The World’s Cheapest Car Debuts in India

In New Delhi in the early 1970s, my family traveled by scooter in the classic, death-defying Indian fashion. My father would drive, with me, a toddler, standing on the floorboard in front of him and my mother seated pillion, cradling my infant sister in her arms. My father was a civil engineer and my mother a nurse, and in India at that time, cars for a young family were far out of reach.

More than 30 years later, I recently listened to Ratan Tata, chairman of Tata Sons, the holding company for the sprawling Indian conglomerate Tata Group, describe a family just like mine as the inspiration for the Nano, the ultra-cheap “people’s car” that the Tata Group company Tata Motors launched on March 23. “What sparked it off was riding in a car and looking at them and saying, Surely there’s a safer way that these people can be transported,” he recalls.(See the 12 most important cars of all time.)

Tata has told this story many times since Tata Motors started developing the Nano six years ago. The project began with an audacious promise: build a safe, road-worthy vehicle costing 100,000 rupees (about $2,000), so affordable that it could allow millions of people in the developing world to park their scooters. Competitors dismissed the idea as folly. The Maruti 800, the Nano’s closest competition, sells for about twice as much. Yet Tata has been as good as his word. The Nano is going on sale on April 9 at 470 outlets across India at a factory price of 100,000 rupees, not including taxes and transport costs. Within a few years, Nanos could also be available in Europe and the U.S.

The debut of the world’s least expensive car comes at a time when the entire auto industry is in crisis. Demand for vehicles has plunged with the global recession, hobbling two of Detroit’s giants, GM and Chrysler. Even Toyota, the model of a modern car company, is facing its first operating loss in decades. Tata Motors, India’s largest automaker, is not immune. Sales of its commercial vehicles and cars have slumped, and debt from the company’s purchase last year of luxury brands Jaguar and Land Rover is weighing on Tata Motors’ balance sheet. Tata argues that the Nano is exactly the right car for these difficult times. “If I had conceived a million-dollar supercar today, I think you’d have every reason to question whether that’s the right product at the right time in the planet that we are living in,” Tata told TIME during a March 5 interview. “What has happened in the changing global economic situation reinforces, if nothing else, the fact that a low-cost car has a place.” (See the 50 worst cars of all time.)

Yet the path that Tata Motors has followed to bring the Nano from sketchpad to showroom may prove to be much more important than its price tag. The company’s engineers and parts suppliers started from scratch, rethinking every component to minimize cost and weight without sacrificing basic performance, comfort and style. As battered carmakers search for new business models to adapt to shifting, shrinking consumer demand, the Nano may point the way to the future — one that will likely revolve around smaller, more fuel-efficient and more cheaply produced vehicles.(See pictures of the Nano.)

The Quest to Get More from Less
The Nano is about as basic as transportation gets. It rolls on tiny 12-in. wheels, the tires have no inner tubes, the windshield has just a single wiper and drivers must make do with one side mirror. But it’s not simply a stripped-down car. The shell was designed to be rigid with less material, and the body panels are made out of Japanese and Korean steel, giving the exterior a high-gloss look and feel. Delphi designed a streamlined instrument cluster that weighs just 14 oz. (400 g), compared to 2.2 lb. (1 kg) for the models it sells in North America and Europe. These and dozens of other refinements yield a car that weighs just 1,322 lb. (600 kg), less than half the weight of a Honda Accord. Reducing weight helps make the most of the Tata Motors – designed two-cylinder engine, which is bolted in the rear (like the classic people’s car, the Volkswagen Beetle) and can power the Nano to a top speed of about 62 m.p.h. (100 km/h) in 23 seconds. Fuel economy is excellent: about 56 miles per gallon (24 km/L), better than a Prius, Toyota’s hybrid sedan.(Read “India’s Top Automaker, Tata Motors, Hits a Rough Patch.”)

The car, which has four doors and seats four adults, doesn’t feel like a lightweight on the road. I drove one on an empty test track at Tata Motors’ main plant in the western Indian city of Pune and found that, while the interior is spartan, the Nano handles as well as any of the other low-end minicars available in India. The brakes lack feel and there’s little storage space, but the car turned heads. Our photographer drove a bright yellow Nano — this one fully equipped with air-conditioning — through the highways, cobbled avenues and side streets of Pune. People swerved and tailgated to get a closer look, waving and shouting, “Hey, Nano!” as the car passed. When we stopped, a crowd immediately gathered. “It looks very appealing to the eye,” says Bhagwat Pulsandar, 25, a Pune law student. “Possessing a car is a status symbol,” says Rajib Das, 30, a shopkeeper in Sukantonagar, West Bengal, who says he wants to be the first in his village to own a Nano. “Who wouldn’t want to rise in life?” (See pictures of muscle cars.)

