Tata Nano Case Analysis

Introduction: The Tata group is one of the largest automobile companies in India and ranks sixth in the commercial vehicle manufacturing in the world. It is a leader in the commercial as well as the passenger vehicle segment. The top three passenger vehicles are sports utility vehicle, mid-size car and mini-truck. In May 2008, the Tata group acquired Ford Motor’s British based automotive icons Jaguar and Land Rover. Lack of safer, comfortable and spacious means of transportation and poor quality of mass transport is a common concern in India.

Decision Problem: The Tata group come up with a unique concept “Tata Nano: the People’s car” to be built within USD2500 (Rs1 lakh), an affordable, safer, comfortable and spacious alternative to the middle class families and students. The chances of Tata Motors squeezing a drop of profit out of a $2,500 Nano is highly unlikely with the Nano’s long promised price staying the same and rising cost for raw materials. Choosing a single culprit for this is impossible, since escalating material costs have raised the price of everything from corn flakes to crude oil.

Focusing only on the Nano’s steel exterior, it’s clear how difficult it will be for Tata to stick to that $2,500 price for long. Tata has faced controversies over developing the Nano as some environmentalists are concerned that the launch of such a low-priced car could lead to mass motorization in India with adverse effects on pollution and global warming. Protests over the land acquisition led Tata Motors to shift its manufacturing plant to Gujarat.

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While currently the political tensions have subsided, there is no guarantee that in future land acquisition row would not lead to another full fledged political war. Decisions Alternatives: Innovative Marketing: Tata will sell its ultra cheap new car through its own retail outlets as well as auto dealerships. The Nano’s overall marketing strategy will use conventional media in an unconventional manner. Innovative Technology: With the shift to smaller cars for emerging markets, carmakers must develop new technologies and new business models to meet the demands of these markets.

Small cars must be lighter and more fuel-efficient, so manufacturers are turning to such technologies as alternate power trains, fuels, propulsion systems, and braking systems, as well as materials not typically used in cars, including plastics for exterior body components such as doors, and strong, lightweight alloys and composite materials for structures. It brings to market a totally different value proposition than the one available and can change the paradigm of a product. Cost Reduction: Use of alternate materials and reduced consumption of material being used were primary considerations to minimize the cost of production.

Alternate Suppliers to get same material at fewer prices as well as establishment of suppliers near the manufacturing facility were key strategies adopted by Tata Group. This helped in reducing the delays in the supply chain and setting up dedicated vendors to supply the raw materials to the Nano plant. Industry Analysis: India is well-known for its massive transportation system. As India’s transport network is developing at a fast pace, Indian Automobile Industry is growing too and therefore, providing employment to a large section of the population.

Thus the role of Automobile Industry is very essential in Indian economy. Various types of vehicles are manufactured by the Automobile Industry. Indian Automobile Industry includes the manufacturing of trucks, buses, passenger cars, defense vehicles, two wheelers, etc. The industry can be broadly segmented into the car manufacturing, two wheeler manufacturing and heavy vehicle manufacturing units. The major Car manufacturer are Hindustan Motors, Maruti Udyog, Fiat India Private Ltd. , Ford India Ltd. , General Motors India Pvt. Ltd. Honda Siel Cars India Ltd. Hyundai Motors India Ltd. , Skoda India Private Ltd. , Toyota Kirloskar Motor Ltd. The two-wheeler manufacturing is dominated by companies like TVS, Honda Motorcycle & Scooter India (Pvt. ) Ltd. , Hero Honda, Yamaha, Bajaj, etc. The heavy motors like buses, trucks, defense vehicles, auto rickshaws and other multi-utility vehicles are manufactured by Tata-Telco, Ashok Leyland, Eicher Motors, Bajaj, Mahindra and Mahindra, etc. India`s giant automotive manufacturer company TATA MOTORS has largest share in commercial vehicle in India.

It has also positioned itself in the international market after acquiring Jaguar and Land rover and exporting their key products in the international market. The future of Indian Automobile market is bright as it looks forward to manufacturing and implementing new innovations. Political factors: The liberalization of the automobile industry in 1990s encouraged foreign investors and Indian companies to enter into joint ventures. India became the largest and fastest growing car markets in the world in 2005-06 and it was reported that the passenger car market grew by 25% per year and the passenger vehicle exports grew by 12. % annually. India has a well established regulatory framework under the Ministry of Shipping, Road Transport and Highways in which SIAM (Society of Indian Automobile Manufacturers) plays a very important role. All the stake holders are part of the regulation formulation setup. The Indian Auto Industry is implementing both Safety & Emission regulations in compliance with International Standards for sustained growth of the auto industry for combating the environment concerns and become a global export hub.

