Ratan Tata has often proved his critics wrong in the past. The unveiling of the Tata Nano in New Delhi on Thursday is yet another victory for him.
Many had scoffed at his dream of producing a car for as little as Rs1 lakh. Tata has punched his critics in the face by showcasing a car that meets safety norms and is ahead of India’s current emission standards. He also took a few good-natured swipes at environmentalists who fear that a cheap car will lead us into a gridlocked and polluted hell. The car’s a good looker as well.
Car markers will be scrambling to their drawing boards and trying to assess what this new vehicle will do to the structure and costing of the global automobile industry.
Round 1 has been settled: Ratan Tata and his team have given us the world’s cheapest car, though the final price paid by the consumer is likely to be a little more than Rs1 lakh because of taxes and dealer margins. Round 2 will not be about engineering and innovation, but about profits. It is hard to know right now whether the Tata Nano can be sold at a profit. Till then, Tata Motors’ bet will continue to be a risky one and will have to be bankrolled by cash from the profitable trucks business. A similar bet on the Indica had turned dangerously sour at the beginning of this decade. The initial development and manufacturing costs of that car were an expected strain on the company’s finances. But an unexpected downturn in truck sales pushed Tata Motors into a Rs500 crore loss.
It is quite clear that Tata Motors has created a new price point in the global car market by challenging some of the core assumptions of the automobile industry. A car that can be profitably made and sold at below $2,500 to consumers can put the spark back into a tired auto industry—and grow the entire market many times over.
Besides local companies such as Bajaj Auto, Tata’s small-car dream has even inspired Carlos Ghosn, the turnaround man in the global automobile business, to say he wants to explore frugal engineering opportunities in India. What Ghosn probably really meant was frugal costing, which only comes with no-frills designing. He isn’t called “le cost killer” for nothing.
Ghosn successfully turned around Nissan Motors from a debt-laden company to a profitable one in the early part of this decade, but Nissan’s profit is now shrinking despite rising sales. Margins are thinning, though it’s a long way from joining the loss-makers club led by General Motors, the world’s biggest car maker.
Car makers big and small are struggling to stay profitable. A few, such as Toyota, have done so by reinventing themselves with innovations such as greener engines. But the vast majority is losing shareholders’ money—because the market is too competitive and there are too many also-rans. Building cars is hard and expensive work.
Outsourcing to low-cost countries such as Brazil, China and Thailand may have delayed the day of reckoning for many auto companies that have been struggling with low growth and anaemic profits. But this industry was ripe for innovation. Part of that is being done through advances in fuel technology and the launch of hybrid cars. But Tata Motors has radically reinvented product design, logistics, distribution and much else. This could prove to be an inflexion point for an entire industry. It’s a proud moment for the company.
The launch of the Tata Nano is also a signal for the rest of Indian industry to innovate and reap the benefits of the ongoing shift in global economic power. Hundreds of millions of Indians and Chinese are rising out of poverty. They need cheap and relevant products and services. The market is a huge one. The Tata Nano should be the first in a string of innovations from domestic industry, hopefully.
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