Nano brings pride, but profit?

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):

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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]

In addition, the Nano already gets 70mpg, and there are discussions of an electric model in the future.

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?

68 thoughts on “Nano brings pride, but profit?

  1. “..certainly if the nano is really less polluting than a 2-wheeler then a case can be made that it is less polluting – I haven’t seen any hard statistics or claims that it is.”

    i’ve read that the nano is less polluting. according to a discover magazine article from last year: (http://discovermagazine.com/2008/may/21-two-strokes-and-youre-out)

    “A single two-stroke engine produces pollution equivalent to that of 30 to 50 four-stroke automobiles. With roughly 100 million motorcycles in Asia—roughly half of them using two-stroke engines—that translates into as much as 2.5 billion cars’ worth of smog. “

    two-wheelers account for 76 percent of india’s vehicles, so if they were replaced by nanos, pollution would decrease. but other problems will get worse – congestion being the most obvious one. everything is both a solution to something and a problem to be solved.

    according to another article: “Tata Motors, which is working with a French firm on using compressed air as fuel, has signed up for the Progressive Automotive X Prize, a $NZ13 million competition to build the first mass-produceable 100 miles per gallon (42km/litre) energy-equivalent vehicle.”

    “However, I absolutely reject the approach embodied in the quote that I parodied, that means we must ape Western consumption patterns uncritically.” “I am not going to advocate supporting anything that is basically going to encourage these classes to commit a form of environmental suicide in the long-run.”

    i don’t think i nor anyone else here is saying that. but right now the genie is out of the bottle and unless we stop taunting the poor with visions of us riding around in cars, or prohibit them from watching television filled with nothing but glamorous ads for cars, tvs, washers and other mod-cons, they are going to aspire to be like others. how can we then say “do as we say, not as we do because it’s really bad for you?” perhaps tata was wrong to build the nano, but if not tata, someone else would have. but perhaps it will spur more innovative, environmentally-friendly solutions.

    of course the nano is not chiefly about looking out for the environmental concerns of the poor. but neither are cell phones, tvs and computers. most of these end up in polluting toxic recycling outfits in the developing world, often dumped there by the wealthier countries or the wealthier in each country. and it’s the poor who end up handling them in abysmal conditions. should cell phones and tvs and computers be withheld from poorer countries and especially poorer people in those countries until and unless they enforce stringent environmental conditions? perhaps so.

  2. also from the discover article:

    “Bryan Willson, director of the Engines and Energy Conversion Laboratory at Colorado State University (CSU) in Fort Collins, has cofounded a start-up, Envirofit, that sells a retrofit kit for two-stroke engines. The technology reduces hydrocarbon emissions by almost 90 percent while increasing fuel efficiency by as much as 35 percent. The first 400 kits were made available in the Philippines last fall. The U.S. Environmental Protection Agency (EPA) awarded Envirofit a contract to retrofit two-stroke auto-rickshaws in Pune, India, and is spending about $100,000 to test the Envirofit kit there this year. “We’re sponsoring a pilot program to see if conversions are a viable technology solution for these vehicles in India,” says Margot Perez-Sullivan, a spokeswoman for the EPA. The goal is to have 15,000 retrofits in Asia by the end of 2008.”

    so maybe not everyone will buy a nano. perhaps those without families would prefer to stick to a two-wheeler.

    “”as one indian auto analyst pointed out, in india a car meant for 5 will probably seat double

    Yeah, and how safe is this exactly?””

    • not saying that it’s safe or advisable, just pointing out the mentality of those who would probably use it as a real family car may last for awhile, until the average indian also decides everyone in the family should have their own car 🙂
  3. The indirect effects on pollution, through increasing congestion, may well be greater than the direct effect of putting some new cars on the road. And, as an aside, I doubt the two wheelers would be retired. They’d either remain within the family to give added flexibility, or they would be sold to people who could not previously afford them.

