When Carlos Ghosn, the chief executive of the Franco-Japanese alliance of Renault SA and Nissan Motor Co., visited India early in 2007 to do a deal with Mahindra and Mahindra Ltd (M&M), he coined the term “frugal engineering” to highlight the ability of Indian engineers to produce more with less resources.
So taken up was Ghosn with the concept that he visited India later in the year to sign two more pacts, with Ashok Leyland Ltd and Bajaj Auto Ltd, for making small trucks and smaller cars.
What ticked his imagination and that of the rest of the world was what has come to be called the Tata Nano, the Rs1 lakh car from Tata Motors Ltd, which critics had dismissed as impossible to do.
“We have been able to build a small, well-packaged, very affordable four-door, four-seat car that is economical to operate,” said Ratan Tata just prior to formally unveiling the car.
Inside view: Interior shot of the Tata Nano. Company chairman Ratan Tata said the car was a result of no radical changes, no reinvention of the manner in which a car is produced. (Photo: Ramesh Pathania/ Mint)
Noting that “virtually everything was developed ourselves,” Tata said the car was a result of “no radical changes, no reinvention of the manner in which a car is produced. A host of small and medium issues that has made it possible.”
The key breakthrough is that his company was able to, in a “small space, package a car quite effectively,” he says.
Indeed, Tata Motors is now going to start selling—later this year—a car that is not only the cheapest but also boasts of an engine that will be ahead of its time in meeting emission norms within India.
Frugal engineering as a concept is nothing new, says I.V. Rao, head of engineering at Maruti Suzuki India Ltd, India’s largest car maker, which has been publicly sceptical of efforts to sell a car for Rs1 lakh. The company’s Maruti 800 is today the cheapest car on Indian roads, retailing for around Rs2 lakh.
“Volumes are lower in India compared with other markets, such as Europe and North America,” notes Rao. “So, we are used to being practical and sensible and look at the economically most viable things in terms of design and usage.”
He cites the example of piecemeal automation in Maruti’s factories, which have the same efficiencies and productivity as fully automated factories in developed markets. Labour costs in India are often as low as one-fifth of those in developed countries, and Indian firms use more manual input in production.
“There is no rocket science to it,” said Pawan Goenka, president, automotive, at M&M, which partnered Renault for making the Logan sedan. “It comes from a culture of not wasting anything.” Mahindra engineers, for example, were able to shave 15% off the cost of the Logan by adopting methods such as local sourcing of machinery equipment and tweaking vehicle specifications to meet Indian norms.
And nowhere is the impact of frugal engineering and its necessity more evident than in the race to build small cars at prices of $2500-3,000 profitably—something car makers have doubted, even as they wait for the next big thing in car making that will help keep cash registers ringing.
Car sales in the world’s largest markets, such as the US, Japan and in Europe, are either dipping or rising at under 5%, compared with double-digit growth in the emerging markets, according to statistics from the Organisation Internationale des Constructeurs d’Automobiles, an international grouping of auto makers.
Meanwhile, the passenger car market in India has grown at an average of 14% a year over the past three years.
“Frugal engineering is not about cutting corners to give a shoddy product,” said Rajat Dhawan, who consults on automobiles for McKinsey and Co. “About two-thirds of it is tailoring a product to the local market.”
This is what has helped a company such as Maruti Suzuki, which sells fuel-efficient, low-cost cars, and helped it retain a 50% market share.
“India’s car market, in which every seven of 10 cars sold are small cars to woo the majority first-time buyers, has grown at double digit rates to reach 1.4 million units in 2006-07. With oil prices touching $100 a barrel and SUV buyers trading in their gas guzzlers for more compact vehicles, worldwide demand for small cars is likely to grow by 30% to 27 million vehicles by 2013,” according to auto research firm CSM Worldwide Inc.
“Global companies who have entered India want to participate in the country’s growth and use it as a base for exports,” said Abdul Majeed, who consults on automobiles for PricewaterhouseCoopers.
While the first company to showcase a road-ready car was Tata Motors with its Tata Nano, others are also walking that path now. Bajaj Auto unveiled its small car prototype earlier this week, though with the caveat that the final car may look different when it hits the road in some four years.
Others, such as Toyota Motor Corp. and Chrysler Llc., have announced their intentions to build their cheapest cars ever as they try to increase market share in developing markets such as China and Thailand.
“People are now developing products for emerging markets, where the target cost is low,” said Manish Mathur, who consults on automobiles for AT Kearney and Co. “You have to figure out how to develop products for price-concious consumers.
Only seven of every 1,000 adults in India own cars compared with 12 in neighbouring Pakistan. Most of the customers are price conscious buyers looking for small vehicles with easy manoeuvrability and fuel efficiency.
One of Bajaj’s key focuses is on engine technology, where it hopes to apply techniques from its experience in two-wheeler manufacturing. The company hopes to make engines which are twice as fuel efficient than the vehicle that offers the maximum mileage today.
“The main issue is, how do you get the product to be smarter,” said Rajiv Bajaj, managing director of Bajaj Auto, in a recent interview. “Making a car that weighs two tonnes with a 2-litre engine and costs $20,000 is not the most sensible way to move a 70kg individual 20km a day.”
Bajaj said reducing the size of the car and limiting its performance in terms of power and speed are ways of cutting the cost of the vehicle, besides technology breakthroughs.
Indian companies are also spending more on research and development as they seek to become self-reliant in technology and explore new product categories.
R&D expenses have increased by as much as 70% over the past three years for companies such as TVS Motor Co. Ltd, India’s third largest maker of two-wheelers. As a percentage of net sales too, this number is closer to 2.5% compared with 1-1.5% a few years ago.