Little Tata Nano Faces Big Challenges as Job One Could Be Delayed

Little Tata Nano Faces Big Challenges as Job One Could Be Delayed

By Nick Kurczewski

Nearly everything about the Tata Nano is on a smaller scale than other cars. From its tiny exterior dimensions to its ultra-low $2,500 base price, the Nano is the reigning champ of automotive frugality even before it goes on sale in October.

Stretching only 122 inches in length, the Nano is almost two feet shorter than a Mini Cooper. And with a curb weight of roughly 1,200 pounds, the Nano makes a lithe sports car like the Mazda MX-5 Miata suddenly seem like a candidate for Jenny Craig. The two-seat Japanese convertible weighs a whopping 1,200 lbs. more than the four-passenger Nano hatchback.

While the Nano's proportions are small, the Spartan city-car is causing full-size headaches for the folks at Tata Motors as production looms close. In fact, those problems are so large they could force Tata to postpone the introduction of the tiny Nano.

Since the Nano's unveiling at the New Delhi Auto Expo in January, the car's base price of $2,500 has stunned the world. Automotive pundits wondered how Tata Motors could have cut costs so dramatically and delivered on the company's promise of a "1-Lakh" price point. After all, the next cheapest car in India, the austere Maruti 800, costs almost double the Nano's sticker price.

Penny Pinching and Price Increases   

One of the problems facing Tata Motors is that, while the Nano's long-promised price has stayed the same, costs for raw materials have gone through the roof. Even as oil retreats from a high of nearly $150 per barrel, the chances of Tata Motors squeezing a drop of profit out of a $2,500 Nano is highly unlikely. Choosing a single culprit for this is impossible, since escalating material costs have raised the price of everything from corn flakes to crude oil. 

Focusing only on the Nano's steel exterior, it's clear how difficult it will be for Tata to stick to that $2,500 price for long. "The price of steel to automotive [applications] in the U.S. and abroad has most probably increased by some $100 to $150 per car produced since 2007," says Michelle Applebaum, managing director of Applebaum Research, a steel equity research firm in Chicago. 

While that level of cost increase can more easily be absorbed by a vehicle costing, say, $10,000 to $15,000; for an ultra-low-cost car like the Nano, a $100 per-vehicle cost increase for steel could wipe out any profit margin. Luckily for Tata Motors, the Tata Group just happens to include Tata Steel, currently India's largest steel company according to the Group's website.

Relying on companies within the Tata Group is one way to keep costs in check - or at least absorb potential losses by the Nano over a much wider net. A more elementary cost-cutting method is the fact that a car of the Nano's small size and light weight simply needs less stuff to go into its construction. A base Nano does without mod-cons like power-steering, a stereo, air-conditioning and, believe it or not, two windshield wipers.  The Nano makes due with one wiper, as Tata engineers found it sufficient and helped save complexity and costs.  

This has still not stopped the Tata Motors from putting enormous pressure on its suppliers. Paul Blokland, managing director of Segment Y, an automotive consulting firm based in Goa, India, says that Tata has taken a long-term approach to this problem. "One of the reasons Tata has been able to price the Nano so aggressively is because they signed contracts for five to seven years with suppliers."  Blokland says that this is an "extraordinarily" long time for these types of parts supply deals.  

But the question remains:  How many Nano suppliers can cope with (potential) short-term losses during the car's introduction in the hope of gains three to four years down the road?  Blokland is in no doubt that Tata will stick to the $2,500 price, at least briefly. "What they'll probably do is churn out the first few at that price, and then quietly raise the price." Modest increases would ease the burden on suppliers, though they could also raise the ire of Indian car buyers drawn to the Nano for its ultra-low cost. 

Rising Prices and Political Tensions

For those paying close attention, it's been quietly known ever since the Nano was shown in New Delhi that the "1-Lakh" price was always a bit artificial. The price does not include taxes and transportation fees - much less a single option. Still, Tata Motors might be forced to sell the first Nanos at a loss, if only to make good on the promise of a $2,500 car. 

"With a car like the Nano, and the sort of project where you announce a certain price point, it represents a huge challenge," says Todd Turner, president of Car Concepts Inc, an automotive trends analysis company based in California. Turner says that profits can still be made on small cars - especially during the current exodus from gas-guzzling SUVs - and points to successful examples like the Toyota Yaris and Honda Fit sold in the U.S.  Of course, these Japanese economy cars cost thousands of dollars more than the Nano.

Whether or not the Nano even begins to roll off the production line at its new Singur plant, located in West Bengal, is also now in serious doubt. Protests over the land acquisition methods used by Tata Motors began on Aug. 24, led by Mamata Banerjee, chief of the Trinamool Congress political party. A report in The Hindustan Times states that Banerjee's demands include that 400 acres of farmland (acquired for the Nano factory) be returned to farmers. 

The Trinamool Congress argues that farmers were forced off their land, or given payments that were only a fraction of the land's true value. Tata Motors has spent more than $350 million on the factory in Singur, and many suppliers to the Nano have set up factories nearby. This has now made Singur's once cheap farmland a pricey commodity, and a flashpoint for political unrest.

Known for her fiery rhetoric, Banerjee has already gone on hunger strikes to protest the Singur factory, and once promised "a blood bath" if Nano production was not moved elsewhere. Despite the severity of these threats, Banerjee maintains that she is open to dialogue during the indefinite protest, according to a report in the Business Standard. Representatives of the Trinamool Congress did not respond to repeated requests from AutoObserver for an interview.

The Hindustan Times reported Monday the protests at Tata's factory caused traffic gridlock on the national highway, hampered the movement of vehicles entering the state and prompted authorities to divert traffic away from the area.

This has all cast a troubling shadow over the Nano, which has been hailed as being as much a symbol of Indian pride as it is an engineering feat of automotive cost-cutting. Ratan Tata, chairman of the Tata Group and Tata Motors, has expressed concern over the protests that have plagued the factory. Last week, Tata hinted to reporters that the Singur factory could be at jeopardy and production moved if a solution is not found. Rising material costs and razor-thin profit margins could soon be the least of the troubles facing the Nano.     

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.