The Background And History Of Tata Nano

Tata Motors Limited is a leading automobile company in India, with consolidated revenues of USD 32.5 billion in 2011-12. Tata Motors is a leader in manufacturing of commercial, passenger, military and electric vehicles. It is also the world’s 4th largest truck and 2nd largest bus manufacturer by volume. In January 2008, Tata Motors introduced Tata Nano, dubbed as the “People’s Car” and also known as the world’s cheapest car. The car was launched in March 2009 which created a significant impact in the Indian automobile market.

The main target group of customers for Tata Nano are the lower and middle income families in India, many of whom resisted purchasing four-wheelers mainly due to the price affordability and maintenance cost. Launching Tata Nano gave an opportunity for these groups to purchase a car within their means.

The main competitors of Tata Nano are Suzuki Maruti-800, Suzuki Maruti Alto, Suzuki Maruti A-Star, Chevrolet Spark and Hyundai Santro. Their factories are located in various part of India.

Before Tata Nano came into the market, the leading low-cost car in Indian market was the Maruti-800, priced at around ₹ 188,988 – ₹ 223,498. The car was made to cater to the higher middle class or middle class people segment (Annual income above ₹ 300,000). The used car market in India is also huge, forecasted to be growing at a compound annual growth rate of around 22% from 2011 to 2014. Introduction of Tata Nano impacted the used car market in India significantly. Used car sales dropped by 30% immediately before the Nano’s introduction into the market. As for the new-car market, car sales of the Maruti-800 dropped by 20%.

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The popularity of the small car segment in India is exemplified by market leader Maruti Suzuki, which is projected sell about million small hatchbacks this year, attaining about 50% of the car market share. Tata Motors market share is currently around 14%.

During the initial launch, Tata Nano was priced at about ₹ 100,000. In December 2008, the cost of the car increased significantly due to higher raw material costs. Currently, the fixed prices of the Tata Nano in India are as follows

Model

Base Model

Tata Nano CX

Tata Nano LX

Price

₹ 141898

₹ 171489

₹ 198605

* Delhi city ex-showroom price of the Nano

MICRO-ECONOMIC FACTORS

Demand for Tata Nano:

Consider a buyer who has two options:

A) Buy a car at ₹ 200,000

B) Buy a car at ₹ 140,000

Considering the demand, we may expect that the buyer choosing option B as the price is lower and leaves the buyer with a surplus known as “consumer surplus”. The buyer can then use this surplus for other purposes.

Then when the price is P1 [price of the other cars] the quantity demanded is Q1 [quantity with respect to the price of the other cars]. When the price of the car is P2 [price of the car “Nano”] quantity demanded increases to Q2 [quantity with respect to the price of ‘Nano’].

Generally while defining the negative relationship between the price of “Nano” and the quantity demanded of it, we take the ceteris peribus assumption, where all the other variables say, taste of the consumer, time period, prices of substitutes and complimentary goods are generally kept constant.

Consumers would likely shift their demand towards Nano when the price of Nano is less compared to the price of the other competing cars in the market. Hence, the demand for “Nano” would rise and demand for the other cars would fall.

Consumer Surplus:

Consumer surplus is defined as the excess satisfaction that the consumer gets when he might be willing to pay more for a product than he actually has to pay. Thus, in the present case a consumer might be willing to pay ₹ 200,000 for any other car in the market, but he actually pays ₹ 140,000 for the car “Nano”. So, the difference ₹60,000 is his excess satisfaction known as consumer surplus.

Producer Surplus:

Producer surplus is the amount that the producer would be willing to sell rather than let go a sale.

Complements:

Complements are goods / products that “go together,” often consumed and used simultaneously. An increase (decrease) in the price of one product shifts the demand curve for another product to the left (right). Fuel / steel are complement products for the Tata Nano car. If the price of fuel / steel goes up, demand for Tata Nano cars decreases and vice-versa.

Source: www.mypetrolprice.com

Substitutes:

Substitutes are generally goods / products where one could be used in place of the other. An increase (decrease) in the price of one product causes the demand curve for another product to shift to the right (left). Second hand cars (used cars) are the substitutes for the Tata Nano. If the price of Tata Nano goes up, used cars demand increases and vice-versa.

ELASTICITY OF DEMAND:

Elasticity of demand refers to the relative responsiveness of the changes in demand to the changes in the price or income or price of substitutes and complementary goods. The elasticity which gives a relationship between the price of the commodity X and the quantity of commodity Y is known as price elasticity of demand. If this concept of elasticity of demand is used in our example, we can say that with the rise in the price of the other cars the demand falls and the demand for the car “Nano” increases. Thus, there is a positive relationship as in our case we have taken two commodities which are good substitute of each other.

