Economics - Nano Small Car Big Dreams

Assessment Front Sheet IMPORTANT: Your assignment will not be accepted without the FRONT SHEET. Campus: Stream: Level: ACL 1 Year/Semester Module Name: Economics for Business Assignment Type: Module Assignment Student’s Name: Brinlia Fernandes Assessor’s Name: AMIT ASWANI Issued on: Reqd. Submission Date: Actual Submission Date: Submitted to : Higher Level Skills Students are expected to develop the following skills in this assignment: • Cognitive skills of critical thinking, analysis and synthesis. • Effective use of communication and information technology for business applications. • Effective self-management in terms of planning, motivation, initiative and enterprise. Certificate by the Student: Plagiarism is a serious College offence. I certify that this is my own work. I have referenced all relevant materials. ________________________ (Student’s Name/Signatures) EXPECTED OUTCOMES Assessment Criteria – To achieve each outcome a Achieved (Y/N) student must demonstrate the ability to : The students will understand the implication Study car industry well and then should be able to of Economic models in the real competitive apply theory to the case given. corporate world. The students will learn to understand The student should be able to assess the strategy innovative strategies thought by the corporate adopted by TATA and the cause behind this to be ahead in the competition. innovative strategy The student will learn to study market They should study different market structure and be structures and see the different structures able to give their interpretation to the same in prevailing even in the industry in different context of given case. segments. Assignment Grading Summary (To be filled by the Assessor) Achieved Yes/No Grades Grade Descriptors (Y / N) P A Pass grade is achieved by meeting all the requirements defined. M1 Identify and apply strategies to find appropriate solutions. M2 Select/design and apply appropriate methods/techniques. M3 Present and communicate appropriate findings. Use critical reflection to evaluate own work and justify valid D1 conclusions. Ability to anticipate and solve complex tasks in relation to the D2 assignment. D3 Demonstrate convergent, lateral and creative thinking. OVERALL ASSESSMENT GRADE: TUTOR’S COMMENTS ON ASSIGNMENT: SUGGESTED MAKE UP PLAN (applicable in case the student is asked to re-do the assignment) REVISED ASSESSMENT GRADE TUTOR’S COMMENT ON REVISED WORK (IF ANY) Date: Assessor’s Name / Signatures:

CASE STUDY SMALL CAR, BIG DREAMS Tata has long been seduced by the “gold at the bottom of the pyramid” theory, which holds that companies can make the most money by penetrating the mass market. Tata’s strategy is more akin to what happened in the personal computer industry. Once, PC’s were high-priced business machines made by select manufacturers. Players such as Compaq and Dell multiplied the size of the market by turning PC’s into easily assembled, cheap units that could be afforded by middle class families, who began buying PC’s to replace electronic typewriters, board games, accounting machines, etc. Tata says his strategy is to do the same – to create a low cost design, get it assembled on the cheap so that the car can be middle-class families, who he hopes will begin buying it in place of the twowheelers they currently use. In this way, Tata says he hopes to sell a million units of the small car by 2010. On the face of it, the number is achievable. Two wheeler sales are currently about 7.5 million units a year, while car sales are about 1 million units. Hence if Tata convinces just 10 per cent of India’s two-wheeler owners to upgrade to his cheap car, he will sell 750,000 units a year. Add another 300,000 units sold to car buyers attracted to Tata’s pet project for its intrinsic appeal and the 1- lakh car will be among a handful of brands selling over a million units annually. But that premise has a flaw. More than 90 per cent of two-wheelers sold in India are in the Rs 30,000-45,000 range. These are commuter bikes used for traveling from point A to point B. These buyers are highly sensitive to purchase price, fuel efficiency and maintenance costs. Since the Tata car will cost three times as much and give just 20-25 km to the litre, as against a bike’s 60 km per litre, experts believe this segment may not migrate to cars in such large numbers. (Please remember prices also includes annual maintenance cost.)Assuming the on-road price of Tata’s 1 lakh car will really end up being between Rs. 1.4 lakh and Rs 1.5 lakh, at the current rate of interest the monthly cash payment on a five year car loan for this amount works out to Rs 3,200. Given that, the monthly running costs would be about Rs 3,000, the total cost of owning Tata’s car will be about three times the total cost of owning a twowheeler.

