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BUSINESS | CARS
What the failure of Tata's Nano teaches us about aspirational purchases in the developing world
Before the Tata Nano ever hit the roads, environmentalists issued ominous predictions about the impact of the world's cheapest car. If Tata Motors achieved its goal of shifting to the Nano some of the 13 million Indians annually who buy motorcycles, it would add hundreds of thousands, if not millions, of cars to the country's congested roads every year. Global efforts to cut carbon emissions and curb climate change would be for naught. The Nano became an emblem of the Malthusian downside of emerging-market success: increasing pressure on the world's limited resources.
We can all relax now. More than two years after the first Nano rolled out of the factory in July 2009, only 130,000 have been sold, and its monthly sales figures in India are well below those of more expensive vehicles like the Maruti 800 and the Ford Figo, popular brands in the next highest category of small, cheap cars. When Tata Motors launched the Nano, it was so concerned about being unable to meet demand that it offered prebooking and drew up a waiting list. This year the company even resorted to offering $400 cash discounts to perk up sales before the big Diwali holiday on Oct. 26.
Why would the world's cheapest car need a discount? Auto analysts recite a litany of missteps and just plain bad luck, from a supply chain disrupted by political protests to a safety scare to pricing that didn't quite hit the promised 100,000-rupee threshold to a market strategy that underestimated just how upwardly mobile Indian society has become. The resulting tale offers surprising lessons about developing-world markets: that price isn't everything and that creating aspirational homegrown brands, as well as entirely new consumer markets, is a tricky business.
The Nano's problems began well before production, when farmers who had been displaced by the original Nano factory in the eastern Indian town of Singur held a series of protests over inadequate compensation offered by the state, which has the right to acquire farmland for industrial development. Construction continued despite the controversy in Singur, which eventually became a cautionary tale of how India's outdated land-acquisition laws are stifling growth. After several violent clashes between police and protesters, Tata Motors chairman Ratan Tata abruptly shuttered the Singur factory. He decided to build a new one in the western Indian city of Sanand and insisted that the Nano would be launched as planned in spring 2009. The only way to do that was to temporarily shift operations to an existing plant and slash the first year's production target to 50,000, from 250,000.
That disruption may have undermined the original premise of the Nano--a car at a price competitive with motorcycles'. Abdul Majeed, an auto-practice leader for PricewaterhouseCoopers in Chennai, says that despite the worldwide publicity for the one-lakh, or 100,000-rupee ($2,000), car, the actual tab after taxes, transportation costs and basic add-ons like air-conditioning was closer to $3,700. With reduced capacity, Tata Motors could not get the volume needed to maintain the promised price. At the higher amount, the Nano was competing not with motorcycles but with established small cars like the Maruti 800, which begins at about $4,500. If customers can get "a slightly better vehicle for not much more money," Majeed says, they will, and Nano's edge disappears. "I think the fundamental reason is pricing."
Tata Motors rejects that criticism, saying surveys show customers are satisfied with the pricing. The one-lakh figure, says a spokesman, was just a goal for the engineers, but it was always meant to be the base price for a car fresh off the factory floor.
Fairly or not, the Nano's nickname reflects its extreme engineering. Not only were the usual compact features stripped out, but the Nano was also designed and built from scratch, minimizing curves and the number of components in order to simplify production. Its widely admired engineering wasn't enough, though, to get people to buy it. Tata Motors had 200,000 preorders for Nanos in the months after the launch, but with so few cars in production, each sales outlet had just one Nano. Dealers were not allowed to send them out for test drives, so customers could only look at the car. A mere 30,000 Nanos were sold in the first year.
Tata Motors also didn't bother to advertise the car right away, so the only message that potential customers heard was the worst possible kind: there were at least six reported cases of Nanos catching fire, in one instance while the owner was driving the car home from the dealership after purchasing it. (No one was injured.) Murad Ali Baig, an auto analyst and columnist in New Delhi, says the company did not give a clear explanation quickly enough about what happened to the cars. That lack of clarity, he says, "created a great deal of anxiety that the car might not be as safe as it's cracked up to be."
Tata Motors, which claims the car is perfectly safe, eventually traced all the problems to "foreign objects" that had gotten lodged in the car or unauthorized equipment that had been installed. The company also added a shield to the catalytic converter, which gets very hot, to reduce the risk of combustion. Still, the damage was done. By November 2010, monthly sales had dipped as low as 509 units.
The Nano's first marketing campaign--which began in December 2010, to coincide with the beginning of nationwide open sales--tried to right things with ads that stressed the practical virtues of the car: its sturdiness and its fuel efficiency. Television commercials stressed traditional life and middle-class respectability, a vision of an India where an entire village turns up to greet its first Nano and where parents wait for their children to fall asleep in the car before holding hands.