Price Elasticity:

In the case of Nano, price elasticity of demand is relatively elastic (e>1) because a little increase in its price will lead to a greater decline in the quantity demanded.

Income Elasticity:

When there is an increase in income of consumers, purchasing power increases and demand for Nano decreases.

Tata Nano is deemed an inferior product, ie. a product that decreases in demand when consumer income rises, unlike normal products, for which the opposite is observed. Normal products are those for which consumers’ demand increases when their income increases.

Consumers generally prefer Tata Nano when their income is constricted. As a consumer’s income increases the demand for Tata Nano decreases, while demand of costly cars increases.

Cross Price Elasticity:

Substitute:

The price of Tata Nano deliberately makes it a close substitute to some products in the two wheeler market. Tata Nano, in a few years’ time, could adversely impact the second hand car market and reduce the price of second hand cars by around 20 to 30% and their sale by 35% (Reuters 2008). This could make second hand cars much cheaper, bringing them closer to the price of two-wheelers.

Type of Market:

The small car segment comprises of a few competing car manufacturers (Hyundai, Maruti Suzuki and General Motors). The car products offered are homogeneous / differentiated. Given the scale of production and the investment needed, barrier entry is high and costly. Hence, this market is an Oligopoly. Tata Nano created a totally new market segment supplying to the middle class or lower middle class sector i.e. the lower income sector. This has resulted in Tata Nano establishing a monopoly in this sector.

The elasticity of demand for the car “Nano” is positive, which shows that for this elasticity the total revenue is rising and marginal revenue (i.e. additional revenue accrued by selling each Nano) is greater than zero.

Marginal costs:

Marginal costs help to indicate how much the total costs changes because of change in the production level by one unit. If there are only proportionally growing variable costs, variable costs will be equal to the marginal cost. However, when there are only fixed costs, marginal cost will be zero. Any increase in production does not change costs.

Sunk costs:

Highly specific investments are usually sunk costs. Sunk costs are irrelevant for any future action because they have already been incurred and cannot be recovered.

Sunk costs mainly denote barriers to exit. One of the big drawbacks of the sunk cost is that, suppose if a company sustained high sunk costs then it will have problems in deciding to exit the market even if it sees good opportunities outside.

A lot of money was spent to design and make a prototype. These are the sunk costs incurred by Tata motors.

MACRO-ECONOMIC FACTORS

Tata Nano sales are affected by various factors like GDP, population size to the demand for personal vehicles, cost and availability of petrol, cost and availability of public transportation, road density, country geography, income homogeneity, population-age distribution, population density, etc.

Below is a graph showing Tata Nano sales (Jun 2010 to July 2012):

The Economy of India:

The economy of India is the 3rd largest by purchasing power parity (PPP) and the 11th largest in the world by nominal GDP. The country is a member of BRICS and one of the G-20 major economies. On a per capita income basis, India ranked 129th by GDP (PPP) and 140th by nominal GDP in 2011, according to the IMF.

India is one of the fastest growing economies in the world, with growth of over 200 times in per capita income in the period from 1947 (₹ 249.6) to 2011 (₹ 54,835) (Economic Times – May 31, 2011). The growth was mainly due to a vast increase in the size of the middle-class consumer, a huge labour force, growth in the manufacturing sector and large foreign investments. India is the 19th largest exporter and tenth largest importer in the world. Economic growth rate was stuck at around 6.5% for the 2011-12 fiscal years.

During the last couple of years, the Indian economy has moved into higher growth. Furthermore, demand for Tata Nano car is benefitting from India’s favourable demographic profile, which is reflected by its very young population (50% of population under the age of 25), gradually improving dependency ratio, growing urbanization and trend towards smaller, nuclear families. These trends results in greater savings and better car-purchasing abilities.

Increasing GDP per capita levels is also playing its part in increasing vehicle affordability. In India, the GDP per capita has almost doubled between 2000 and 2011, while car prices (adjusting for the decline in duties) have stayed around the same level compared to 5 years before, thus increasing flexibility to own cars.

Political Stability in India:

An investor’s worst nightmare is, no doubt, political instability. It interrupts the flow of foreign direct investment plans into the public sector as well as the private sector units and this certainly upsets economic growth.

There are different opinions on the political stability of India, depending on how one looks at it. It could collapse or prosper, depending on how the government work together with the people for the interest of the country.

Even though corruption is prevalent in the India Government, it is politically stable as the economic boom has created higher standards of living and stability within the region. The government is not perceived to collapse in the near future.

Interest Rate:

Rising interest rate tops the list of reasons for low consumer demand. Hence, car buyers are affected as about 85% of Tata Nano cars are hire purchase. “Interest rates are one of the highest we have seen in the last 7-8 years. This has affected customer affordability as many of them also have home loans and will face a combined impact of inflation and interest rates,” says Arvind Saxena, director, marketing and sales, Hyundai India. The 2% increase in interest rates in the past four months affected Tata Nano car sales significantly. Presently, interest rate for car loans is between 11.25%-17%.

