchase, a M2W vehicle, will opt for a Nano instead (Gupta, 2008; Guttikunda, 2008; Mohan, 2008b).
First of all, personal motor vehicle sales have already been growing very rapidly, even without the Nano – in fact, they nearly doubled, just between 2001-02 and 2006-07. In particular, car sales grew an astounding 22% just over the previous year, more rapidly than for M2W vehicles, which grew 11% over the same period. However, M2W vehicles continue to account for the bulk (78%) of all motor vehicle sales, and – this is key -- 85% of passenger vehicle sales (SIAM data quoted in Gupta, 2008).
Secondly, although the Nano has been proclaimed, with much fanfare, as the "people's car" on account of its low (by international standards) price of 100,000 rupees (approximately US$ 2040 at current exchange rates), the on-road price will likely be around 125,000 rupees for the basic model, and around 150,000 rupees for its deluxe versions (as against the approximately 205,000 rupee on-road price tag for the immensely popular Maruti 800, in its standard version). Further, one needs to consider the operating costs of the Nano over its service life, in terms of fuel, insurance, servicing, and maintenance, in addition to its capital cost, in determining its attractiveness to potential buyers.
Guttikunda (2008) and Mohan (2008b) have worked out the economics of owning and operating a Nano relative to a M2W vehicle for a middle class family. Whereas the annual payments for fuel, and loan servicing for a M2W vehicle would amount to 10% of the annual income of a typical middle class family, they would account for as much as 22% of this income if the family chose to purchase a Nano (Guttikunda, 2008). According to Mohan (2008b), given that a middle class family cannot afford to spend more than 15% of income on transport, the annual payments he calculates for fuel, loan repayment, insurance, and servicing and maintenance for a Nano would require an annual income that only about 20% of families command even in a wealthy city like Delhi (it should be noted that Mohan assumed a higher number of daily kilometres travelled than did Guttikunda).
Finally, as Mohan (2008b) points out, used air-conditioned cars in reasonably good condition have been available for 100,000 rupees or less. Yet, it does not appear that M2W vehicle users have shifted to these cars in any significant way.
Given the foregoing, and given the low operating and maintenance costs, high maneuverability, and ease of parking of M2W vehicles, it is not very likely that those who currently use or plan to purchase these vehicles will switch to the Nano. Neither does it appear to be likely that the Nano will lead to accelerated car ownership. The Nano is likely, however, to take a share of the high-end M2W vehicle market, and to some extent the low-end car market -- although it should be kept in mind that the annual expenses for the Nano are likely to be only around 10% less than for the Maruti 800. The Nano may also establish for itself a niche market, perhaps comprising second or third family cars (Gupta, 2008; Guttikunda, 2008; Mohan, 2008b). But a true "people's car" – assuming of course the desirability of the majority of Indians owning a car – the Nano will likely not be, in a country in which more than two-thirds of the population live on $2 per day. Indeed, as Mohan (2008b) observes, if the term people includes more than 70% of the population (which one hopes it does!), there can be no "people's car" in India.
Regardless of the effect of the Nano on motor vehicle ownership and activity, it may safely be assumed that a business as usual approach will sooner rather than later lead to an intolerable situation for all, including those in motor vehicles. This paper is an argument for a rejection of that approach, and for policy choices, challenging though they undoubtedly are, that will hopefully lead us to transport (or more precisely, accessibility) systems that are resource conserving, environmentally benign, and socially equitable, in Indian cities."
And from the Economist:
India cars: The one and a half lakh car
FROM THE ECONOMIST INTELLIGENCE UNIT
Tata Motors is trying a number of tactics to try and boost sales of the Nano, its ground-breaking low-cost car.
Sales in India of the much-lauded Tata Nano passenger car have dropped dramatically in the past four months, as surging raw material costs forced Tata Motors to raise the price of the car twice in that time. The price rises mean that the most basic version of the car no longer costs the original 1 lakh (Rp100,000; US$2,200). At the same time, the car's profitability is being dented all round as Tata is being forced to come up with new ways to try and shift the Nano.