    Also, I think it’s wrong to think of a car as something that people want just because they’re aping westerners. Many decades ago my grandfather had a bicycle which he rode around the pind. Sure, he gained prestige by it but it also let him cover more distance in a more convenient fashion than walking. For people in villages, distance is one of the major factors contributing to their low standard of living. Transportation isn’t a luxury, it’s an important element of productivity. Whether it’s buses, cars, or train, people do need to get around.

  4. Will the Nano help with increasing spending and demand on roads and infrastructure ?

    In the US there was a huge boom in roads and highways in the mid-twentieth century. Everyone knows the image of the American Dream, getting on the highway in your convertible to drive wherever you want and be the master of your own destiny. Cars and the automotive industry really defined the image of middle class americans post-WWII. Will we see something similar in India ? Highways being built from North to South – proper roads from pind to pind ? I am sure many here have spent hours in a Scorpio or Jeep bouncing around on horrible roads to get to relatives living in remote regions.

    Has the government committed to ramping up to accommodate the influx of drivers ? I am sure even pre-Nano with the larger middle class and economic boom, there are probably already huge numbers of new drivers. And if the roads are built, as some have mentioned – will there be more done to improve road etiquette / basic driving skills ? Will lories get their own lanes so you don’t have to honk all the time ? AWAAZ DHO !!

  5. Many people worried about the Nano’s effect on climate change miss an important detail in the global warming forecasts. The Intergovernmental Panel on Climate Change consensus forecasts all assume that the population of India (and China, and other developing economies) will acquire and use automobiles at a vastly accelerated pace relative to the past. The baseline assumption for per car CO2 emissions by these cars is assumed to be greater than that of the Tata Nano. The baseline forecast’s estimate for the total number of these newly acquired cars in these societies is also, of course, vastly larger than the number of Nanos expected to be manufactured. So every Nano that gets sold reduces CO2 emissions in the future, relative to the baseline global warming consensus forecast that the scientific community (in particular, th IPCC) uses.

    If you were to read some of the more ‘progressive’ commentary on the Nano in the Western press (such as the Guardian newspaper) you pick up the distinct whiff of disdain for the prospect of the poor of the world flocking to buy cars, en masse, totally ruining the carefully laid plans of the concerned and enlightened community to battle global warming. Nothing could be further from the actual facts.

  6. A lot of people are under the impression that the Indian auto market is somehow unique. It is not. While all various markets on both a national and regional level have their own particular nuances and preferences, patterns in consumer decision making when it comes to aspirational choices are near universal. The U.S. auto market is littered with numerous now defunct car makers that died in the golden years of the auto market because they failed to understand the logic or often illogic behind consumer choice. There are numerous other markets similar to India’s in the developing world, and the trends are crystal clear. People prefer bigger and more ostentatious cars just like the Americans and sub-sub-subcompacts like the Nano are generally avoided unless neccessary. $2500 is not that far from $5000, and people are willing to pay more for more car. The Nano is an economic dead end as it is competing in a highly competitive niche that also tends to be temporary (due to many hungrier emerging competitors) while simultaneously damaging the marketing perception of other mid-value Tata autos. The Nano is essentially one giant vanity project for Ratan Tata. That is not to say vanity projects from enormous egos cannot be successful, but then again Henry Ford was competing against the likes of Toyota back then.

  7. I like the tubeless tires on the Nano. Imagine if Tata made an electric Nano and a hybrid Nano and sold them for less than $5000. That could be a game changer. Globally.

  8. $2500 is not that far from $5000, and people are willing to pay more for more car.

    !!! To say this in a commment about how people and companies don’t understand the Indian car market is ironic. The Indian middle class (i.e. the top 10%) has a per capita income of about $1,800 per year – the people in the bottom 50% of that and below don’t think doubling the price of a $2,500 car matters?