The Margins Are Small, Too
Not much marketing will be needed to sell the Nano to aspiring Indians like the ones I met in Pune. Indians buy about 1.4 million cars and 7 million two-wheelers a year. Even if the Nano initially grabs just a fraction of this market, as Tata executives expect, demand will outstrip the current annual production capacity of 45,000 cars — meaning there will likely be long waiting lists and disappointed customers. But Tata Motors can’t make more Nanos due to a controversy over construction of what was to be the Nano’s main factory in Singur in the state of West Bengal. Last year, protests over people who were displaced from their farmland by the plant turned violent. The company was forced to abandon Singur and shift production to four existing facilities in other cities, a disruption that delayed the launch by several months. A new plant in business-friendly Gujarat will be ready at the end of 2010 with an annual capacity of 250,000, expandable to 500,000.

In the near term, the Nano will have little effect on Tata Motors’ revenue, adding just 3% to sales, analysts estimate. It will have even less impact on the company’s ailing bottom line, because the Nano’s profit margin is tiny, says Vaishali Jajoo, a senior automotive-research analyst at Angel Broking, an investment firm in Mumbai. “It will take at least four to five years to break even” and recoup the company’s development costs, she says. There’s more profit to be made from fully equipped Nanos with air-conditioning, power windows and upholstered seats, which cost about $3,300. “How they’re really going to make money is by selling the high-end version,” says Tilak Swarup, general manager of SupplierBusiness India, whose team of analysts tracks suppliers to the global auto industry. But the company has not yet decided how many high-end versions to produce.

Nor is the rollout plan for the rest of the world set. Tata Motors sells cars, trucks and buses in 16 countries in Europe, Africa, the Middle East, South America and South Asia. For now, the company only has firm plans to export the Nano to Europe starting in 2011. While the possibility of selling Nanos in the SUV-loving U.S. were once considered remote, Tata executives now say the recession is changing the buying habits of American consumers, offering an opening for economical vehicles. They have plans to develop a Nano for the U.S. in the next three years.

Tata Troubles
While the company seeks to redefine the low end of the market, Tata Motors is struggling with its attempt to gate-crash the luxury-car segment. Last year, the Indian carmaker made auto-industry waves when it spent $2.3 billion to buy Ford Motor’s lossmaking Jaguar and Land Rover (JLR) business. Since then, demand for luxury vehicles has tanked, sales of Tata Motors other models have softened, and the company faces a looming deadline to refinance $2 billion in loans for the JLR deal. “That’s a major cash-flow crunch for them,” Jajoo says. The company is pursuing several options: floating shares of Tata Motors, rolling over the JLR loan at a higher interest rate, and getting a bailout for JLR from the British government. “Tata Motors is progressing on the refinancing options and discussing with banks,” a spokesman said. It can also tap funding from stronger sisters within the Tata Group, which controls 98 companies in sectors ranging from steel to technology services. But “the whole group is under major debt,” says Swarup of SupplierBusiness India.

Nano sales won’t do much in the short run to ease the burden. But Tata Motors’ efforts to pioneer cost-saving business processes during the Nano’s development could translate into a healthier bottom line down the road. One of these innovations is “distributed manufacturing.” Instead of investing in expensive factories and hiring additional workers as sales volumes increase, Tata Motors plans to limit Nano production at its central plant to 500,000 cars every year. Beyond that, it will use satellite plants to build the car’s components and distribute these in Nano “kits” to independent entrepreneurs — trained and monitored by Tata Motors — for final assembly and distribution. “They will become our dealers,” Ratan Tata explains. He hopes the Nano will push the auto industry toward fully outsourced manufacturing, leaving car companies to focus on design and marketing — a structure similar to that used in the highly competitive computer industry, where companies such as Apple create products but subcontract the actual manufacturing to specialists operating factories in China and other countries where labor costs are relatively low. “What I tried to describe on the Nano is an attempt to look at [outsourcing] as a business model,” Tata says.

This bold idea may take years to realize, but the Nano is a first step. Tata hopes the car’s launch will encourage similar innovations throughout the Tata Group. Others envision the Nano as something even more: a way to connect and mobilize India’s declining rural economy, creating new jobs, new infrastructure and a culture of innovation far outside the big cities. “It’s kind of like the iPod,” says Tarun Khanna, a Harvard Business School professor who has studied the Tata Group for years. The Nano is a blank slate, he explains, that makes people think, What can you do with it? What if auto-rickshaw drivers bought Nanos, for example, and used them as more profitable, safer taxis? Or if farmers used them to bring their goods to market more quickly?

In an unhappier scenario, the Nano ends up not as a tool to empower the rural poor but as another urban burden. If middle-class mobility comes to millions of people in the developing world, their shiny new Nanos could greatly add to traffic congestion and air pollution in major cities. Tata doesn’t see it that way, calling complaints about the potential environmental impact of widespread Nano adoption “somewhat ironic.” “It’s almost like a car is O.K. for some people, but don’t spread it to the larger base of the population,” he says. “Why are we denying the masses comforts that we enjoy today?” There are millions of other families still in India, still piled onto motorcycles, who have asked themselves that question. “It’s difficult to carry my entire family on a bike,” says Jyotirmoy Sarkar, a rice farmer in a village 72 miles (116 km) from Kolkata. “For people like me with limited means but big dreams, Nano is a dream come true.” That’s a big order for a small car.

— with reporting by Nilanjana Bhowmick / New Delhi

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