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Cheap cars: After Tata, auto giants join race

By Nandini Lakshman, BusinessWeek
August 31, 2007 10:08 IST
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For the past four years, auto enthusiasts in India have been eagerly awaiting the launch of one of the industry's most ambitious projects, Tata Motors' ultra-low-cost car. Ratan Tata, chairman of India's largest private-sector conglomerate, announced in 2003 his intention to make a $2,200 car, which is now likely to debut at the Indian auto show next January in New Delhi.

Others are not just waiting to see what Tata unveils. The group's innovative venture into the very-small-car space has sparked the imaginations of a host of Indian entrepreneurs, who are planning to compete with products of their own. In the last couple of months, many Indian manufacturers - from scooter and motorcycle makers to automakers, auto component players, and various auto professionals - have announced plans to roll out low-cost cars. The price range: $3,000 and below, with engine capacities ranging from 660 cc to 1,500 cc in gasoline, diesel, and hybrid versions.

India's automakers think small

If Indians are gung-ho about the small car, so, too, are the foreigners. On Aug. 22, Toyota Motor chairman Fujio Cho revealed at a press conference in New Delhi that Toyota plans to enter the small-car market, and India could be its first destination. Cho's announcement follows months of speculation that Toyota was considering a small car for India, based on its European hot seller Yaris, manufactured with subsidiary Daihatsu.

For a growing middle class

German carmaker Volkswagen is also said to have plans for a two-door, rear-engine car. And speculation about the intentions of Ford Motor is building. A Ford spokesman in India, contacted by BusinessWeek, would not comment on a news report that the US company has plans for a sub-1.2 liter car.

India's 50 most powerful people

This very-small-car segment is shaping up as a major Indian battleground, thanks to the growth in the Indian middle class and its disposable income. Companies are counting on the small-car projects to push aspirations further. "This segment is a large, but challenging, opportunity," says Ramesh Mangaleswaran, partner and head of the auto practice at consulting firm McKinsey & Co. According to him, everyone is using the price of the Tata car as a threshold. "This class of consumer is totally cost-driven, so it isn't just the initial cost but life-cycle costs that are critical," he adds.

Leading the race are ambitious multinationals that lost prior opportunities to be in India and are now anxious to catch up. The Franco-Japanese alliance of Renault and Nissan is one. In April, Renault and Nissan Chairman Carlos Ghosn - in India to launch Renault's compact car Logan - said he was watching the $3,000 car market and intended to offer a product for India's masses. In July, Renault began talks with Bajaj Auto, a leading Indian scooter and motorcycle company, for a $3,000 car.

Four-wheeler technology

Rajiv Bajaj, managing director of Bajaj Auto, told reporters that he has been working on a new indigenous technology for a four-wheeler which, if viable, the company will showcase at the New Delhi auto show in January.

India's talent gets loads of TLC

He is known to be working on a multiutility vehicle, but hasn't ruled out a small car.

This represents a big move for Bajaj Auto. The company has been the second-largest player in the Indian two-wheeler segment, and investors have long been grumbling that the company was giving up a lucrative market of buyers who wanted to get a vehicle that was more than a scooter but less than a car.

Bajaj's fiercest competitor, the New-Delhi-based $3 billion Hero Group, India's largest bike and cycle maker, has also stirred the car pot, but won't give details. The group's 23-year-old joint venture with Honda Motor for motorcycles, Hero Honda, has been one of the most successful in Indian auto history, but now Hero is looking at making vehicles with four wheels rather than just two. "We are exploring avenues but it's too early to talk," says Pankaj Munjal, managing director for Hero Motors and Hero Cycles.

The last rajah

For these players, entering the car market is yet another opportunity, say analysts. If the Tata car succeeds, it could eat into the 65 million-per-year two-wheeler market in India. The most affected would be premium two-wheelers with 35 per cent of the market and 16 per cent operating margins, double the average for bikes.

Already, rising interest rates have hit consumer spending on two-wheelers, with many consumers pushing back purchases at least until the Indian New Year festival season in September. In the most recent quarter, domestic two-wheeler sales for the major players fell between 6% and 13%. "That's because of the inventory buildup and nonavailability of finance," says Ramnath Subramaniam, vice-president of research at SSKI Securities.

Up from the bullock cart

The transition away from two-wheelers makes the small car's success seem inevitable. Despite India's increasing wealth and the multiple auto offerings, small cars continue to dominate Indian roads, with 70 per cent of the 1.4 million-car annual market. That's likely to double by 2008. Spurred by a growing demand for compact and low-cost cars, auto sales are expected to soar from $34 billion last year to $145 billion by 2016.

The many faces of Tata group

According to the Strategic Foresight group, between 2001 and 2007 about 100 million Indians moved up the ladder from being bullock cart-users to being two-wheeler users. The next move is a car - an affordable one, which bridges the gap between the $1,450 average scooter to the $4,800 small car currently on the market.

That's why the upcoming Tata car is aimed at the first-time car buyer, or the two-wheeler user wanting to upgrade. The space is wide open, says McKinsey's Mangaleswaran. "Manufacturers are looking to capture this."

It wasn't always so, not even a year ago. Tata's small-car venture was pooh-poohed by many in the industry as a mad idea by a dreamer. Earlier this year, Maruti Chairman Osamu Suzuki dismissed the Tata car as "impossible." But now there's talk in the market that Maruti Udyog, the Indian subsidiary of Suzuki Motor (which is now changing its name to Maruti Suzuki), may slash prices of its 800cc, $4,800 car and spruce it up for a relaunch. "The game is about volumes," says Amit Kasat, auto analyst at Motilal Oswal.

But profitability is a big issue, and the critical factor is making the car at the lowest possible cost. Tata is confident: Says Ravi Kant, Tata Motors' managing director, "It is not just pure price play, but a lot to do with innovation and effective use of resources." This is not idle talk, as Ratan Tata produced India's first indigenous car - the Indica - in 1999, helping Tata Motors emerge as the second-largest carmaker in India. And that's why everyone wants to be in his game.

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Nandini Lakshman, BusinessWeek