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Home > Business > Special

Tata 'People's Car' could face rocky road ahead

Joe Leahy and Paul Betts | January 15, 2008

When Ratan Tata unveiled his $2,500 "People's Car" last week, local press gushed that it was "the true spiritual successor of the Tin Lizzie" - Henry Ford's Model T that made the car affordable for the masses.

But if the Tata Group chairman's rivals at Japanese car and motorcycle makers Honda and Suzuki are to be believed, the Tata "Nano" has much to prove before it will justify such hyperbole.

Honda's chief executive Takeo Fukui told the Financial Times this week that bad roads and high petrol prices would force many people in emerging markets to stick with motorcycles rather than switch to cheap cars such as the Nano.

Shinzo Nakanishi, managing director of Maruti [Get Quote] Suzuki, India's biggest carmaker, told Indian newspaper Mint that ultra-basic cars were "not where the market is".

He added that Suzuki could not build a car for the same price as the Nano without sacrificing quality and standards.

Such talk might be expected from rivals. But it does point to one critical issue for Tata - just because the Nano is cheap does not mean its buyers will compromise on quality.

In fact, the Nano's target market could prove even more discerning than the standard customer.

Those switching from motorcycles to the Nano will be lower-income people who are acutely aware of value for money.

"They will be far more critical customers because they are going to stretch to buy this car," says Mohit Arora of JD Power.

Unfortunately, Tata's car range already routinely ranks at the bottom of quality and consumer satisfaction surveys.

So Tata will need to pull something new out of its hat if the Nano, made of new materials and adhesives, is going to prove a match for the sturdy motorcycle on India's bone-jarring rural and suburban roads.

Lack of sparkle

When Nestl� acquired Perrier for about Euro 2bn in 1992, the Swiss food multinational thought it had pulled off quite a coup. After an epic battle with Italy's Agnelli family - also keen to lay its hands on this quintessential French brand - Nestl� had finally taken control of the world's most famous sparkling water.

True, Perrier was not in good shape at the time. A couple of years earlier, it had been forced into a massive recall of some 280m bottles after traces of benzene were found in its water. That incident shattered its image, cost the company about Euro 150m and opened the door to Nestl�'s takeover.

But the Swiss were confident that their global scale and management savoir faire would quickly help revive the French company and add some extra fizz to its expanding portfolio of international spring water brands. Unfortunately, right from the beginning, Nestl� found itself caught in a classic confrontation with old-school local unions and staff used to dealing with a highly paternalistic French owner and unhappy with the new multinational culture of the Swiss giant.

After a long string of disputes, the Swiss finally read the riot act four years ago. Nestl�'s chairman, Peter Brabeck, warned the unions and Perrier employees that he was losing patience. The multinational also hinted it could consider moving production elsewhere - to the Czech Republic, for example - or indeed sell the business if the unions and the workforce refused job cuts and other steps to improve productivity.

For in spite of its strong brand image, Perrier had become a symbol of French labour rigidity. Its productivity was so dismal that Nestl� claimed workers at its Italian mineral water company San Pellegrino were four times more productive than their French counterparts.

Following Mr Brabeck's outburst, the two sides have made efforts to improve Perrier's operations, but relations have nonetheless remained tense. The unions, workers and local administration at Verg�ze in southern France, where Perrier is based, have continued to worry about Nestl�'s threat to move production elsewhere. So to leave nothing to chance, they have decided to rename the famous spring water Source Perrier-les-Bouillens rather than simply Perrier.

Under this name, Nestl� would be unable to market spring water produced in another country, or indeed another French region, with the Perrier label, since it would now incorporate the geographical denomination of the actual spring - Les Bouillens - where the famous fizzy water is extracted.

The Swiss immediately challenged the name change in the courts but the judges have on two occasions - the latest was Friday - ruled in favour of the local administration. Nestl� intends to appeal against the latest ruling, which would continue to frustrate its efforts to restructure Perrier and make maximum use of its famous brand name. Yet should the locals of Verg�ze continue to stymie the ambitions of the giant Swiss multinational, Perrier would definitely become one of the worst investments Nestl� has made in its long history.

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