Could Price Hike for Nano Actually Help Tata?
September 05, 2008
By Nick Kurczewski
PARIS -- No one at Tata Motors will admit it, but hiking the globally ballyhooed $2,500 price of the Nano city car could be exactly what the Indian auto company needs during its current crisis.
Two weeks ago, AutoObserver detailed the mounting challenges facing the Nano as it nears production. Those problems have now officially gone from bad to worse.
On Tuesday, Tata Motors announced that it has suspended all work at the brand-new $350 million dollar factory scheduled to build the Nano. Protestors have surrounded the plant, located in the eastern town of Singur, demanding Tata hand back 400 acres to local farmers. They believe many farmers were forced from their land, or given paltry payments far below market prices.
A Tata Motors spokesperson said, "The situation around the Nano plant continues to be hostile and intimidating. There is no way this plant could operate efficiently unless the environment became congenial and supportive of the project."
Higher Price, Higher Interest = Lower Pressure
Playing with the Nano's holiest of holies - its rock-bottom sticker-price - might be seen as the last thing Tata would do at this sensitive moment. However, it might not be as dastardly a plan as once imagined.
Paul Blokland, managing director of Segment Y, an automotive consulting firm based in Goa, India, suggests that letting the market dictate the Nano's price could help Tata out of its current predicament. Interest rates could play an especially important key role in the success or failure of the Nano. Ironically, higher rates could help the Nano, at least in the short term.
"A car loan (in India) is typically around 14-15 percent, a loan for second-hand car around 18 percent, and 20-22 percent for motorcycles. The riskier the prospect, the higher the rate," said Blokland. "As the Nano is likely to appeal to those moving up from motorcycles and second-hand cars, the interest rate on a loan for a Nano is likely to be in the region of 20 percent, rather than the 14 percent charged on a conventional car loan."
An interest rate on par with motorcycles could have a dramatic impact on Tata Motors' plan to sell 250,000 Nanos in India annually, beginning in 2009. Higher rates could scare off first-time car buyers attracted by the Nano's ultra-low price. On the other hand, it could help control initial demand (dubbed by some as "Nano-mania") until production comes up to speed.
Finance Companies and Early Adopters
Sanjeev Prasad, managing director of LeasePlan, a leasing company with operations in India and 29 other countries, does not foresee Tata Motors letting that happen.
"More than 90 percent of all vehicles in India are purchased on some sort of credit," said Prasad, speaking with AutoObserver from his offices in Gurgaon, near Delhi. All major Indian auto manufacturers have their own finance companies - including Tata Motors - and Prasad believes Tata could insist on financing the Nano itself to avoid higher rates.
Paul Blokland suggests Tata might not want to throw its weight around in the finance world, at least during the Nano's launch. "Given the troubles in Singur, Tata may want to restrict supply initially."
Speaking with AutoObserver before Tata announced the suspension of work at Singur, Blokland suggested that letting the Nano's price creep upwards - due to higher initial interest rates and consumer demand - could help diminish early (and unrealistic) pricing and production expectations.
This could buy Tata some breathing room. Limited production of the Nano at another Tata factory would allow for a small run of cars for the 2008 model year. Tata is unlikely to meet the October sales deadline, though rolling a few thousand Nanos off a production line by year's end could help the company save face. As for balancing rising raw material prices with the $2,500 sticker, Tata could allow the first Nanos to be priced much higher and blame limited production and high demand as the culprits.
"The early adopters will pay [for the Nano] anyway," says Blokland.
Anyone who remembers the sales mania caused by once must-have cars like the VW New Beetle or Chrysler PT Cruiser knows that consumers are willing to pay thousands over sticker to be the first to own a hot new model. Does it really change things if that new hot model also happens to be the cheapest car in the world?
Posted by Michelle Krebs at 4:00 AM under Analysis , Business , Companies , Featured | Comments (1) | digg this | Seed Newsvine
20% loans!? Geez, I should open up a bank in Bangalore.
Posted by: estreka | September 08, 2008 at 4:56 PM