Yet this strategy was out of step with that of the Nano's stated competition, India's most successful motorcycle makers. In one slick ad, the Bollywood heartthrob Hrithik Roshan descends from a moving helicopter, action-hero style, while on a Hero bike. In another, movie star Priyanka Chopra plays a sassy small-town belle who takes a hapless suitor for a ride on her cherry-red Pleasure scooter, then ditches him with the tagline "Why should boys have all the fun?"
Critics of the Nano's ad campaign say it missed a big part of the reason Indians buy cars: they aspire to a life that's more glamorous than the one they know. Even those who have bought Nanos reflect that, since 38% of them opted for the most expensive model and only 20% went for the basic one. "The Indian market has shown that it's willing to move up," says Baig. "Money isn't everything." Baig, who drives a Nano in his posh South Delhi neighborhood, says Tata Motors would do better to aim its marketing at consumers like him, a small but influential group of "reverse snobs" who can afford any car but like the Nano because it's famous and convenient. A few high-profile Nano drivers among India's 190,000 millionaire households might do a lot to popularize it among the country's 100 million-strong middle class--a market that has doubled over the past five years, according to Goldman Sachs.
Meanwhile, Tata's competitors are starting to figure out the complexities of the Indian mass market. Ford, for example, has avoided the ultra-low-cost-car category in India and has sold 115,000 of the $7,500 Figo since its launch in March 2010. Michael Boneham, managing director of Ford India, estimates that 70% of the Indian car market lies in the $7,300-to-$12,200 range. "Beyond that, the volume drops off pretty quickly," he says. In marketing the Figo, Ford emphasizes the advanced technology, like Bluetooth, available even at the low end. "This perception that Indians want cheap is a little misleading," he adds. "They didn't need to go in at absolutely the very lowest level. They want to demonstrate to their friends and family that they're succeeding."
Tata Motors defends its marketing strategy and says all it has to do to get sales going is get the Nano closer to where the target customers are, in small towns and villages. Nearly all of its 619 sales outlets are in big cities, so the company is trying to expand into towns with populations under 500,000, opening locations that sell and service only Nanos. Six are in operation so far, with 300 more planned by the end of 2011. "Had we been able to enter the market at full capacity, all this would have taken place much earlier," the Tata spokesman says. "We set a certain footprint. Now we have to expand that footprint." A bigger footprint is crucial to the Nano's business model. Majeed estimates that Tata Motors would have to run its Nano factory at 80% to 90% of capacity to make a profit because margins are so low.
For now, Tata Motors is trying to boost production by selling Nanos in other parts of the subcontinent where market conditions are similar to India's, with motorcycles far outnumbering cars. But even in places like Sri Lanka, where 700 Nanos have been sold since May, there are image problems. Nayanajith Thilekarathana, a businessman in Colombo, bought a Nano recently for about $10,000. (The bigger tab is due to Sri Lanka's extremely high import duties.) The Nano is significantly less expensive than other imported cars, but after several local taxi services started cruising the streets with GPS-equipped Nanos, it acquired a new label. "I have had people coming to me asking whether this is 'that taxi car,'" he says with disgust. "People still want a vehicle to be a status symbol, and that sometimes overrides convenience and economics."
As any number of emerging-market companies--from Japanese electronics makers like Sony to Korean car giant Hyundai and, more recently, Chinese appliance makers like Haier--can attest, building a great brand takes time. "This is a 10-to-15-year process," says Ashish Singh, chairman of Bain India. For now, Tata Motors' first step will be replacing Carl-Peter Forster, who abruptly resigned as CEO in September because of "unavoidable personal circumstances" after less than two years at the company. Tata Motors claims it's in for the long haul, and it has plans to launch a version of the Nano for Europe, the Tata Pixel, within three years, aimed at space-squeezed urbanites coping with recessionary budgets. Given its economic problems, maybe Europe is the continent where austerity will trump emotion.
38%
Percentage of Nano owners who buy the most expensive model
13 MILLION
Annual number of motorcycle buyers in India. Tata Motors hopes to capture some of that market
PHOTO (COLOR): NO, THANKS Sales of the touted "people's car" have been low
PHOTO (COLOR): Under fire Protests erupted after Tata Motors acquired land for a Nano factory in Singur
PHOTO (COLOR): Small achievement Tata Motors chairman Ratan Tata at the Nano's launch in 2008
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By Jyoti Thottam, New Delhi
With reporting by Amantha Perera, Colombo
Copyright © Time Inc., 2011. All rights reserved. No part of this material may be duplicated or redisseminated without permission.