In November 2010 (the latest figures available) Tata Motors delivered just 509 Nano cars to Indian consumers, according to the Society of Indian Automobile Manufacturers (SIAM). That equates to an 85% decline compared with November 2009, and was the car's lowest ever-monthly sales total since it was launched onto its home market 17 months ago.
Unfortunately for Tata, this was not a one-month blip. In July 2010, monthly deliveries of the car peaked at an impressive 9,000 units. In each of the subsequent four months between August and November 2010, however, monthly sales have crashed compared to the previous year. In the first 11 months of 2010, just over 71,000 Nanos were delivered to Indian customers.
Tata's Chief Executive Officer Carl Peter Forster has blamed the sales decline on the worsening availability of financing loans in India, as cautious banks become nervous about lending to low-income consumers, in case they default on their repayments. Yet purchasers of rival models do not seem to be experiencing the same financing problems.
On the contrary, new car sales in India are booming right now. In November 2010, new car demand leapt by 21% compared to the previous year. This followed an incredible October, when new car sales reached their highest ever monthly total, at 182,992, which was a 38% year-on-year increase. Indeed, the Indian economy is enjoying brisk consumer spending all round, driven by rapidly-rising GDP, which in the last quarter grew by 8.9% compared to last year. SIAM is now predicting that Indian new car sales will increase by at least 25% in the current fiscal year, which began in April.
Worryingly for Tata, there is unlikely to be any lift in Nano sales this month or next. October and November are the strongest months of the year in the Indian car buying calendar, thanks partly to the five-day Hindu festival of lights, Diwali. The downside of this sales rush is a two-month sales hiatus in December and January.
The one and a half lakh car
Almost certainly more relevant to the Nano's waning sales than any financing issues are the two price rises that Tata has put in place in the last five months. Tata raised the price of the Nano by 4% in July 2010 and then by another 9% in October. The cheapest variant of the Nano now costs around Rp140,000 (US$3,100). Crucially, this means that the car is no longer the one lakh car it was dreamt up to be. The 'one and a half lakh car' does not have quite the same ring.
These price rises are in direct response to surging raw material costs, especially in the two key commodities of rubber and steel. Ironically, it is partly the booming car sales in the two emerging Asian giants of India and China that has fuelled demand for these raw materials, which in turn has pushed their prices up.
Another reason for the Nano's sliding sales is the reports of fire or smoke within the car. Such reports first emerged shortly after the Nano's launch in mid-2009 and were the reason that many of its initial orders were cancelled. Stories continue to circulate, as does one particularly damaging photograph of a Nano that has spontaneously burst into flames.
Tata has been forced to take drastic action to avoid inventory levels of the Nano building up even further. Production of the car at Tata's Sanand factory, in Gujarat India, is said to have stood at just 71 cars a day during the month of November, or 2,000 for the entire month. The factory, which only opened in July 2010, is capable of building 250,000 Nanos a year.
The company is pouring money into various sales and marketing tactics to try and shore up Indian sales. These include more than doubling its warranty repair period to four years or 60,000km, up from its previous 18 months or 24,000km. Tata executives point out that this makes the Nano even more economical compared to rival products as owners get free repairs for years.
In response to the waning number of loans available to would-be Nano buyers, Tata is also working hard to put a number of financing programmes in place. For example, India's largest commercial bank, the State Bank of India, is offering seven-year loans to Nano buyers with extremely favourable annual interest rates compared to their standard loans.
The carmaker is even now targeting the purchasing power of its own employees with their own bespoke financing scheme. From the beginning of 2011, all Tata employees with a monthly salary of over Rp12,500 (some 25,000 employees) can buy the car on a four-year loan with annual interest rates of just 2%, and no processing fee. This compares with the 14% interest rate for a normal car loan. Repayments will be deducted from workers' monthly salaries under the scheme, which is even open to blood relatives of employees.
If these tactics work, then Tata may be able to overcome some the problems caused by its rising prices. But it will still be some way from making the Nano a success. The car's utra-low price was always dependent on exceedingly high volumes, which is why Tata is working so hard to keep up the car's sales momentum. Nor were the array of expensive sales, marketing and financing tactics included in the Nano's original business plan, and nor indeed surging raw material costs. The profit margins on this vehicle were always perilously low. Right now, they must be non-existent.