The Secret Design A paradigm shift in costs necessitated innovative thinking on the use of materials and the car will make more use of plastics and composite materials than any other vehicle on the road. Where the design is also light is in safety features. “It’s a volume game and the margins will be tighter. So, the costs have to be cut to the bone.” Distributed Manufacturing With this product, Tata Motors could turn the concept of economics of scale and single-location mass manufacturing on its head. Right from the start of the project Ratan Tata insisted the small car would be built using a distributed manufacturing system. Under this, a completely knocked-down kit of the car will be built at three Tata-owned plants, the brand new one at Pant Nagar in Uttarakhand, its old plant at Pune in Maharashtra, and Singur. Distributed manufacturing was also aimed at a social dimension of providing rural entrepreneurship. The kits will then be ferried to warehouses across the country, where they would be assembled by dealers. “This innovation is the key in the supply chain and distribution.” This is unheard of in the automobile industry, especially since multiple manufacturing locations require multiple vendor bases, which affect the viability of suppliers due to the additional capital expenditure of setting up the plant Posing a challenge to the Tata 1-lakh car has certainly been a hot topic of discussion in the boardroom of several car makers. But for the moment, Tata Motors seems to have a 2-3 year lead over every other company – except Maruti Suzuki. Questions: Q1.Discuss the changes in manufacturing strategy that the TATA’s are working on and how will this changed strategy help in lowing the cost of the car. Q2.What kind of market structure is TATA facing, specifically in this One lakh car segment? If you think there is any competition, name the competitor.

Some Known Facts Not too long ago, many pundits within the industry had held that small cars such as the Maruti 800 have outlived their use and must, therefore pack up. Yet, just in 2008, a glowing Mr. Ratan Tata drove on to the stage in his Nano, that sports is a far lower powered engine and which may soon storm the Indian roads. Surprisingly, many of the same pundits who had bemoaned the twilight of Maruti 800 have now begun to celebrate the business sense that the Nano exudes. It looks like, in any case, the Tata Nano project has defied textbook constructs of successful venturing. In fact, we knew for good reasons that there is much less money to be made in small cars. We also knew that products conceived for specific markets have less possibility of success than those visualized on a global basis. And, admittedly, auto majors with a wider, deeper portfolio of cars are rightly believed to be able to gain more profitably from a radical but relevant offering. Such manufacturers, it is often acknowledged, are able to reap from the economies of scale that can be got from sharing the costs of design, manufacture and retail, among their entire product line-up. The Tata project bore none of the above usual stamps of success. Yet it is pretty hard to term Nano anything but a success going by the reception it received. This perhaps indicates that the real game is one of strategy. Indeed, it is not so much about cars or of experience as about getting clear the underlying concepts and attitudes. Ironically, Tata's capture of the "small car concept" is in itself hardly path-breaking. One recollects that when the Maruti 800 was introduced around the mid1980s, it was, even after adjusting for the then stronger rupee, an immensely affordable car (well below a lakh of rupees). It was, in fact, India's first small, sweet car. But, over time, the sweetness of Maruti 800 - rather than the real demand for small cars - had diminished. That was primarily because of its price, which

kept on surging.

What is certainly path-breaking is the the price tag of the Nano. Even if we went all the way back before all those price rises and income growth spread over the past two consecutive decades, Nano's price would have still generated a landslide sales record in the mid-1980s. The stalwarts of the car industry never quite saw 'small cars' as 'small cars'. Here is where Tata Motors strode ahead, giving Mr Tata and his team a head-start. The Nano, then, brings home the truth that lacking certain advantages can actually prove more rewarding. The car industry, unlike the insurance industry, which enjoys safety cover from reinsurance, has never been able to obtain a guaranteed cover for assured success. One could say that the future Nanos would certainly get their shots of incremental improvement. So, too, would be the approaches of many other aspiring small-car makers, after taking note of this primordial shift. Well-known thinker, George Santayana, once famously quipped that those who do not remember the past are condemned to repeat it. So, Mr Tata, one hopes, will remember what made the Nano a product of luminous leadership. Success is indeed its tailwind although it is a little too early to be looking for it in the rear view mirror!

Ratan Tata’s views about his Small Car – The Nano Ever since the Nano debuted, Tata Motors chairman Ratan Tata has faced all manner of questions. He has painstakingly answered all of them. Ratan Tata’s views to people who find Nano to be cramped on the inside, he is of the view, ‘A small car is a SMALL car. If one is looking for a limousine this is not the car to buy. If one is looking for a three-box sedan, this is not the car to buy. He says Nano is manufactured complying with the emission norms in India and the current engine meets BS3 and is capable to being scaled up to Euro 4 as well. There is a cost attached to being a totally green car. At the end of the day; all the things one asked for, may not be there in this vehicle because it had a cost target and that would include some of the green stuff as well. He further continues saying they are a socially responsible company and not a philanthropic trust. He says that they’ll make profit however he says for the margins there would be several up trim versions and that they will have their margins spread over those versions. Mr. Tata says that India desperately needs a mass transport system and better infrastructure. However those are issues that they do not deal with. They would rather be concerned if Nano has to create absolute chaos all over India. He desires to change the manner in which one travels in semi urban and rural India.

