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Tata Motors Steers Into Ultra Affordable Cars

Tata Steers Into Ultra Affordable Cars

How can a car sell for less than $3,000? That's the price Tata Motors set for it's new People'smotor, this tiny car includes absolutely no extras-no radio, no reclining seats. What the People's car does have, however, is an ultra -low price tag. And that is what makes it very attractive to millions of potential buyers in India. Now "someone who never even dreamed of a car finds it within reach," says Ravi Kant, the CEO/ managing director of Tata Motors.
Racing to develop and market the world's cheapest car has been a challenge, even for manufacturer with as much experience as Mumbai- based Tata, which is India's largest automaker. The company began working on the People's Car in 2003 with the goal of creating a functional yet eye-pleasing design that would fit buyers' lifestyles and tight budgets and, at the same time, be profitable to manufacture and sell. The most essential ingredient was keeping costs inline to keep the car ultra- affordable.

Low Price, Low Costs
The first step in developing the People's Car was to establish an upper level for the car's price: roughly one lakh (100,000 Indian rupees), the equivalent of less than $3,000. To sell a car at this price, "you have to cut costs on everything -seats, materials, components?the whole package," says a Tata official. That's exactly what Tata did, using expertise gained from its years of marketing trucks, cars, and buses for markets in India, Europe, South Africa, Southeast Asia, and the Middle East. For instance, Tata sells its India compact car for $8,500 in eastern Europe.
The 33- horsepower engine of the People's Car may not win races, but it can get to a top speed of about 80 miles per hour. Thanks to low-cost parts and manufacturing, the cost of each engine is only about $700. In contrast, an engine made in the West can cost twice as much. By shaving the cost of each and component, streamlining assembly methods and offering only a stripped-down basic model, Tata has been able to achieve its low-price goal.

What's Driving the Market?
India's healthy economy is propelling millions of consumers into the middle class and accelerating demand for affordable transportation. As many as 65 million people currently drive small motor scooters in India, often carrying family members on the back. Some of these drivers will be able to trade up to new car if the price is right.
In fact, new-car sales are projected to double by 2013 to more than 3 million cars per year. Small wonder that Tata designed its People's Car with four doors to appeal to buyers who often have family members and friends riding along. Finally, India's population attract young first-time buyers with a low-priced model and maintain their loyalty as they graduate to higher-priced cars in the years ahead, the company will profit in the long term.

Competition on the Road of India
Competition is fierce at the low end of the car market. Maruti Suzuki India, which sells small cars starting at about $5,000, is the market leader. With its nationwide service network, high brand recognition, and new production facilities in the works, Maruti Suzuki is a formidable competitor.
Other rivals are also expanding to take advantage of this fast-growing segment of the market. Hyundai India, for instance, is opening a global center for small car manufacturing and adding manufacturing space. Its Santro sedan, which offers both air conditioning and power steering as standard features, sells for about $6,300. Volkswagen is creating a new subcompact for India, even as its Skoda division introduces the low-priced Fabia model there.
Toyota is designing a no-frills car that will sell in India and other emerging nations for under $7,000. In the process, the company expects to develop new technology that will help it cut costs on other vehicles in its global product mix. Honda has a plant in India and is breaking ground for a second plant right now. Meanwhile, U.S . carmakers are looking at how the might enter the market in the near future.
Renault-Nissan, one of the most aggressive competitors that Tata will face, is just starting work on a car to be priced at or below $3,000. The company knows a lot about low-cost, low-priced cars, because since 2004, it has produced its popular $7,000 Logan four-door sedan in Romania and Russia. Nearly half a million Logans are already on the roads of Europe, and even though Renault-Nissan's two plants are operating at full capacity all day, every day, the firm is still struggling to meet ever-growing demand. To shave costs, into Renault-Nissan limited the number of parts that go into the Logan and avoided expensive electronics. To speed development and eliminate the high costs of building prototypes, the company produced from digital design directly to production. This achievement alone saved $40 million and is one reason for CEO Carlos Ghosn's confidence that Renault-Nissan can succeed in the worldwide ultra-low price segment. "With the Logan, we have the product and we have the lead, " he says.