Inflation Rate:

Inflation always has a detrimental effect on the automobile market. Like a double-edged sword, it affects the manufacturer/supplier and the consumer. An increase in raw material costs (steel, rubber, etc) increases production costs for Tata Nano. Together with increase in fuel cost, these factors render the disposable income of the consumer insufficient for the purchase and maintenance of a car. Hence, this results in a slower rate of market development for Tata Nano.

The above graph, when superimposed together with Tata Nano sales graph shown previously, gives a clear indication of how Tata Nano sales are affected by the inflation rate fluctuations. On a positive note, the graph also shows inflation rate decreasing, implying a potential increase in demand for cars in the future.

Unemployment:

According to the above graph, the unemployment rate has decreased and it is at 3.8% presently. Low employment rates result in increasing disposable income as more people are working. Demand for Tata Nano cars expected to increase as the lower and middle income families have higher disposable incomes.

Gross Domestic Product (GDP):

GDP is an important factor as it allows the company to estimate purchasing power in the wake of the global crisis. Falling GDP usually means smaller purchasing power. According to Euro Monitor International, 2009, two or more consecutive quarters of negative real GDP growth indicates a recession. Currently India’s GDP growth rate is decreasing and this could affect Tata Nano sales.

Consumer Confidence and Consumer Expenditure:

The Indian consumer market is one of the world’s largest. This is attractive to marketers since it implies a significant market for products. However, according to Global ratings agency Fitch (August 2012), consumer expenditure is at its lowest in 7 years even as consumer confidence remains high. Low consumer expenditure will reduce the demand for products like Tata Nano. A high level of consumer confidence does not have a very profound effect on consumer expenditure.

Tata Nano Exports:

Apart from the domestic market, Tata Nano cars are exported to Taiwan, Malaysia, Sri Lanka, Myanmar, Indonesia, Bangladesh and Nepal. There are plans to export to European, Thailand and USA markets.

Export market for Tata Nano looks favourable as the depreciation in rupee is likely to boost exports. The rupee has depreciated 4.7% against the U.S. dollar this year after slipping 18.7% in 2011.

CONCLUSION:

The launch of Tata Nano has revolutionised the Indian automobile industry. By creating the cheapest car, Tata Motor has developed a product affordable to the masses which other manufacturers in the world have yet to match. This is an achievement of Indian innovation at its best.

A couple of negative setbacks for Tata Nano:

1. In 2010, a few Tata Nano cars reportedly caught fire due to technical problems, causing concerns on the car’s safety.

2. Nano is perceived as a poor man’s car. Punnoose Tharyan, editor of India’s Motown magazine, commented, “A Nano is always bandied about as a poor man’s car. Nobody wants to be caught with it.”

These factors may affect the sales of Tata Nano. Hence, Tata Motors will have to take concrete steps to mitigate these setbacks.

As the competition in the low cost car segment increases, Tata Nano will slowly lose its monopoly position. Using Porter’s Five Forces Analysis Framework:

Threat of Entry

With predictions of good economy growths for India and increasing purchasing power of Indians, many new automobile players will be keen to compete in the India automobile market. Bajaj Auto, the second largest bike maker in India, recently entered the car market when it introduced a low cost passenger vehicle.

Threat of Substitutes

Bigger second hand cars are selling at the same price of a Tata Nano. Other substitutes such as LPG/Diesel/Petrol auto rickshaws are strong alternatives. With the ever-increasing traffic and petrol prices in India, people may prefer two-wheelers, which give almost double the mileage in half the cost and are easy for parking.

Bargaining Power of Suppliers

Raw material prices are determined by the suppliers, which affects the production cost of the automobile industry. However, bargaining power of suppliers does not affect Tata Motors greatly since it obtain its raw materials from a subsidiary of its parent company (Tata Steel).

Bargaining Power of Buyers

Given the availability of substitute products mentioned previously, buyers have a higher bargaining power and choose something else other than Tata Nano.

Industry Rivalry

Tata Nano faces fierce competition, each car manufacturer wanting to have a significant market share in the small car segment.

With the increasing threats, there are plans underway to move Tata Nano forward:

1. Tata Motor plans to launch a CNG Bi – Fuel and Diesel variants in early 2013, making Tata Nano one of the most fuel efficient vehicles in the world. Demand is expected to increase.

2. Tata Nano exports projected to increase with the highly-anticipated launches of Nano Europa, Nano Pixel and Nano Mega Pixel for international markets.

The future looks promising for Tata Nano.