Monday was the debut of the long awaited Tata Nano, India’s answer to the Model T. Initial reviews are favorable, with reviewers impressed by how normal a car the Nano seems to be, given its small size, engine and cost (via anatha):
Even the green crowd seems accepting of the new vehicle. While Greenpeace protestors picketed the announcement of the car, Ratan Tata claims that the Nano is less poluting than many two wheel vehicles on the market and even UN Framework Convention on Climate Change executive secretary Yvo de Boer said,
“I am not concerned about it (the Tata Nano) because people in India have the same aspirational rights to own cars as people elsewhere in the world.” [link]
So it’s a lot of car for the money and it’s green. What I don’t understand is the business side of the equation. Can Tata make money on this car? And if not, will the Nano and Tata motors survive?
As typical with new models, Tata is taking a loss on each Nano it ships. Tata has admitted that it will only be profitable in the long run, once efficiencies of scale kick in to drive the cost per unit downwards. However, while Tata aspires to produce a million cars per year, right now they can only make 50,000.
Once the new factory in Gujarat opens up, they hope to make 250,000 cars per year, but even then it’s expected to only add 3% to revenues. It’s going to take more than six years for Tata to break even on this car at that rate, and I suspect that’s an optimistic projection.
Meanwhile, Tata is in a weak financial position. On Tuesday, S&P lowered Tata’s ratings from B+ to BB- and indicated that further downward revisions were in the offing. This pushes Tata’s bond ratings further into junk territory just as it is struggling to refinance $2 Billion of the $3 Billion bridge loan it took to finance the acquisition of Jaguar and Range Rover.
I can think of two ways the Nano will have a positive effect for Tata:
The Nano is providing a cash infusion in the form of deposits for new cars:
Right now, you have to pay for the car up front, even though supply is limited. There will be a lottery to determine the first 100,000 customers, so many customers will have paid down a deposit without getting a vehicle in return. If you don’t get a car right away, you can get your money back or you can leave it with Tata who will pay you 8.5% interest on the deposit. All of this brings in a massive amount of cash
Despite its constrained production run, the company has set no limit to the number of people who can apply…Suppose the initial allotment of cars is subscribed twice over: Tata Motors will get an immediate cash infusion of more than 20 billion rupees. If it can sustain the hype and expectations, it won’t have to return this booking money to the surplus customers. It will, in effect, have secured for itself a cheapish source of deposits, redeemable for a car, as production allows. [link]
This is clever, but at even with such an optimistic scenario, it brings in only a half a billion dollars when their debts are much larger than that.
The Nano is a massive branding and publicity exercise:
the Nano project as a whole makes more commercial sense than the basic car considered by itself. If nothing else, it has been a phenomenal branding exercise. As Ravi Kant, managing director of Tata Motors, put it yesterday, the Nano has become a “happening product”, attracting 30m hits to its website and inspiring online communities at Orkut and Facebook. The company hopes to make money from merchandising, selling every frippery you need to pimp your Nano, as well as T-shirts, bags, key-rings–even a Nano teddy bear. [link]
The publicity from the Nano is huge, but there are limits to the amount of money they can make on Nano Schwag. And while they are getting a reputation as an innovative company that makes good cheap cars, I’d think this will hurt them with Jaguar and Land Rover buyers who don’t want either association with their pricey old-school vehicles. I really think they might burn themselves in terms of marketing – I don’t think they can be known for Nano and still try to sell to the luxury market.
Honestly, I’m baffled. Any thoughts? What am I missing?