Environmental and Safety Concerns
As enthusiastic as Tata and other car manufacturers may be about marketing millions if tiny cars with tiny price tags, the car has generated both environmental and safety concerns. Some critics fear that broadening the base of car ownership will only add to the pollution problems in India's largest cities. Where national and local regulations do not require antipollution devices, manufacturers are unlikely to install them because of the added costs.
Safety is an issue because more cars on the road mean more traffic congestion and more opportunity for accidents. Cars made by Tata and its competitors comply with all of India's safety standards, but those standards do not require equipment such as air bags and antilock breaks. Safety advocates worry that people traveling in the smallest, lightest cars will be more vulnerable to serious injury if involved in a traffic accident. For now, the automakers are moving ahead as they monitor the issues and stay alert for possible changes in government regulations.

Getting in Gear
Can Tata score a big hit with the People's Car? Certainly the company has a long history of good marketing management and above-average profitability> Being based in India gives Tata the advantage of being close to its customers and understanding their needs. And Tata's engineers have found creative ways of containing costs to keep the new car ultra affordable. With competitors readying their own super budget models, however, Tata will have to get in gear to keep the People's Car ahead of the pack.

Questions for Discussion
1. Which factors seem to have the greatest influence on Tata's decision about pricing its People's Car? Explain.
2. What appear to be Tata's primary pricing objectives for the People's Car?
3. Assess the level of price competitions in India's car industry. What are the implications for Tata's marketing?
4. Why must Tata pay close attention to legal and regulatory changes when planning and pricing future models of the People's Car?

Solution Preview

CASE QUESTIONS:
1. Which factors seem to have the greatest influence on Tata's decision about pricing its People's Car? Explain.

a) General Company Objectives
• To create a functional yet eye-pleasing design that would fit buyers' lifestyles and tight budgets and, at the same time, be profitable to manufacture and sell.
• To keep the People's Car ahead of the pack (of competitors).
• To develop and market the world's cheapest car.

b) Company Strengths
• The company has expertise gained from its years of marketing trucks, cars, and buses for markets in India, Europe, South Africa, Southeast Asia, and the Middle East.
• Low-cost parts and manufacturing.
• The company has a long history of good marketing management and above-average profitability.
• Currently, cars made by Tata comply with all of India's safety standards,
• Being based in India gives Tata the advantage of being close to its customers and understanding their needs.
• Tata's engineers have found creative ways of containing costs to keep the new car ultra affordable.
• The company expects to develop new technology that will help it cut costs.

c) Tata's Power car features
• The product can get to a top speed of about 80 miles per hour.
• The car has generated both environmental and safety concerns.
• Currently, cars made by Tata comply with all of India's safety standards,
• Tata designed its People's Car with four doors to appeal to buyers who often have family members and friends riding along.
• People's motor car includes absolutely no extras-no radio, no reclining seats.

d) Demand Prospects
• India's healthy economy is propelling millions of consumers into the middle class and accelerating demand for affordable transportation.
• As many as 65 million people currently drive small motor scooters in India, often carrying family members on the back. Some of these drivers will be able to trade up to new car if the price is right.
• New-car sales are projected to double by 2013 to more than 3 million cars per year.

e) Competitive Situation
• Competition is fierce at the low end of the car market. Maruti Suzuki India, which sells small cars starting at about $5,000, is the market leader. With its nationwide service network, high brand recognition, and new production facilities, Maruti Suzuki is a formidable competitor.
• Other rivals are also expanding to take advantage of the fast-growing segment of the market.
• Hyundai India is opening a ...

Solution Summary

The solution discusses how Tata Motors steers into ultra affordable cars.

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