  9. Dizzy Desi – thanks for those figures, I will need to look at them further; this is one part of the problem I haven’t considered too much.

    two-wheelers account for 76 percent of india’s vehicles, so if they were replaced by nanos, pollution would decrease. but other problems will get worse – congestion being the most obvious one. everything is both a solution to something and a problem to be solved. This assumes that 2-wheelers would be replaced by the Nano; which I think is an assumption that would need to be looked at. 2-wheelers are popular for a number of reasons in India and not every owner will be a family of 5 that would be eager to upgrade to a Nano. Secondly the figures cited in that study look at Asia as a whole and the aggregate market. I think as the article later points out one could easily institute a scheme to convert the two-stroke 2-wheelers into more efficient engines. i don’t think i nor anyone else here is saying that.

    I think if you look at some of the comments, like Alberuni’s they pretty much are saying that. of course the nano is not chiefly about looking out for the environmental concerns of the poor. but neither are cell phones, tvs and computers. most of these end up in polluting toxic recycling outfits in the developing world, often dumped there by the wealthier countries or the wealthier in each country. and it’s the poor who end up handling them in abysmal conditions. should cell phones and tvs and computers be withheld from poorer countries and especially poorer people in those countries until and unless they enforce stringent environmental conditions? perhaps so.

    It is not a zero sum game; we can improve on both fronts now. And no one said the Nano should be banned or anything; I just think it is a bit farcical the way people are trying to sell it as a big environmental leap forward for everybody when it isn’t. Problems like toxix recycling can be handled fairly straightforwardly, since rich countries don’t allow their citizens to run the risks of dealing with them but poor countries do. Until the latter start valuing the lives of their poorer members more then things won’t change. Which of course they should do. Also, I think it’s wrong to think of a car as something that people want just because they’re aping westerners.

    Actually you have misinterpreted (somewhat wilfully, it must be said) what I actually stated. I said we should not “ape Western consumption patterns uncritically� this does not mean that we can’t desire the same goods, we just can’t afford to produce, consume and dispose of them the same way as has been done in the past by Western countries; who were very unaware/uncaring about the ecological costs of doing so. We should aim for a high standard of living without necessarily having to follow the exact same model; I think some of the co-operative and regulatory changes being put in place in countries of Europe and SE Asia are more relevant for us; which of course need to be adapted to local conditions. For people in villages, distance is one of the major factors contributing to their low standard of living. Transportation isn’t a luxury, it’s an important element of productivity. Whether it’s buses, cars, or train, people do need to get around.

    Yes, I am well aware of the importance of transport for the rural sector; since rural development is what I have been studying for the last decade. Spending on roads is actually, for every rupee spent, the most poverty reducing form of expenditure the govt can engage in outside the short-term. However, I don’t think the problems of the rural poor will be solved by the Nano. The baseline forecast’s estimate for the total number of these newly acquired cars in these societies is also, of course, vastly larger than the number of Nanos expected to be manufactured.

    You are going off what the current figures are which were considerably revised downwards from initial estimates after the worsening economic conditions (I actually think final sales will be even lower but that is a separate topic). Initially the thinking behind the Nano was to accelerate the pace of car ownership and your assumption only holds true if every Nano owner would have gone for a higher polluting alternative in its absence. Given that part of the motivation behind the Nano was to ensure that car ownership spread to those who were not car owners and for whom under current prices were not able to own cars; I don’t think this is a valid assumption.

  10. To say this in a commment about how people and companies don’t understand the Indian car market is ironic. The Indian middle class (i.e. the top 10%) has a per capita income of about $1,800 per year – the people in the bottom 50% of that and below don’t think doubling the price of a $2,500 car matters?

    he..he.. Dr. A. well said.

    I think Tata Nano will be a winner. Owning a car is something aspirational. Anyone who can afford a Rs 50,000 two wheeler can just push a little further and get the comforts of owning a car. But the explosion of cars would cause undesirable side effects, screwing up the Indian cities’ pathetic infrastructure even more.

