About The Authors

Monday, September 16, 2013

The Nano and the Model T: History Lessons Not Learned

Nano: no price is low enough

Back in 2007 the Tata Nano ultra-low-cost 4-seat car garnered attention; other companies were rumored to be starting their own projects. However, since its 2009 launch it has not sold well. While Japan has its "kei" cars (軽自動車), which are taxed less and until recently did not require proof of a parking spot, economy cars have not sold well. And while the "kei" cars are less expensive, they're not cheap, and come with amenities car drivers in developed countries expect, such as air conditioning.

...Tata fortunately didn't bet everything on the Nano...

We in the US have our own experience with a product similar in concept to the Nano: the Model T. At the onset it was still out of reach of the average American, but Henry Ford and his engineers improved production efficiency and otherwise lowered costs, so that while it initially sold for $850, when production ceased in 1926, it was selling for $350 [using the BLS inflation calculator, that's equivalent to about $4,800 today]. Or rather, not selling.

Instead consumers preferred two other vehicles. One was a Chevy, better appointed though at a higher price point. By 1923, customers could get a Chevy with an enclosed steel Body by Fisher painted in bright Duco colors, an electric starter and other amenities. The other vehicle to which price-conscious consumers gravitated was a used Model T. By the 1920s millions were available, and for farmers and others looking for basic transportation they went for half the price – or less if you were handy, as the Model T easy to fix.

Cars are aspirational products, and in India those wanting a vehicle opt for a Maruti Alto. Even though the base Alto costs 50% more than the Nano, in August 2013 Alto sales surpassed 17,000 units while the Nano sold under 2,000 units.

The other challenge is from below. Motor vehicles are durable goods (though less so on Indian than on American roads), and so the Nano faces competition from used cars. The Nano doesn't have a useable trunk, but all other models do – and a used Alto will set you back less than a new Nano.

Then there are motorbikes, for which India is the world's largest market. Bikes outsell cars by 7:1 – in August 2013 only 180,000 cars were sold, while the leading bike firm Hero by itself sold 460,000 units. At the most expensive end, a Hero Karizma will set you back over R100,000 [rupees], but most models run R40,000-R60,000. Compare that to the base Nano at R162,000 and the base Alto at R242,000. Bikes are utilitarian, too, and if you can hang on, they're capable of carrying more people than a Nano, for half the price.

Nothing New

Of course we've been here before, and we don't have to go back most of a century to find similar examples. In electric cars we had the Aptera at one end – a 3-wheel, strictly utilitarian vehicle – and the Tesla at the other. We know how that went. When Roger Smith wanted to experiment at GM, he set up Saturn. Now by refusing to overdealer he was able to claim a new "no hassle" purchasing experience, which many consumers liked, or to put it more bluntly, were willing to pay for. But by focusing on compact, utilitarian cars, Smith guaranteed the business would generate thin margins (and by insisting on all-new factories and designs, he built in high fixed costs). We also know how that went: Smith's successors could find no business case for continuing to invest in the brand. In contrast, what has GM successfully pushed in China? Not some stripped-to-the bone Chevy, but decked-out Buicks. They can't make them fast enough, the cash just keeps rolling in.

Tata fortunately didn't bet everything on the Nano. It also purchased Jaguar Land Rover, after Ford had restructured and turned them into profitable businesses. There is no upmarket for the Nano; it's already down the road and over the hill. There may be a higher-volume downmarket for JLR, which has passed the starting line with a good position and has yet to peak. Mixed metaphors, yes. Mixed performance, too. But an old story.

mike smitka