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The Tata Nano

The new people's car

Mar 26th 2009
From The Economist print edition

Why the Nano alone cannot solve the mounting problems of its maker

IS THE Tata Nano the car the world has been waiting for, its launch this week a moment not only of automotive history but of real social significance? Or will it prove to be no more than a dazzling digression for its troubled maker? Fifteen months after its unveiling at the Delhi motor show, the cheapest and most talked-about car of modern times has gone on sale. The plainest version costs 1 lakh (100,000) rupees ($2,000), as promised by Ratan Tata (pictured above), the head of the Tata group and the driving force behind the project. At half the price of the next cheapest car on the market (the aged Maruti 800), the Nano will bring car ownership to people who would never previously have considered it. But it has not been an easy gestation.

Last October Tata Motors, India’s biggest indigenous vehicle-maker, abandoned the $292m factory that it had built in Singur, West Bengal, to make the Nano. Violent protests by farmers, stirred up by local politicians, over the state’s forced purchase of their land for the 1,000-acre site had left Tata with the choice of buying the protesters off or walking away. After much soul-searching, and having found an alternative site at Sanand in Gujarat, Mr Tata opted to start again. The decision has been costly. Some of the original investment has had to be written off and the new factory will cost $389m. Suppliers who had been setting up near the Singur operation have also had to start again.

As a result the Nano’s launch is seven months behind schedule. When Sanand opens next year it will have an annual capacity of 250,000 units, extendable to 500,000. But for the moment an existing factory at Pantnagar in northern India has been converted to produce the car at a rate of 50,000 a year. With demand expected greatly to exceed supply, the first 100,000 Nanos will be allocated by lottery.

Tata is making the best of a bad lot by asking prospective buyers to place deposits that come close to the full price of the car. Someone ordering the basic model will have to find $1,875 to place an order for a car with an on-the-road price (including taxes) of around $2,500. Anyone opting for better-kitted-out versions with air conditioning and electric windows will have to stump up nearly half as much again. For those who need credit, Tata has helpfully lined up 15 “preferred” banks and lenders.

In the rush to get their hands on the first Nanos, customers are expected to place deposits worth up to $1 billion—money Tata will hold on to for at least three months before the allocation is completed. Those wishing to be considered for the second batch of cars will be paid interest (at well below the market rate) after a year, but Tata will get to keep at least $200m interest-free while it ramps up production.

That is cash that Tata Motors could certainly do with. Ravi Kant, the firm’s boss, insists that earlier predictions that it will lose money on the Nano are wide of the mark: raw-material prices have helpfully fallen, a recent excise cut from 16% to 8% is not being passed on to customers and the majority of Nanos sold are likely to be the fancier, more profitable models. But according to Deepak Jain of Edelweiss Securities in Mumbai, Tata Motors faces a funding gap this year of at least $3.4 billion. About $1.4 billion of that is in the form of short-term loans raised for working capital, and $2 billion relates to the bridging loan taken out last year to finance its $2.3 billion purchase of Jaguar Land Rover (JLR), a British premium carmaker, which must be either repaid or refinanced in June.

In the last quarter of 2008 Tata Motors reported its first net loss for seven years, of $54m, as sales of medium-to-heavy commercial vehicles in India fell by nearly 60% and its share of a flat passenger-car market failed to improve, despite the launch of the well-received new Vista hatchback. During the same quarter an attempt to raise $885m through a rights issue ended up with Tata Sons, the group holding company, taking up 61% of the ordinary shares.

Tata Motors’ credit rating is also under pressure. This month Moody’s cut its rating from B1 to B3 with a negative outlook, the second cut in five months, and this week Standard & Poor’s reduced it from BB- to B+. Mr Kant expresses confidence that despite the difficult credit-market conditions Tata Motors can handle the situation. But JLR adds substantially to his difficulties. Through sheer bad luck, Tata’s purchase of JLR in June 2008 coincided with the meltdown in rich-world car markets. “We had a strong start to 2008, with record sales,” says David Smith, JLR’s chief executive, “2007 was Land Rover’s third record year, we made £327m profit, and more in the first half of 2008, so we were very profitable.”

Since then, however, sales have fallen 22% by volume despite a strong performance (albeit from a low base) by Jaguar, thanks to the success of its new XF saloon. Land Rover, the cash cow of the group for several years, has seen sales slide by a third. Since the summer, Tata has ploughed $1.2 billion of working capital into JLR, 1,800 jobs have been cut, a pay freeze has been agreed on with the unions and production has been slashed by up to 60%.

The picture is not entirely bleak at JLR. Mr Smith says that inventories have been largely run down and production will resume after Easter at 70-75% of capacity. Jaguar’s XF is winning in consumer-satisfaction surveys, and Mr Smith is confident that the new XJ luxury saloon will be launched on time in July. Meanwhile, a JLR team is working with Tata in India to source cheaper parts.

But without a recovery in its main markets, JLR will remain vulnerable. This week Mr Tata warned that JLR would not be able to carry on as it is without £500m ($730m) in loan guarantees from the British government. Mr Kant insists there is no buyer’s remorse on Tata’s part. But JLR is so big compared with the rest of the business—by next year it will contribute more than half of Tata Motors’ revenues, according to some estimates—that its fate will shape that of its Indian parent.

In a different way, the same is true of the Nano, but the risk is as much reputational as financial. Rakesh Batra of Ernst & Young India, a consultancy, says rivals are watching closely, and Tata must succeed when it comes to quality, service and the availability of parts if the Nano is not to fall flat on its pert little nose. Undaunted, Mr Kant believes that the Nano is tapping into a social and economic revolution in India. “There is a paradigm shift under way in the country,” he says. “Through the explosive growth of cellphones and television, the aspirations of rural people are converging with urban people.” He also points to India’s plan to connect every village with a population of more than 1,000 to the road network by 2010. Nor are his ambitions for the Nano limited to India. The Nano Europa, a plusher version that meets Western safety and emissions standards, will go on sale in 2011, with an American version due a year or so later. “The interest in the Nano”, he says, “is worldwide.” (Source: Economist)