Saturday, May 31, 2008

A contrarian view on the Tata Nano: Five years at most

This is a big year for Tata Motors. Nano has produced the $2500 car, taking the world's-cheapest-car title from the Chery QQ3 from China which retails for $4000-7000. This is indeed an "innovation" in the automotive industry that has the world raving.

Congratulations to Tata, and thanks for thinking (always) about India's poor.

However, I predict that the Nano is unlikely to grow in sales for more than five years for three reasons.

Firstly, apart from Toyota (known for its quality), no car company has managed to straddle everything from the People's car to the world's most luxurious. That strategy has been tried and failed by many including Fiat and Ford. Cheap and Luxury simply don't go together, and its hard to keep them apart. The automotive industry is about scale and purchasing power. When Ford went on its buying spree (Volvo, Jaguar, Land Rover) it soon started to mix up Jaguar and Ford components. That was ok for a while because it improved the Jaguar's notoriously poor engineering. But when Ford brought in its designers and stylists, and then tried to mass market the car, the reverent brand fell fast from grace. I believe the Tata will face similar strategic challenges. How does the culture of the Nano survive under the same roof as the reverent Rover and Jaguar brands.

Secondly, eventually no one wants to be seen in the "cheapest" car. The Nano will sell for a while in India (five years tops), and allow many many people to own a car. The Nano is a remarkably nice looking car from the outside for its price. However, five years down, unless the car improves substantially in style (and loses the "extremely cheap" label, I believe sales will start to fall sooner than we think, following the follow the route of Chery's cheapest car (which fell 26% this year). The Nano will likely acquire a stigma, or be a punchline. Few will want to be seen in the world's cheapest car.

Remember the Scojo Foundation which brought affordable reading glasses to the world's poor. Although Scojo started selling $1 plain glasses and $3 glasses with better design, the poor incredibly preferred to buy the more stylistic glasses. No one wanted to be seen in the not-so-nice-looking-but-cheap glasses. The poor like to be fashionable too. Scojo has "improved" pricing, along with better designs. The cheapest glasses are now $3.

Lastly, the Nano is no guarantee that people will stick with Tata for their next car. Its more likely that they won't. Toyota and Honda have incredible brand loyalty because they make high quality reliable cars. However, GM and Ford experience a high turnover; a majority of their customers leave and don't come back (unless they give these massive "cashback" promotions). Unless the Nano is well made and highly reliable like Japanese cars, the Nano will help other carmakers more than it helps itself.

So while the Nano is great right now, does wonders for the Tata Group in terms of free global PR, is a great sell for the power of India's elegant-and-value-driven innovation, it may not be the financial success that many believe. Unless Tata enforces Japan-like quality early in the Nano.

The PR for Tata, India and the inspiration to India's innovators is already worth several billion dollars.

However, they may not recover the financial investment in five years.


Rachit Chandra said...

Nice Insights! I guess the experience with Ford in India speaking :)

Rajit said...

I would differ from your perspective on Nano. I think Nano is a classic disruptive innovation and will be very successful.

1. Tata realized that Nano and Jaguar can not thrive under the same roof as you correctly point out. Infact,reason most companies fail at disruptive innovation is that they don't create a separate organization for the new venture. Tata has created Nano from scratch. They hired new employees(not taken from Tata Motors and not even Auto industry), those who had the ability to think outside the box. They looked at other industries for ideas (e.g. furniture industry for car seat design), started the design, manufacturing plant (brand new plant), suppliers etc. from scratch. The only thing common is the name TATA. Hence they have made a delibrate effort to keep Nano separate from other brands of Tata Motors.

2. The competition for Nano is scooters, motorcycles etc. The target customer is one who takes his family of four on a scooter (familiar sight in India!!). So, for these people the question is not about the cheapest car but just having a car. For those who can afford more expensive cars, are anyway not the market. Think about Southwest. They started as competition to Greyhound and not Delta. Are people today ashamed of flying in the cheapest airline?

3. I agree that people might not stay with TATA if they upgrade their car. But this is not the main point for Nano's introduction. Quality for Nano's target customer means very different from quality for an average car customer. Average car customer may care about smoother ride, power brakes, better reliability but Nano's customer would be happy with anything that fits in the family and takes them from point A to point B, even if the ride is bumpy (at least it would be less bumpier than scooter ride) and reliability is not great (remember the benchmark is against scooter - I remember tilting/kicking my sccoter to start and never complaining!!).

The jury is of course still out on Nano but Nano fits all the patterns of a disruptive innovation (new market disruption)and I think it would be successful.

Rajit Kamal