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Foreign Customer Preference: Tata's new $2500 car!

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Read about the $2,500 (new!) car that will be sold by Tata by the end of the year.
http://articles.moneycentral.msn.com/Investing/Extra/WorldsCheapestCarArrivesTomorrow.aspx
Think about the future of the international market. One issue that has come up is that this car will not be popular in a country like China.
For example, Newsweek: One key country hasn't bought into small-is-cool: China. SUV sales there rose 51 percent last year, big Buicks are all the rage, and small cars go begging. Tata predicted a Chinese automaker would be first to match the Nano's price, but analysts doubt it. "In China, image is more important than function," says analyst Michael Dunne of J.D. Power. "Nobody wants to be seen on the bottom of the totem pole."
http://www.newsweek.com/id/123068/output/print
Stephen Dyer, Principal, A.T. Kearney (Shanghai) Management Consulting: However that vehicle is more suitable for Indian market than it would be for the Chinese market, therefore I would not expect to see many Nano's here in China for a number of reasons. First, small vehicles, although in demand for the lowest market, certainly are not the long term future of the Chinese automotive market as it matures. We would expect that the demand for the mid-range vehicles would increase much more than the smaller vehicles, just due to Chinese consumer preferences.
Questions: Do you agree with the idea that the Chinese market for small cars will remain small compared to bigger cars due to customer preferences? Or is there some other explanation why the demand for small cars in China was growing slower than for larger cars? What would an economist say?
You can get per capita income figures about China (and other countries) from the CIA World Factbook: https://www.cia.gov/library/publications/the-world-factbook/

Additional insights from the Stephen W. Dyer interview:
Tata Nano not suitable for China
Stephen W. Dyer: So we've seen recently the development of the Tata Nano, which is a car that theatrically will cost at least a base version of US $2500. No one thought that was possible a year ago. People saw it as an objective, but they were very skeptical that it would be achieved. It's remarkable that Tata has achieved this objective. However that vehicle is more suitable for Indian market than it would be for the Chinese market, therefore I would not expect to see many Nano's here in China for a number of reasons. First, small vehicles, although in demand for the lowest market, certainly are not the long term future of the Chinese automotive market as it matures. We would expect that the demand for the mid-range vehicles would increase much more than the smaller vehicles, just due to Chinese consumer preferences.
Secondly, Chinese safety standards are very similar to European safety standards, they are not quite exactly the same, but they are essentially based on the European safety standards. There are significant questions whether the Nano could achieve the safety standards to compete in the Chinese market.
Gasgoo.com: Do you think the distribution method of the Tata Nano wills also function in China. It is said that the Tata Nano is sold in a MacDonald's way. Tata deliver the auto parts to a dealership, the dealership assemble and then sell them. Do you think the sales method, not the product will make sense in China?
Stephen W. Dyer: If we think about models for automotive industry, one of the very innovative models is to think about mass customization, which means developing a vehicle that could be quickly and easily assembled as close to the customers as possible, to satisfy the needs of each customer. This is very difficult in practice on a large scale, especially as the technology in the vehicles and the safety requirements and the emissions requirements increase, there is a lot of manufacturing and assembling expertise that is required to assemble such a high standard automobile. If we think about the sales model in China, it's very similar to the European and U.S. models; at least the government's intention is to increase the standardization of the selling models within China to approach that of western countries. I would see that is a continuing trend, I would not see a trend of on-site assembly of vehicles in China; I would see it mainly mimicking the modeling of the U. S. or European sales model.
Gaasgoo.com: I think that is a very effective way to cut cost, such as the logistics cost. Also according to local news report, Tata is considering online sales for Nanos. Do you think that is an innovation?
Stephen W. Dyer: After-sales service is usually supplied by the dealers. So that is not innovative. But if what you are saying is true, if the vehicles are shipped in pieces to the dealers, that is definitely very innovative. And I could see how logistics cost and inventory would be improved, because the dealer is able to assemble and customize a vehicle, if that's the case, in different colors, different configurations, certainly that's very innovative. The question in my mind is how that would impact quality. In the more mature market, that method may be difficult to succeed with, because of the potential negative impact on quality if you have vehicles being assembled by a network of dealerships throughout the country, it's very different to control how well those vehicles are assembled. Therefore it would be a serious risk to adopt such a practice in a market in which quality is better understood and expected.
Gaasgoo.com: Maybe Tata Motors would send some technicians to the dealerships. And they have received serious training before doing the on-site assembling and sustaining.
Stephen W. Dyer: The reason that automotive plants are of certain size is that there are economies of scale. Some of the economies of scale relate to having a pool of workers that are flexible and interchangeable, so that you can produce high volume quantities of vehicles at a very low cost. If you are producing vehicles at a dealership, the volume is very low, so the productivity there would also be very low. Right now that may make sense in terms of cost effectiveness and quality, because for one thing labor cost potentially of those technicians is still very low; secondly, the consumers that are buying the Nano is not as focused on quality as consumers that are buying a higher end vehicle. For that vehicle, it may make a lot of sense to adopt such a late-stage assembly method. But it may not make as much sense for a higher end vehicle; it may not make as such sense as the Indian labor cost increase. But now, if that's the case, indeed it's highly innovative.

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Dear Student,

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Anna Liza Gaspar

ANSWERS

Questions: Do you agree with the idea that the Chinese market for small cars will remain small compared to bigger cars due to customer preferences? Or is there some other explanation why the demand for small cars in China was growing slower than for larger cars? What would an economist say?

I do not agree that the Chinese market for small cars will remain small compared to bigger cars due to customer preference, however I do believe that the growth in this segment of the market might grow at a rate slower than that for larger ...

Solution Summary

This solution of 413 words provides the argument against the idea that the Chinese marketing for small cars will remain small compared to bigger cars due to customer preference. References used are included.

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