Economical factors: There is a massive transportation system in India for the public which helps the economy to the large scale. The new development of road system is contributing a lot towards the transportation system of the country. Better and wider roads built with the long lasting material are helping the economy of the country as less expense will occur. With the better transportation system the material is moved to different places with a greater ease and in short time, in turn, helps in increasing the GDP as more products can be made in same time.

The per capita income of India is increasing due to which the buying power of the consumers has also increased making people buy cars and bikes. The banking system in India provides people with easier and cheaper finance schemes which help the consumers to buy vehicles easily. Social factors: The Automotive Research Association of India has been playing a crucial role in assuring safe, less polluting and more efficient vehicles. New measures are being taken to make the automobiles less polluting. Reducing pollution helps creating a better and healthy environment for the society.

Technical factors: The Indian auto Industry is working with the authorities to facilitate for introduction of the alternative fuels. The latest technology is being adopted by the companies and is being launched in India as well. A lot of new safety measures are now taken into consideration before the car or any other motor vehicle is launched to ensure its safety and reliability. The impact of the severe downturn in the automobile industry during the year 2009 was observed in the fall of major players like GM, Chrysler and Ford. On other the side, the small car segment has seen substantial growth and a rise in demand.

The majority of growth in the global automobile industry in the coming decade is expected to be from emerging economies such as India, China and Eastern Europe. Significant growth of auto market in these countries will be attributed to the fast growing small car segment. The small-car revolution is taking place within the context of the very different needs and desires of the new consumer in emerging markets. The low-cost cars are typically their first choice to be driven around the town, but not for long distance trips. Company Analysis: Strengths

Brand name TATA: Tata Motors is the only company in India with a broad based presence across the industry, in all segments of the commercial vehicles market – heavy and medium commercial vehicles, light commercial vehicles, pick-ups, mini-trucks – and key segments – compact, midsize car and utility vehicle segments – of the passenger vehicles market. Unique Understanding of customer needs: Going forward, Tata Motors had anticipated that non-car owning families, at the bottom of the pyramid, will look for an extremely affordable vehicle. Nano is an excellent option to meet the needs of low-income group.

Environmental Concerns: High oil prices and concern for environment are critical factors in success of small car industry. High fuel and commodities prices are expected to be around for the foreseeable future, and the prices will only make cars more expensive to build and to run, thus reinforcing the desire to keep cars small. Concerns about the environment and global warming are also promoting the trend toward fuel efficient smaller cars – not just in the developing world, but everywhere. Access to distribution channels: When a new product is ready to be launched, a well developed distribution is must for its success.

The TATA motors had an advantage of well established distribution channel across the world Weakness Low power: The low-cost cars are typically their first choice to be driven around the town, but not for long distance trips. Not a status symbol: Small cars are still seen as an entry level option as it offers limited features. The small car segment doesn’t find many takers in the developed world where people still prefer luxury and safety over anything else. Delay in manufacturing: Due to political issues, the manufacturing plant was shifted to Gujarat.

The political conflict and opposition from local community caused a major delay in the establishment of the production facility for the Tata Nano. Opportunities Large market for selling: It will be commercialized all over India. It is mostly targeted to the middle class and lower middle class people. First car in low range: NANO enjoys the monopoly are there are no competitors in this segment. Potential in global market: The success of Nano would lead to decreased demand of products from developed countries as there is a greater emphasis on fuel efficient vehicles and traffic congestion globally.

Once the companies from developed countries experience restricted growth in developing countries, the demand for oil-guzzling cars from developed countries is sure to decline. Nano is expected to cut sales of bigger car companies in India and other developing markets. Nano possess a great potential to become the master of roads in the developing countries. Threats Company rival: NANO is the only player so it has the price freedom but as the Maruti and Honda are also planning to launch the car in the same segment the price competition will start.

Concerns over traffic congestion: A larger number of cars will adversely impact the environment due to emissions. Analysis of Alternatives: Branding identify the maker of a product and allows consumer to assign the responsibility for its performance to a particular manufacturer. The new Tata Nano focuses on not only one segment of Indian population which has an access to the other automobiles, but also to a greater percentage of population who can overstretch a bit from buying a new two-wheeler or a used small car to getting a brand new vehicle in the form of the “People’s Car”.

