India will signal to the world a very tentative arrival as the next hub for global disinflation as Ratan Tata unveiled his $2,500 (about Rs1 lakh) car, the cheapest ever.
If the “People’s Car”, as it has been dubbed by the media, is successful, makers of mass-produced goods from computers to microwave ovens will be forced to consider using India’s engineering prowess to rewrite their definition of affordability.
As food prices continue to soar globally, it’s going to be impossible to keep labour costs down in emerging markets. Material and energy costs, too, will be hard to control. After giving a price discount to the world in labour-intensive manufacturing, China is currently taking a breather. Chinese domestic inflation is at its highest in a decade and its exports are becoming progressively more expensive.
The next impetus for long-term disinflation may come from engineering innovation of the kind that the West won’t attempt because it doesn’t think it’s either important or profitable.
And yet, affordability holds the key to tapping what Boston Consulting Group calls the world’s “next billion consumers.” Not exactly at the bottom of the pyramid and not really middle class by Western standards, these customers “sit just above the poorest of the poor and just below the group currently targeted by commercial enterprises,” the consulting firm says.
Every time someone like Tata, who has only a 10-year history of making cars, decides to go after this market, critics snigger. Sceptics have already begun doubting if a $2,500 car can ever meet Western standards of safety or environmental protection.
But they are missing the point: This isn’t a product for the West. It’s aimed at a family of four that’s currently forced to use a motorcycle or a scooter because it can’t afford even the cheapest car on the roads and there’s no reliable public transport where it lives.
This isn’t the first time Tata has faced naysayers. In January 1998, Tata unveiled a small hatchback—India’s first manufactured car of its own—at an auto show in New Delhi.
The “Indica” was a $400 million gamble for the Mumbai businessman, who had succeeded his uncle as the head of the salt-to-software conglomerate seven years earlier. Sceptics wondered if at 60, Tata was taking too big a risk with a business in which he—indeed the entire country— had no expertise. Tata Motors Ltd rolled out its one millionth car in November last year.
Tata’s decision to go in for a fully locally built product, followed by Indian tractor maker Mahindra & Mahindra Ltd’s success with the Scorpio, a sport utility vehicle developed domestically, had a profound impact on the way the global auto industry came to view India.
The country’s underappreciated engineering capabilities began to be discovered. The process is still in its infancy, but at least it has begun.
“There are already signs that auto makers are choosing to use India’s auto-engineering potential to cut the high cost of design as auto-model lives shrink and the imperative grows to innovate at lower cost,” New York-based consulting firm KPMG Llp said in a recent report.
That, in fact, is a successful template, which India can use to create large-scale employment in almost any industry where engineering skills are important.
It’s also a prospect that can be easily squandered if the government doesn’t address the challenges posed by shortages: From roads and ports to skilled managers, many of the ingredients that are required for making India a thriving auto hub are constrained by their limited supply.
The next billion
“There are still not many ports you can export from, and the feeder rail lines to those ports that exist are insufficient,” Rajiv Dube, president of Tata Motors’ car business told KPMG.
Together, autos and autoparts are a $34 billion industry in India. That’s tiny by global standards, but growing very fast at 17% a year.
There’s a good chance of India becoming a worldwide production centre for 3.4m- to 4m-long mini and small cars, for which there is a big domestic market and potential in Europe, Japan, South-Eeast Asia and Africa, KPMG says.
That may well happen if Tata’s $2,500 car catches the fancy of customers from Thailand and Turkey to Nigeria just as it has of the global media.
Economists generally agree the US consumer won’t—and shouldn’t—forever remain the world’s consumer of first resort.
There are more than a billion people in the rest of the world who are at the cusp of explosive consumption growth. But someone has to first make the goods that they can afford. Simply waiting for consumers to become more affluent before they can be sold Western-style goods is to pass up the profits that are going to be made serving them now.
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