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Nano Venturing the Indian Auto Market: Would it be Profitable?

By: ishani_ckb Posted Mar 24, 2009 marketing fandas 891 Views

Analysts felt that with a GDP over trillion dollars which was growing at 9% (as of early 2008), and per capita income of $1000, Indian market had good potential for a car like Nano. Being priced at Rs. 1lakh, the equated monthly installment (EMI) for Nano at 12% (the existing rate as of 2008) would be around Rs. 2200 and Rs.3200 per month for five and three year loans respectively, which was quite affordable to the Indian middle class. However, as a low cost car, Nano was expected to have only 5% net margin (Rs. 5000 per unit) and hence had to be sold in large numbers to become a profitable venture. “It is unlikely that profits will materialize until production volumes exceed 400,000 units per annum. Margins will be razor thin – negative in the short term – and it will only make a meaningful contribution to Tata Motors’ overall profits once volumes exceed 500,000 units,” remarked an analyst.

On the other hand, some people were concerned over Nano’s quality, safety, and emission standards. Some people opined that at such a low price the company would not be able to provide reliable parts. In addition, the car would not have safety features such as the air bag because of the cost constraint. Besides, as Tata Motors targeted to sell Nano in huge volumes to make profit, the environmentalists raised concerns about the damage this will do to atmosphere and also the congestion it would create in cities. However, Tata remarked that these were fake concerns of a small section of people who had grudge to others’ aspiration to improve the quality of life. According to him, while they did not have any problem with other auto manufacturers’ production growth, then they should not have problem with Nano. He further mentioned that “the car is fuel-efficient (does 50 miles to the gallon) and its tailpipe emissions are less than that of some two-wheelers in the market. It conforms to Bharat III emission norms and the engine meets the Euro III standards on exhaust….”

As far as Nano’s positioning was concerned, Ravi Kant, the managing director of Tata Motors, remarked that Nano would not be an urban-centric car and would target the semi-urban and rural markets equally. “It is a car that will go to every nook and corner of the country, even to where people travel by un-mechanised transport or by foot.” With Nano, Tata Motors targeted to fill the gap between the four-wheeler and two-wheeler segment. “After a certain point in the four-wheeler segment, you suddenly drop to two wheelers. In between, there is a gap. In a manner of speaking, you can say that three-wheelers fill the gap, but it is a mode of public transport in India. So, the gap remained,” commented Tata.

As of 2007, two-wheeler and car sales in India were 7.5 million and 1 million units respectively. Analysts felt that even if Tata Motors could convert 10% two-wheelers owners to Nano, it would be able to sale 750,000 units a year. This is higher than the sales target set by the company – 250,000 units annually. However, some analysts felt that the above assumption had a flaw. According to them more than 90% of two-wheelers sold in India were in the Rs. 30,000 to 40,000 ranges. These bikers were highly sensitive to purchase-price, fuel efficiency and maintenance cost. As Nano would cost about 3 times higher and give 20-25 km mileage as against bike’s 60 km, analysts felt that this segment of bikers might not migrate to Nano. Besides, even minor changes in EMI rates could play havoc with the potential buyer’s decision.

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