The branding strategy in Nano’s case is corporate name combined with individual product name. Ever since it was conceptualized, anyone and everyone in the automobile industry had commented that the Tata dream of a People’s Car was just a figment of imagination and making a car at this low a price without compromising on quality is not possible. This very fact makes the Nano special. It is a brand that defines the dream, coupled with the hard work, dedication and determination of a team who believed in and worked for converting this vision into reality.

The introduction of Tata Nano received media attention due to its targeted price. Tata adapted a strong communication strategy to get the word out to the public through media, trade shows, auto shows, internet buzz and pre-launching of the Nano. The demand of any product is mainly driven by two main factors: the price of the product and income of the buyer. Target Markets:
• Two-wheelers people: those people who are working professionals or college students but cannot afford to buy a three lakh car.
• Second hand car user: those people who cannot afford to buy new car but would be able to buy new car cheaper than used car. Auto rickshaw/Three-wheeler: Most of the auto rickshaw costs almost the same price as Nano.
• Middle and lower income class: these are the people that are growing and are also becoming a little richer which is making them afford a car. The buyers in this segment are generally first time buyers and their main considerations are low cost and fuel efficiency The real price of the vehicle is the capital cost plus the running cost (fuel, insurance, service and maintenance). Lower purchase price and running cost of Tata’s Nano would appeal to mass markets.

The introduction of Tata Nano would elevate the number of households that could afford a car by 65%. Tata will be creating a whole new segment and in turn, getting the first mover advantage. It is also assumed that lesser the fuel consumed by the car, the more number of Nano will be purchased by the people. For most of the products, as the income goes up, the demand goes up. As the income increases, the household moves the ladder up graduating from bicycle to two or three-wheeler and two-wheelers to motorcars. In addition, if the price were to decrease, the demands get a further fillip.

It has been assumed that the low price of Nano will galvanize the demand. The strength of income elasticity outweighs the price elasticity for an expensive product. Vehicles also fall under this category. It is the growing income that strongly impacts the demand than the lower price. India’s two-wheeler market was listed second largest globally in 2007 and the demand is expected to be 18 million units by 2011. Among the two-wheeler segment, the motorcycles, scooters and mopeds have major share in the market. Three-wheelers also dominate the market for carrying passenger and cargo loads.

The majority of the two-wheeler and three-wheeler owners does not own a car and belong to the lower or middle income groups. With fast growing middle class, it has been projected that there will be increase in demand for lowest end car. The Tata Nano group is targeting the two-and three-wheeler middle-income groups, college students and used car buyers. In the absence of strong competition, Maruti Udyog ltd. has dominated the Indian automobile market since 1980s. The competition in India’s automobile history had been heating up in the recent years.

As the automobile sector rapidly evolved through deregulation and open markets, many foreign companies already set up their presence in India through tie-ups with local manufacturers and some have done entirely at their own. Since then, there has been an emergence of new competition of higher value segments of passenger car market. For the four wheeler segment, Maruti Udyog dominates the automobile industry holding 52. 2% share of the passenger car market, followed by Hyundai with 19. 2% and Tata Motors with 16. 6%. For two wheeler segments, it remains quite a local dominant game but some global players also have presence in the market.

Major players in this segment include Bajaj Auto, Hero Honda, TVS Motors, Yamaha and Kinetic. The two-wheeler with its low price and lower running cost would continue to be an option for biker and lower income segment. Nano would position itself as the cheapest car against its major competitors, Maruti Udyog and Hyunda Motors India Ltd. without compromising quality, safety and emission standards. Since the car has to be built within a cost of USD2500 (Rs1 lakh), no conventional design would work. There is a lot innovation in that is required in the design and manufacturing process which will help in reducing the costs.

There is stiff opposition from the environmental groups. This is because of the fear that a larger number of cars will adversely impact the environment due to emissions. The company designed the car from scratch to offer customers a low cost small car, meeting regulatory requirements and achieve performance targets such as fuel efficiency. Nano has been designed with a family in mind. It would serve as roomy compartment for a family of four. Nano’s safety and emission standards exceed current regulatory requirements. Tata is taking advantage of its well established dealerships and changing the manufacturing and distribution channels.

