Tata Nano – the People’s Car

Tata Nano – The People’s Car

Question 1

Tata Motors has always been characterised by a strong focus towards innovation, and with its Tata Nano the company aimed at creating an ultra-low cost car that could be afforded by the masses. The company’s objective was to innovate and break the industry paradigms with a value innovation project, which aimed at attracting new customers and at creating a new market, avoiding competitors by creating a product with a new value proposition (Kim and Mauborgne, 1997). Kant and his team wanted to provide a car that could be attractive to the masses and redesigned every single part of it around the requests and needs of the target customers: they wanted a small car,  with low purchase and maintenance costs, which anyway retained all the minimum comfort and performance requirements.

Although creating value providing something new was fundamental, the team had to consider the cost side and, in order to contain costs, much attention was devoted to the elements that could be eliminated or simplified without losing value for the client. Tata Motors questioned many of the industry paradigms which had never been questioned before. For example, the engine was deprived of all the additional features and was simplified so to make it lighter, more efficient, and cheaper. Despite the simplifications, customers would have not perceived any difference in performance. The company opted for the rear-engine, a risky move since it had never been installed in a small car, but which would have allowed to free up space in the car. Additionally, the seat was limited to three positions instead of infinite ones, and this allowed Tata to cut further costs without completely removing the option.

A new value curve resulted from the re-design of each single feature (Exhibit 1). The strong attention to costs allowed Tata to price its Nano slightly higher than the two-wheeled vehicles but still lower than competitors’ small cars, such as the Maruti 800 and the Alto, its direct competitors. The Nano costed in fact to the final customer between $2,951 and $4,074, against an average of $5,000 for the Maruti and of $5,500 for the Alto.

At the same time, the car had to respect the safety requirements imposed by the government. Although these requirements were met and the safety provided was higher than that of motorcycles, the Nano car offered fewer additional safety features than competitors’ cars. A similar reasoning could be applied for performance, which was only marginally lower than those of competitors’ offerings, but better than two-wheels. Despite not outperforming the small cars on the safety and performance segments, the Nano car had a better manoeuvrability and was more fuel efficient than their direct competitors, and it scored only slightly than two-wheels on these dimensions.

Kant and his team worked on many more characteristics to create a product superior to competitors’. An important element to devote attention to was dimension and internal available space: the Nano car was on average 10% larger than the other small cars, which made her a “real car”. This element made the car attractive to the other small cars. At the same time, other additional features such as four available seats, air-conditioning and heater made the Nano a valuable alternative to motorcycles. The trendiness of the car with respect to two-wheels was an additional element that made it attractive to the segment of motorcycle owners.

The newly designed Nano car appeared to have an advantage over small cars in terms of costs, with a lower purchase price, maintenance and running costs lower. The car could instead be potentially appealing for two-wheeled vehicles users thanks to a fuel efficiency close to those of two-wheels, and the additional comforts provided by a car. For this segment, the additional value proposition relied not much on the costs, but more on the additional features that a motorcycle could not offer, without large increases in the cost of ownership.

Question 2

To estimate the feasibility of Tata’s production target, it is necessary to understand the potential market for the Nano Car; from this it will be possible to understand how to best target the chosen customer segments, and to estimate a potential market share for Tata in the Ultra-Low-Cost (ULC) car market. Once estimated the demand for the company’s product, it will be possible to compare this volume with the production capacity and estimate whether the target can be met in the relevant time frame of the project. The time frame chosen for the analysis is four years. In this way, it is be possible to analyse the Tata required production under two different scenarios: before other incumbents enter the market, and after their entrance. In fact, the underlying technologies required for the production of such type of car can be easily copied and, if on average it takes the first mover four years for such a project, it seems reasonable to consider two years for followers to develop a competitive product.

Following the previous question, the Nano car added strong value to two-wheels owners, whereas the advantages with respect to small cars were limited mainly to costs, and to more internal available space. Therefore, it seemed reasonable for Tata to target only the two-wheel segment, and not both. But in addition to this segment, since in 2009 car penetration was still low, Tata could potentially attract that part of the large population that still did not own a car.

To estimate the market for ULC cars, A.T. Kearney research for the Nano has been used. The available data indicate an initial demand of 2.6M ULC cars worldwide. To estimate how much of this market is represented by India, it has been assumed that India demands the same portion of ULC as portion of Low-Cost cars in general. In 2009, this portion was equal to 10%, which means that Indian demand for ULC cars was 260K. Computing the CAGR over 11 years for the global market, and considering that Indian share of this market grows over time, it has been possible to estimate the potential market size of India between 2009 and 2014 and the demand over the period; the results are shown in Exhibit 2.

Knowing that Tata received 206K orders in 2009, an 80% market share has been estimated. It seems reasonable to assume that the market share remained constant in 2010, but dropped to 40% from 2011 as other competitors entered the market. The interest of competitors in the market is proved by Toyota and Ford, which were already introducing their small cars in 2010, possibly planning an entrance in the ULC car segment in the following years. The results show that between 2010 and 2014 Tata was likely to have a demand of 1.4M vehicles (Exhibit 2). From the analysis, it therefore seemed reasonable for Tata to achieve its production targets and run the production facility almost at capacity, assuming that the company was able to attract all the estimated demand.