  11. Most Americans will see this thing as a death trap. A diesel car could easily get better mileage without sacrificing safety. It will never fly over here.

    Whatever happened to TATA’s compressed air car? That is a great idea. Most gas stations are already set up to deliver compressed air. Would be much more efficient than any sort of electric car.

    We need to get over our hybrid fetish. The battery technology just isn’t there.

  12. We need to get over our hybrid fetish. The battery technology just isn’t there.

    “We need to get over our moon landing fetish. The rocket technology just isn’t there.”

  13. Its interesting that folks from societies with lots of choices sound dissaproving that lower-middle class indians have a new transportation choice. Instead we have all kinds of mumbling about air-powered cars and other new technologies that likely can only originate from richer countries. On the other hand, countries like india can excel in the intelligent low-cost application of existing technologies to solve their specific problems. This is what the chinese have done in many different contexts. And this is exactly the nano achievement 🙂

    Koschei output sounds a lot like what the GM people might have said when Toyota introduced the Corolla in the 60s.

  14. Its interesting that folks from societies with lots of choices sound dissaproving that lower-middle class indians have a new transportation choice.

    But if we give the darkies choices and capabilities they might choke on the sweet air of freedom! They are too savage and barbaric to make responsible consumption choices. Not at all like our responsible former masters.

  15. 54 · GurMando said

    Will the Nano help with increasing spending and demand on roads and infrastructure ? In the US there was a huge boom in roads and highways in the mid-twentieth century. Everyone knows the image of the American Dream, getting on the highway in your convertible to drive wherever you want and be the master of your own destiny. Cars and the automotive industry really defined the image of middle class americans post-WWII. Will we see something similar in India ? Highways being built from North to South – proper roads from pind to pind ? I am sure many here have spent hours in a Scorpio or Jeep bouncing around on horrible roads to get to relatives living in remote regions. Has the government committed to ramping up to accommodate the influx of drivers ? I am sure even pre-Nano with the larger middle class and economic boom, there are probably already huge numbers of new drivers. And if the roads are built, as some have mentioned – will there be more done to improve road etiquette / basic driving skills ? Will lories get their own lanes so you don’t have to honk all the time ? AWAAZ DHO !!

    http://en.wikipedia.org/wiki/Golden_Quadrilateral

  16. More vehicles that are tuned to the local landscape does provide means for generating revenue for the government. Think sales taxes, registration fees, and collecting more income tax for businesses prospering off a product such as nano. The nano will also be provided in knocked down “kits” for locals to assemble. That was part of Tata’s unique strategy – to allow local production and business people to customize/build nanos for their area. The plan is to also have electric and natural gas versions.

    To improve the roads and infrastructure, one needs means to pay for it. Also, lots of people die/get hurt in two wheeler accidents. I’ve seen plenty of families stuffed on a scooter and always thought that was very dangerous.

  17. saa – driving in india is probably always gonna be different (i am being nice here :-), I wouldnt look for the kind of infrastructure there is in coastal china, forget about the USA.

    So still lots of honking and a few cows but nano should help push the govt to build more infrastructure, especially near smaller towns and district HQs. The govt in india always does the absolute minimum needed or demanded of it, certainly the nano wont change that. The main hope in india is bottom-up growth where the emerging middle-class, folks who work astounding hours and have the kind of drive makes you and I look like complete goof-offs, get a chance to push ahead and force change.

    Otherwise, just spend an hour in any indian (federal/state) govt office and you will realize how bad things are…so when people say things like “why doesnt the govt provide this or that” I know that they are either ABD or havent visited one of these offices for a loooong time.

  18. Its interesting that folks from societies with lots of choices sound dissaproving that lower-middle class indians have a new transportation choice.

    And what about people who actually come from Indian society who feel this way? Are they racist/patronising/stupid too. Good chunk of people whi feel this way, even on this thread are people who actually live in India. But I guess it is easy to paint is as some sort of balc and white, Us vs them issue.

    What a ridiculous comment.