Tata group Chairman Ratan Tata did live up to his promise of delivering a Rs 1 lakh car. But, that promise is now costing Tata Motors dear.
When Tata had conceived Nano, the "people's car" in 2003, hot-rolled steel, a benchmark product used in making car body panels, was priced at $399 a tonne. Seven years and 30,000 Nanos later, the price of hot-rolled steel has almost doubled, and is still surging.
This has prompted component suppliers to ask for a revision in rates from Tata Motors. Steel accounts for 50 per cent of a car's weight.
Tata Motors has promised to deliver the first 100,000 standard or entry-level Nanos at a dealer price of Rs 1 lakh.
Sources in Caparo, a vendor for Tata Motors, said it had written to the auto maker, demanding a 5 per cent to 7 per cent increase in the price at which Tata Motors buys body panels from it. The vendor is citing an 18 per cent increase in the price of steel since September 2009 as the reason behind its demand.
"When steel prices increase, we pass it on to the original equipment manufacturers (OEMs). It is up to the OEMs to decide whether they want to absorb it or pass it on to the consumer," said a source in Caparo.
Sona Koyo Steering Systems Chairman and Managing Director Surinder Kapur did not comment specifically on a price revision for Nano, but said there is a basic understanding with all customers that when raw material prices increase, it would be passed on to the car makers.
Tata Motors "was not given to taking frequent price increases with every movement in input prices," a company spokesperson said. "The first 100,000 (Nano) owners are price-protected, and they will get their cars at the prices announced on the launch day on March 23, 2009."
But, vendors said, Nano was working on very thin margins.
"When the plant was being built at Singur (West Bengal), margins were thin because steel prices were very high. When it moved to Pantnagar (Uttarakhand), the situation improved as steel prices crashed. At the current steel prices, cost of production would be higher than the entry-level dealer price," a vendor said.
Tata Motors, however, maintains that Nano is a profitable business regardless of the fact that rival Maruti, which sells one in two cars in India, said recently that raw material prices had hit the company.
While announcing its fourth quarter results, India's top auto maker said a rise in the prices of raw materials, such as steel, copper, and nickel, had eroded profit margins by 70 basis points in the quarter from a year earlier.
For the people's car, however, there is one saving grace. Almost half the bookings were for the top-end version, LX. Around 30 per cent were for the mid-level CX model and the remaining for the entry-level model.
A Tata Motors spokesperson said the company has not yet decided the price or the date for accepting bookings for the next lot of Nanos.
But it is increasingly becoming evident that unless the commodity cycle turns, the company would find it difficult to hold on to the Rs 1 lakh price tag.