Changes in Tata’s manufacturing strategy The Tata Nano has a rear engine with a four passenger seating capacity. Tata aimed this car primarily at the Indian market. The car has a fuel efficiency of around 26 kilometres per litre on the highway and around 22 kilometres per litre in the city. The introduction of the Nano received media attention due to its targeted low price. If ever there were a symbol of India’s ambitions to become a modern nation, it would surely be the Nano, the tiny car with the even tinier price tag. A triumph of homegrown engineering, the $2,200 (€1,490, £1,186) Nano encapsulates the dream of millions of Indians groping for a shot at urban prosperity." The car is expected to boost the Indian economy, create entrepreneurial-opportunities across India, as well as expand the Indian car market by 65%. Ratan Tata, the Chairman of Tata Motors, began development of the world's cheapest production car in 2003, inspired by the number of Indian families with two-wheeled rather than four-wheeled vehicles. The Nano's development has been tempered by the company's success in producing the low cost 4 - wheeled Ace truck in May 2005. Contrary to speculation that the car might be a simple four wheeler the vehicle is "a properly designed and built car". It is not a car with plastic curtains or no roof — it's a real car. To achieve its design goals, Tata refined the manufacturing process, emphasized innovation and sought new design approaches from suppliers. The car was designed at Italy's Institute of Development in Automotive Engineering — with Ratan Tata requesting certain changes, such as the elimination of one of two windscreen wipers. Many components of the Nano are made in Germany by Bosch, such as Fuel Injection, brake system, Value Motronic ECU, ABS and other technologies. The Nano has 21% more interior space and an 8% smaller exterior compared to its closest rival, the Maruti 800. Tata offered the car in three versions: the basic Tata Nano Std; the Cx; and the Lx. The Cx and Lx versions each have air conditioning, power windows, and central locking. Tata has set its initial production target at 250,000 units per year.

Cost cutting features •

The Nano's dickey (boot/trunk) does not open. Instead, the rear seats can be folded down to access the dickey.

• It has a single windscreen wiper instead of the usual pair •

It has no power steering

•

In Base model it has three lug nuts on the wheels instead of four

• It has only one side view mirror

Price Tata initially targeted the vehicle as "the least expensive production car in the world" — aiming for a starting price of 100,000 rupees or approximately US$2000 (using exchange rate as of 22 March 2009 (2009 -03-22) 6 years ago, despite rapidly rising material prices at the time. At its launch the Nano was available in three trim levels: The basic Tata Nano Std priced at Rs. 123,000 has no extras. The Deluxe Tata Nano CX at Rs. 151,000 has air conditioning. The Luxury Tata Nano at Rs. 172,000 has air conditioning, power windows, fabric seats and central locking. The Nano Europa, European version of the Tata Nano has all of the above plus a larger body, bigger three cylinder engine, anti-lock braking system (ABS) and meets European crash standards and emission norms. The base model will have fixed seats, except for the driver's, which will be adjustable, while the deluxe and luxury models will get air conditioning and body coloured bumpers.

Potential effect on the Indian Economy Tata Nano’s launch could expand the Indian car market by 65%, according to rating agency CRISIL. The low price makes the car affordable for families with incomes of Rs 1 lakh [100,000] per annum, the agency said. The increase in the market is expected to push up car sales by 20% over the previous year. “The unveiling of Tata Nano, the cheapest car in the world, triggers an important event in the car market. Based on the statement by company officials, CRISIL Research estimates the consumer price of the car at around Rs 1.3 lakh. This brings down the cost of ownership of an entry level car in India by 30%,” the company said in a report. The Nano is alleged to have severely affected the used car market in India, as many Indians opt to wait for the Nano's release rather than buying used cars, such as the Maruti 800 (a rebadged Suzuki Alto), which is considered as the Nano's nearest competitor. Sales of new Maruti 800s have dropped by 20%, and used ones by 30% following the unveiling of the Nano. As one automotive journalist summarises; “People are asking themselves—and us— why they should pay, say, 250,000 Rupees for a Maruti Alto, when they can wait and get a brand new Nano for less in a few months’ time, a car that is actually bigger”. Rival car makers including Bajaj Auto, Fiat, General Motors, Ford Motor, Hyundai and Toyota Motor have all expressed interest in building a small car that is affordable to more middle-class consumers in emerging markets. The bulk of demand there is for small cars because people are much more sensitive to fuel prices. Honda and Toyota are leading the way on so called cleaner gasoline-electric hybrids, and some environmentalists argue getting prices down on these technologies is where efforts should be concentrated. Inexpensive and ecofriendly electric-cars like Tara Tiny, Oreva Super (both reportedly even cheaper than Tata Nano) and REVA pose even more significant danger to Nano. There are also rumors of Maruti Suzuki introducing a lower priced version of Alto to counter Tata Nano.

Market Structure of Tata in the Small Car Segment The demand for Tata Nano is unlimited. Ratan Tata had a dream to offer millions a car as a substitute to two-wheelers. This led to the emergence of the now famous one-lakh car concept. A decade after starting the project, Tata Motors is on the verge of launching the so called “Chairman’s parting present to the Indian Auto Industry”. The criterion was simple.