The soon-to-be-released $2,500 "People's Car" is a natural fit for India, but don't expect rivals to match it
Forget about sleek styling, a powerful engine, or electronic gadgets in the dashboard. Gurdeep Randhawa is lusting after a bare-bones car that'll soon be available in India. The 39-year-old mill manager in a Mumbai suburb buzzes to work on a $1,350 scooter and piles his wife and two kids on it for weekend outings. But he may soon replace that hazardous family hauler with a $2,500 car Tata Motors (TTM) expects to offer this fall. "It's affordable," Randhawa says, patting his wallet.
It's not just Indian scooter drivers who are eager to see what Tata comes up with. Virtually every automaker on earth will keep a close eye on the Indian Auto Show in New Delhi, where Tata plans to introduce what it's calling the People's Car on Jan. 10. The industry is looking to emerging markets for growth, and many companies are gearing up to build cars that can be sold at rock-bottom prices—in both developing countries and more established markets. Toyota (TM) and Volkswagen's (VLKAY) Skoda subsidiary are planning small cars for India. Suzuki says it will soon cut the price of its cheapest model in India. And Renault-Nissan has teamed up with Indian motorcycle maker Bajaj Auto to launch a $3,000 car next year. "If Tata can do it, we can do it," says Renault-Nissan Chairman Carlos Ghosn.
Can they really? Many auto executives say it's almost impossible to build a car at the price Tata is talking about. Established players' engineering and labor costs are far higher, and few are interested in a car that generates the slim margins Tata is likely to earn. Furthermore, regulators in developed markets wouldn't let such a stripped-down car on the road, and consumers probably wouldn't want to buy it. To succeed, "it has to be more attractive than a used car that sells for the same price," says Nick Reilly, General Motors' (GM) chief for Asia.
Tata won't release the details of the People's Car until the New Delhi show. But the company and industry sources say Tata has kept costs down with such spartan appointments as a dashboard that features little more than a speedometer, fuel gauge, and oil light. The car will lack basics such as reclining seats, a radio, and power steering, and will have a 650cc engine that puts out at most 70 horsepower—about what the Yugo had when it was introduced in 1986—but gets 50 to 60 miles per gallon. The ride, meanwhile, could be a tad rough. Tata will use basic shock absorbers up front, but the rear suspension design dates back decades.
Tata's real advantage may be in development costs. India has top-notch engineers, but they're paid about a third what their counterparts in Detroit earn, according to GM, which has a technical center in Bangalore. Engineering a top-selling model costs about $350 million in the West, but could be about 20% of that in India, estimates Detroit consulting firm AlixPartners. That could mean savings of $300 to $1,000 per car. And factory hands in Mumbai earn just $1.20 an hour, less even than auto workers in China. Tata "will set a benchmark" for the industry, says Stefano Aversa, co-president of Alix.
Tata will also save with an innovative distribution strategy. The company plans to supply kits to dealers who will do the final assembly. While other carmakers use kits in emerging markets, assembly is done at big centralized factories that churn out thousands of cars a month. Tata, by contrast, expects the cars to be built in small workshops. That will save Tata money, since distribution and retail account for roughly 20% of a car's sticker price in the U.S. While it's a strategy that bigger carmakers with less extensive operations in India would have trouble matching, it could also lead to serious quality issues since there will be far less oversight of manufacturing.
The biggest hurdles to selling such a car in the West would be its technology. Tata will save about $900 per car by skipping equipment that the U.S., Europe, and Japan require for emissions control, says James N. Hall, principal of 2953 Analytics, a consulting firm near Detroit. And Tata will forgo features such as antilock brakes, air bags, and support beams that protect passengers in a crash. "It's safer than putting four people on a scooter, but that's it," says Sandy Munro, president of Troy (Mich.) consulting firm Munro & Associates, which has advised Tata on manufacturing the car.
Even if Tata's offering wouldn't cut it in the U.S., the company will put pressure on the world's biggest carmakers. Tata intends to focus initially on India and then other developing markets, where it could cut into the expansion plans of the industry's leaders. Later, Alix Partners estimates, Tata could build a car that would meet U.S. or European specifications and sell for about $6,000—still a bargain in either market. Tata has no immediate plans to do so, but with its ambitious chairman, Ratan Tata, close to buying Jaguar (F) and Land Rover (F) and pushing his own brand elsewhere, don't be surprised to see something inspired by the People's Car on a highway near you soon.