In India, Little Demand for a No-Frills Car- Tata Nano’s Cheapest Version

Amazingly after all the focus on 1 Lakh car, less than 20% of the bookings are for the cheapest version of the Nano…

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May 26, 2009

In India, Little Demand for a No-Frills Car

MUMBAI (Bloomberg News) ??? The chairman of??Tata Motors, Ratan Tata, had 500 engineers work for four years designing the world???s lowest-cost car, convinced that cost-conscious Indian drivers could live without air-conditioning and cup holders.

But only 20 percent of Tata???s initial 203,000 orders for the car ??? the Nano ??? were for the no-frills $2,600 model. Instead, half of the customers booked the top-end model, which costs 40 percent more.

???My children need to travel comfortably,??? said Neelakandan Raveendran, 51, who ordered the most expensive version of the Nano as his first car. The bank clerk earns 24,000 rupees, or about $500, a month and will split the cost of the car with his daughter.

Sales of pricier versions with extras like air-conditioning mean bigger margins for Tata and less chance of a profit-sapping price war with rivals like Maruti Suzuki India, analysts said.

???There is no demand for a bare-bones car,??? said Mahantesh Sabarad, an analyst at Centrum Broking based in Mumbai. ???Based on this experience, it does give other automakers room for pricing their products higher. They don???t have to be drawn down to a pricing war.???

Toyota Motor??and Renault, which are also planning to sell low-cost cars, may be able to charge more for their models on demand from customers in India, where incomes have doubled in the past eight years. Higher prices may mean bigger profits for automakers in India, unlike in China, where discounts have hurt earnings amid a sales boom.

Profit at Maruti Suzuki, maker of half the cars sold in India, and Tata Motors, the third-biggest Indian carmaker, more than doubled in the five years that ended March 31, 2008, as new jobs proliferated in India, the fastest-growing major economy in the world after China.

Maruti???s 800, the company???s cheapest car, which retails for as little as 184,894 rupees in New Delhi, in 2005 saw the end of its nearly two-decade reign as India???s best-selling model. It made way for the Alto, which costs 21 percent more. The 800 now accounts for less than 5 percent of Maruti???s sales, said Mayank Pareek, executive officer for marketing and sales at the carmaker.

The cheapest Nano retails for 123,360 rupees in New Delhi, while the top-end variant goes for 172,360 rupees. ???Higher versions of all cars have better margins,??? Debasis Ray, a Tata Motors spokesman, wrote in an e-mail message.

???It isn???t that the cheapest car sells the largest,??? Mr. Pareek said. ???There is a clear shift, and customers are not just buying the cheapest car. They are willing to spend a bit more.???

Maruti, the New Delhi-based unit of Suzuki Motor in Japan, has said it will not cut the price of the 800 to take on the Nano.

Salaries in India will jump by an average of 8.2 percent this year, after six successive annual increases of more than 10 percent, the human resource consultant??Hewitt Associates??said in February.

Toyota plans to introduce a small car in India in 2010, with an initial annual production target of 70,000 units, said Paul Nolasco, a company spokesman. The company has not disclosed the details of the car, he said. Toyota has an early prototype for a model that may be able to compete with the Nano, the company???s president, Katsuaki Watanabe, said in Detroit last year.

Renault, the French carmaker, and??Nissan Motor??of Japan are together building a $2,500 car with Bajaj Auto, the Indian motorcycle maker.

???The cost issue for the car is still crucial,??? said Pauline Kee, a Nissan spokeswoman. ???We will monitor the development of the Tata Nano rollout. It???s still premature to say whether this will change our strategy??? for developing the ultra-low-cost car, she said.

In contrast to India, combined profits at China???s top 19 automakers fell 48 percent to 10.8 billion yuan, or $1.6 billion, in the first quarter, as Volkswagen and??General Motors??discounted models. Prices of locally made cars fell 4.08 percent in April from a year earlier. China has 52 car brands and more than 100 automakers.

China???s vehicle sales may rise 8.7 percent this year to 10.2 million units, according to the nation???s automakers group. That may be enough for the country to surpass the United States as the world???s biggest auto market. U.S. sales may drop to 9.7 million, according to CSM Worldwide Inc.

With??Honda Motor, Volkswagen,??G.M.??and??Ford Motor??among automakers building new factories and introducing new products in India, tighter competition and lower profitability are only a matter of time, said Puneet Gupta, an analyst at CSM Worldwide based in New Delhi.

???Co
mpetition is going to be really intense,??? Mr. Gupta said. The carmakers ???won???t be able to enjoy the margins that they are enjoying today.???

Tata Motors will begin deliveries of the Nano in July, choosing the first customers through a lottery. In contrast to the entry-level model, the more popular mid- and top-end cars will feature amenities like fabric seats, central locking and front power windows, in addition to air-conditioning and cup holders.

???Today, everyone around me travels in an air-conditioned car,??? said a bank clerk, Raveendren, who is abandoning the family two-wheeler. ???My children, too, wanted one. It???s a must.???

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