A distributed manufacturing system would refer to central control system. The entire manufacturing system would be connected by networks for communication and monitoring. The manufacturing of small cars generally happens in labour intensive countries as this helps the manufacturers in reducing the costs and passing the benefits to the customers. Developing countries like India and China are thus the hubs of small car manufacturing. According to Ratan Tata (Chairman of the Tata Group), the car components could be built at different locations and then shipped as “car kits” to local manufacturers for assembly.

The automaker would oversee the quality and reliability of the assembly operations, taking full responsibility of product liability. Using this strategy, Tata expects to meet the consumer demand as the market grows. Tata is implementing a hub and spoke model for Nano’s distribution. The unique distribution would increase dealership points as well as add sales and customer touch points. In terms of manufacturing strategy, the possibility of Nano final assembly being done at local dealers would be a breakthrough.

The cost structure is basically the cost required for the manufacturing of the product includes the cost of raw materials and the inputs. Nano has the smallest exterior footprint with a length of 3. 1 meters and width of 1. 5 meters but is 21% more spacious than Maruti 800, the world’s smallest car. Nano offers incredibly spacious passenger compartment which can comfortably seat four people. To minimize the cost of production, the alternatives were explored such as reverse auctions, minimizing the cost of luxuries by designing car components to serve multiple functions and long term contracts with over 100 suppliers.

Tata Nano was launched aiming the low-income people of India. So, the price has been decided according to the target groups only. The less number of accessories is another reason for the price to be set low as compared to other passenger cars in the market. Tata implemented market-penetration pricing, which is low to set a low price for a new car in order to attract a large number buyers and a large market share. This will be done by achieving the high sales volume, resulting in cost reduction and allowing the company to cut its price even further.

Tata is working on the strategy of reducing costs and waste to improve profits by implementing a new style of pricing than the traditional way of pricing of automobiles. More cost reduction means more profit. This means Tata’s will continue to squeeze suppliers. The low price of Nano will help to keep out competition and maintain its low-price position. The economies of scale are the cost advantages that a business obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as scale is increased.

Economies of scale may be utilized by any size firm expanding its scale of operation. The common ones are purchasing (bulk buying of materials through long-term contracts), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), and marketing (spreading the cost of advertising over a greater range of output in media markets). Each of these factors reduces the long run average costs of production. Tata is counting on the economies of scale along with careful sourcing of materials to keep prices down.

Nano may impact the sales of the other small passenger cars to some extent. As there is price difference between Nano and two wheelers, the two wheelers would continue to be an entry level option. There is a wide scope for Tata Nano because of the upward migration of the living standards and lower price as compared to the other options available in the market. A large segment of the population is emerging from poverty and entering the middle class. Consumption patterns are changing dramatically. The increases in income mean these newly well-off people find themselves able to afford economy cars.

Rising income levels of middle class in the developing world and reduction in the ownership cost with less expensive cars such as the Tata Nano will increase the demand of the small car and open up new markets for car manufacturers. Low labour cost in emerging economies is also attracting hordes of manufacturers to their soil. As oil prices rise and concerns about the environment grow, the small car will become the king of the road. This is more evident than in the developing world where increasing prosperity is bringing millions of first-time buyers into the market for new cars.

Tata Nano can meet the needs for a second car by families apart from the big sedans for commuting within short distances. Space constraints in most of the major cities in the world make it difficult for owners to manage with a large car. They would rather prefer an easily maneuverable small car. This presents a tremendous opportunity for India, which is growing quickly, building a vast middle class, and gaining experience in building and selling cars. India can take advantage of its experience in this market to become the world leader in the fast-growing small-car segment. Recommendations: Increasing global presence – Nano must show more presence in the developed markets apart from the developing ones since people are becoming more sensitive towards environmental issues and of course they want to spend less on fuel guzzling cars.
• Political issues and Land acquisition- More transparency should be there in land acquisitions for building plants. Local people must be taken into confidence before embarking on building plants in the area.
• The brand needs more of advertising and promotion which it is currently lacking. The low cost must not compromise on quality.

Easy loans must be made available to those who wish to own this car.
• New product launches on time, within budget, and focused on the target segment will be critical to the future success of OEMs and suppliers across all segments. Volatile raw material and input costs, especially oil and steel, will continue to have a pervasive impact on the operating profitability of OEMs. Successfully managing supply chain complexity, implementing low-cost country sourcing strategies, and continuous technological innovation will be vital to achieving long-term cost mitigation goals.