Hopes Fade for Rivals to India's Tata Nano

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Until the Nano came along, Maruti Suzuki laid claim to India's cheapest car, the Maruti 800, which sells in the $3,500 to $4,000 range. Now the company (in which Japanese automaker Suzuki owns a 54% stake) has actually moved away from that segment. In 2007 it redesigned that car, the Maruti 800, into the Maruti Alto, a slightly up-market version with better air conditioning, nicer seats, and a new look, making the approximately $4,500 Alto India's best-selling car. That's no surprise. When hype over the Nano was nearing its peak, Suzuki Chief Executive Osamu Suzuki said the Japanese automaker wouldn't follow Tata's lead. "Our fundamental stance is that rather than Suzuki becoming very concerned about watching over our shoulder to see what other people are doing, we'll move forward at our own pace," he said in December 2007.

Little Incentive

The hesitation among international carmakers—and the challenges Bajaj and Nissan are running into—underline the potential pitfalls of making such a cheap car. The Nano car project is far from profitable; even when it reaches its full production run of some 250,000 cars a year in 2012, it will add no more than a few percentage points to Tata's revenues, according to estimates by Vaishali Jajoo, an analyst with Angel Broking in Mumbai. The company has sold only 7,500 Nanos so far, and with such a low sale price, margins are likely to be almost anorexic—a few hundred dollars at the most when steel and other commodity prices swing to their cyclical lows. With that headline-grabbing $2,500 price tag, Tata hopes to make profits from the slightly up-market versions, which with air conditioning and power windows sell for about $3,200, and its export models, like the Nano Europa, which may retail for as much as $8,800.

For the export models, though, Tata will have to beef up safety measures, making the car heavier, and it will also have to invest even more money to make the electric models of the car it has promised. And it may have to work hard to fight perceptions created by being a cheap, made-in-India car in Western markets obsessed with comfort and safety. Since September three Nanos across the country developed a short circuit that caused fire-retardant plastic parts to smoke up from the heat. Tata says it will carry out a preemptive audit of cars sold and in inventory as a precautionary measure, and it has ruled out a recall, choosing instead to replace the supplier for that specific part, called the combination switch.

Part of the reason other carmakers are taking their time is that it still isn't clear whether it's worthwhile to spend the money and time to develop such a cheap car. For Tata, so far, the benefits have been intangible: swinging an international spotlight onto a company that sells 88% of its cars inside India. At the same time, Tata took four years to design the car, and a year and a half to sell the first one, giving it a head start that might make it difficult for others to catch up. Until the car was actually shown in 2008, many skeptics thought it would be a box on four wheels. "So they didn't start planning a competitor until then," says Prakash Telang, the managing director of Tata Motors. "But we are acutely conscious of the fact that the lead times can't last forever."

Srivastava reports for BusinessWeek from New Delhi. Rowley is a correspondent in BusinessWeek's Tokyo bureau. Moon is BusinessWeek's Seoul bureau chief.

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