At Last, Tata Motors' $2,000 Nano

Tata Motors' overdue launch of its tiny, ultracheap car for the masses faces limited supply, factory delays, and a growing field of rivals

By Mehul Srivastava

It was hardly the new-car launch Ratan Tata might have hoped for. About six months overdue, the $2,000 Nano won't actually be delivered until July. The plants where the five-seater was to be built are still unfinished. And the tiny cars are so low-priced that automaker Tata Motors (TTM) probably won't get much of a profit boost initially.

But six years after the project was conceived, Ratan Tata, chairman of the Tata Group, announced on Mar. 23 that the world's cheapest car would soon be available in one of the world's fastest-growing car markets. Tata Motors, which is 37% owned by Tata Group, plans to begin a lottery to pick 100,000 people who will be eligible to buy the first Nano cars that roll off the production line. "We have made a promise and we have kept that promise," Tata told journalists in Mumbai.

Despite the project's ups and downs, the Nano remains a singular achievement for Tata Motors, India's largest automaker. Globally, Tata's pledge in 2003 to build a $2,000 car set off a race among bigger global players to develop a similar vehicle. In India, it meets all government-required safety and emissions standards. And the buzz has led to big expectations for sales, with Indian dealers clearing out their inventory of other models since the beginning of the year to make space in their showrooms for the Nano.

The question facing Tata Motors now is: Will investors applaud?

Tempering Expectations

While the Nano will no doubt raise Tata Motors' brand, few analysts think the car will add much to the company's earnings for some time. The most generous estimates from analysts put the company's $8 billion in revenues up by 3% this year. The car probably won't make a profit for another three years, when the company could be churning out 350,000 units annually, says India Infoline (INFL.BO) analyst Jatin Chawla. By then, Tata Motors might be offering higher-end versions that meet stricter airbag and rear-crash requirements in other markets, may be exporting to Europe, and may even have diesel and hybrid versions that the company says are in the works.

But that's a big question mark at this point. Even Tata Motors seems to be trying to temper expectations. The automaker's managing director, Ravi Kant, said it may not have the capacity to produce more than 50,000 of the ultralight cars this year. That's half of what Tata had hoped for before protestors drove the company out of its nearly completed $300 million plant in Singur, near the east coast of India. "At that rate of production, it's highly doubtful if they can achieve operational efficiencies, let alone operational profits right away," said Vaishali Jajoo, an auto analyst with the Mumbai-based Angel Broking.

Those numbers are also a far cry from the half a million cars per year that Tata eventually thinks it can build—an ambitious target when you consider that Indians bought a total of 1.2 million passenger cars last year. Ramping up to that level could take years, allowing rivals a chance to close the gap. Indian two-wheeler manufacturer Bajaj (BJAT.BO) has a tieup with Nissan (NSANY)-Renault (RENA.PA), which could launch their own low-cost car by 2011, said an official in Bajaj's product development unit.